25 May 2017

Zimbabwe: Weak Economy Undermining Debt Market

THE recently re-activated debt market is expected to provide investors with an alternative investment platform, analysts said this week, warning, however, that the environment may limit its success.

The debt market on the Zimbabwe Stock Exchange (ZSE) was revived last month, 16 years after it became dormant. This means investors will now be able to diversify their portfolios and mitigate risk.

Analysts said appetite from issuers and investors on the new market was unlikely to be high due to an unfavourable economic environment, which made Zimbabwe vulnerable to capital outflows.

Economist, Tony Hawkins, said: "I still have a problem with this market at the moment. Yes, it's one of the long-term investment platforms but we have a government (which normally is the biggest issuer of debt securities) which is bankrupt. Investors are worried. They are expecting prices and inflation to continue going up. The introduction of new currency (bond notes) is not a great thing to do. I think when you look at the equity market, it is slowly going up. Investors want to hold assets that bring value long-term. Property is one and foreign exchange is another."

A debt market promotes issuance and trading of debt securities. This is usually in the form of bonds, commercial paper, medium term notes and debentures.

What makes debt markets attractive in a normal economy is the fact that borrowers make payments on a fixed and pre-determined basis and on a fixed schedule. This may not be the case in Zimbabwe at the moment.

Raphael Otieno, a director responsible for debt management at Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI), said the success of the debt market depended on three key fundamentals: the type of debt instrument, the volume and the structure of the market.

MEFMI is a regionally-owned organisation with a membership of 14 countries in eastern and southern Africa. It closely collaborates with financial market regulators and international organisations which include the International Monetary Fund, the World Bank, the African Development Bank and the United Nations.

Otieno said: "It depends on a number of things but three fundamentals factors are key for it to be successful. These are the structure of the market, the type of instruments and volumes, which should be big.

He said countries whose debt markets had succeeded had mainly relied on primary dealership arrangements, which was not the case in Zimbabwe.

The arrangement involves a group of primary dealers who support the debt market. Debt instruments are issued to primary dealers who in turn sell to secondary dealers.

"The other key factor is that volumes should be high. In South Africa, Kenya and Botswana, volumes are high. The Zambia market is better though volumes are not that high. The success also depends on what kind of instrument is traded on the debt market. The question will be, will they be liquid? Will anybody be willing to invest in them? The liquidity is a critical element," said Otieno.

Zimbabwe created a regulated platform for listing and trading of debt securities in 1946, with government and local authorities dominating the market.

The debt market thrived until the 1990s, but later lost its glitter and in 2001 the market eventually became inactive, with virtually no trading due to increasing inflationary pressure.

ZSE acting chief executive officer, Martin Matanda, said the debt market, which has already seen one issuer, GetBucks, listing, will enable institutional and individual investors raising capital in a transparent and efficient platform.

Matanda said: "Reactivation of the (debt) market provides benefits for the ZSE's customers who include corporates, the public sector, investors and capital market intermediaries.

"The ZSE's core mandate is to provide capital-seeking institutions an avenue through which they can raise capital through a regulated, transparent and efficient platform whilst at the same time affording investors a platform to trade securities through orderly market intermediary relationships. In executing its mandate, the ZSE is customer-oriented and responsive to the environment it operates in. Enhancements to the existing bond market framework are now in place with the gazetting of the debt market fees and the listing of GetBucks' medium term notes in the past few weeks."

He added: "In the recent past, the capital raising platform has mainly been focussed on equities as indicated by the existence of a vibrant equities market. The (debt) market thus augments the ZSE's role and quest to meet its customers' needs in the current environment. Through a capital raising platform, the ZSE is able to also provide investors with an alternative investment avenue.

Matanda highlighted that the debt market would broaden the local bourse's product range.

"As such, the revival of the market provides the ZSE with an opportunity to contribute towards infrastructural development through offering such a platform," said Matanda.

"The reactivation of the market also completes the backbone the ZSE has been working on to broaden its product range."

The deputy chief executive officer of the Botswana Stock Exchange, Thapelo Tsheole, recently said a centralised bond market created efficiencies.

He indicated that Botswana's debt market, which was developed in the late 1990s, had now grown from P2,5 billion to over P10,5 billion in the past five years.

Zimbabwe has since 2014 been issuing debt instruments outside the regulated platform.

Through the Infrastructure Development Bank of Zimbabwe (IDBZ), government has raised cash for infrastructure projects through the issuance of bonds.

IDBZ has floated bonds worth more than US$100 million mainly for energy projects.

The Ministry of Higher and Tertiary Education recently announced that it wanted to raise cash through infrastructure bonds for the construction of infrastructure such as staff and student accommodation, lecture theatres, laboratories, sporting facilities, administration blocks and student service centres at tertiary learning institutions.

There have been a few successful bonds issued by the private sector since 2009 when Zimbabwe dollarised its economy.

These included Bindura Nickel Corporation's US$20 million bond issue last year to finance the restart of its smelter; ZB Bank's US$10 million and CBZ Holdings' US$20 million bonds issued in 2012 to finance infrastructure development.

However, debt markets the world over are being centralised to promote efficiencies by improving information dissemination, transparency in trading, price discovery and ultimately, liquidity in the market.

The revival of the debt market is expected to usher in new inflows for the local bourse at a time when daily average trading volumes at the ZSE, once one of the best performing stock markets on the continent during the crisis decade to 2008, have plunged by more than 40 percent since 2011.

The ZSE's equities market appears to have lost its glitter and has become fragile, with limited stocks currently giving value to investors.

The International Monetary Fund (IMF) has noted that bond financing has grown compared to other forms of financing in emerging economies.

In a report released recently, the IMF indicated that equity finance dropped from 1,7 percent of emerging economies' combined gross domestic product (GDP) in 2008 to 0,5 percent last year.

At the same time, bond issuances increased from about 0,8 percent of emerging markets' GDP in 2008 to 3,3 percent in 2015.

The slowing economic growth, which makes Zimbabwe more vulnerable to capital outflows and rising budget and current account deficits, among many factors, could make locally-issued debt instruments unattractive.

To encourage foreigners to participate in the bond market, the Reserve Bank of Zimbabwe has removed the 40 percent participation limit on the primary issuance as well as the inhibition to participate in the secondary market.

The central bank has also removed restrictions for foreigners to remit proceeds and coupons.

The ZSE lobbied for foreign underwriters to be allowed to participate in local security issues and the central bank granted that these could underwrite up to US$10 million.

Government has also removed withholding tax on interest payable to non-residents.


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