The assumption of the Reserve Bank of Zimbabwe (RBZ) US$1,35 billion debt to Government coupled with the planned US$150 million to 200 million recapitalisation of the of the bank are probably the most important steps taken to date by the incoming Government to curtail the current liquidity crunch.
Furthermore, the introduction of a US$100 million Interbank programme supported by the African Export-Import Bank as a guarantor will further improve the liquidity situation in the country as local banks can rely on such a market for liquidity support.
The biggest hurdle at this juncture in resolving the liquidity crunch however remains the country’s external debt which according to Government currently stands at US$6,1 billion across various creditors.
It is this debt along with our poor repayment track record that has significantly reduced the country’s probability of accessing debt finance from the international capital markets.
However, if Government sticks to the International Monetary Fund (IMF), Staff Monitored Programme (SMP) and hopefully succeeds in getting debt relief, Government could benefit from budgetary and liquidity support from the growing Sub-Sahara African sovereign debt market.
Since 2006, when Seychelles became the first sub-Saharan African country outside South Africa to issue a global sovereign bond, dozens of other countries within this region have joined in with at least US$10 billion being raised through the issuing of sovereign bonds in 2013 alone, up from about US$1 billion a decade ago.
In 2013, Rwanda, barely two decades after the genocide was able to issue a US$400million bond to a yield of just 6,875 percent, whilst in prior years Zambia raised US$750 million from a 10-year Eurobond at 5,6 percent and Namibia raised US$500 million on also on a 10-year bond with yield of 5,5 percent, Ghana (US$750m), Gabon (US$1,5 billion) and Nigeria (1 billion), amongst several other notable African sovereign bond issues.
The Zambian bond issue surprised the market as it was cheaper relative to issuances by highly rated advanced economies such as Spain and the fact that it was oversubscribed attests the growing attractiveness of the African sovereign debt market.
According to the African Development Bank (AfDB) the drivers of this growing African sovereign debt market are mainly but not limited to; the needs by governments to finance economic and social infrastructure; excess liquidity on the global markets owing to expansionary monetary policies in advanced economies: Africa’s economic, political and social potential and finally appetite for yields and diversification benefits.
Therefore there is huge growth potential for the African sovereign debt market, but the IMF in light of the rapid growth of this market has however warned for the first time that the increased reliance on foreign investors by African countries has made them become increasingly vulnerable to global financial shocks.
For a country to successfully issue sovereign bonds for the first time, according to the IMF certain domestic and external conditions need to be met.
Domestic conditions for issuing sovereign debt generally encompass a demonstration of a good macro-economic performance for many years and a favourable medium term economic outlook. In addition, the country’s external current account position, monetary policy, exchange rate regime, debt to GDP ratio and debt servicing track record, fiscal discipline, and strong reserves accumulation, to name a few, are key domestic factors that participants look at.
The over-subscription of Zambia’s bond issue was probably because it is amongst the few African countries that meet the above criteria, although most recently in October 2013, Fitch downgraded Zambia’s foreign currency senior unsecured bond ratings from “B+” to “B” after government finances deteriorated sharply, but however maintained that the country’s outlook remains stable.
Zambia channelled proceeds from its US$750 million sovereign bond issue mainly towards the upgrading of infrastructure in transport and energy with the country intending to issue another bond in 2014 to the tune of US$1 billion to finance its budget deficit.
Favourable conditions in international capital markets is the most important external condition for a successful first time bond issue, as factors such as the dominant monetary policy regime in the global economy during that period are key when timing an issue.
For example, Quantitative Easing (QE) in the US has resulted in the decline of bond yields in advanced economies thereby making higher yielding bonds from Sub-Sahara Africa very attractive. Furthermore, the excess cash created by QE will also be looking for a new home from a diversification perspective, thereby also making the sub-Sahara African sovereign bond market also attractive.
Looking at the factors required for Zimbabwe to be able to participate in this vibrant sovereign debt market, it is clear that the country still has a long way to go with regards to economic fundamentals and reforms.
It is of great importance to note that the country’s domestic and external debt servicing record has been appalling over the last decade with most recently government defaulting on their Development Bank South Africa (DBSA) loan for the Plumtree – Mutare road rehabilitation project resulting in the main contractor Group 5 of South Africa downing its tools.
Fiscal discipline even under the current multi-currency regime where the government cannot print money to finance its unbudgeted expenditures remains a challenge for Government, with it already agreeing an unbudgeted civil servant increment just a couple of weeks after the 2014 National Budget was announced.
The country’s current account remains a mess because of the country’s huge trade deficit, which has also resulted in the country being unable to accumulate any foreign currency reserves, resulting in the country’s import cover being less than a month.
Furthermore,in order to increase marketability as a bond issuer, Zimbabwe would have to implement structural reforms such as, the reduction of legal and administrative requirements to carry out operations and the adoption of realistic and market based pricing policies for privatised companies so as to encourage foreign direct investment. At a country ranking of 170 out of 189 countries on the World Bank Ease of Doing Business Index, Zimbabwe has a lot of work to do in this regard before even considering issuing a sovereign bond. From a fundamental perspective, Zimbabwe remains far from ready to issue any form of sovereign debt because of a series of shortfalls that make such a bond unattractive to global investors.
However, problems are there to be solved, therefore it is up to Government as the key stakeholder in this country to implement sound economic reforms that will position the country to benefit from the growing sovereign debt market.
- This article was written by Zimnat Asset Management for FinX