RWANDA ISSUED its sovereign euro bond last year and a few weeks ago issued a treasury bond; many are wondering what this should mean for them. The simple answer to that assertion is that these bonds probably mean more for the ordinary Rwandans than changes in some fiscal policy.
Investors in capital markets should not only be complex financial institutions but should be ordinary individuals with an interest in increasing their wealth. People should invest in Rwanda simply not only because they want to invest in the country’s future but also because it is a good financial decision.
While it is near impossible to quantify, the global debt market is measured at approximately $100 trillion as of December 2013. Of that number, approximately 49% is government debt.
The size of the market has been responsible for allowing governments new avenues to raise capital, beyond taxes or simply borrowing from multilaterals like the World Bank, to fund their projects. It has also allowed people to invest in securities and increase personal wealth.
There has been significant discussion of whether these recently shared treasury bonds are safe. They are not and nor should they be. Explained, if there is an increase in inflation then the intrinsic value of these bonds, as with all bonds, will drop.
This is the secondary market risks that encourage people to trade securities and allow bonds to be properly priced. This is not a bad thing but actually a very good thing. The risk factor in capital markets has created unfathomable wealth throughout the world.
Contrary to the constant misguided and at times clearly injudicious commentary by some populists and journalists, capital markets have been a force for good the world over.
Rwanda’s current treasury bills are now tradable in the secondary market which will allow people everywhere to inject capital into the market. As the value changes, people can choose to buy and sell these assets, which means a fee for brokers, movement on the market, and increased sense of security for holders of any asset in that market.
A strong capital market is characterised by one that has significant trading activity. The Dow Jones Industry Average, the Dow, is an aggregated number that shows the level of trading activity of some of the world’s largest firms.
Those numbers that scroll on the bottom of most international news channels are more than just numbers. A high risk investor that had simply invested in the Dow at the bottom of the market, in 2008, would have doubled their money today.
Capital markets allow for the efficient allocation of capital. They move money from firms/individuals that do not deserve them, to those that do. There is often no greater free market than the capital markets.
Many firms that people previously believed were the cornerstone of the specific economies have been taken down by the objective nature of capital movement in stock markets. A good example of this would be Apple whose invention has made it the largest capitalised firm on the NASDAQ but whose inventions such as the iPod have forced firms such as Sony to close branches of their business such as the Walkman.
As the iPod became more popular, traders sold Sony stock and bought Apple stock. This caused a drop in the price of Sony stocks and the eventual removal of defunct products. This is the beauty of the capital markets as it is a clear market mechanism to communicate the choices that a firm makes.
Capital markets additionally allow firms to get the funding that they need to grow. Amazon.com was only able to follow its ‘get big fast’ strategy by selling $200 million in junk bonds (high risk low value corporate bonds) on the capital markets.
As the capital markets grow, become more transparent, and, most importantly more active, people will have huge opportunities to create wealth.
Adam Kyamatare is an economist based in Copenhagen.