As the National Bank of Rwanda was unveiling the results of the last issue of the 5 year Treasury Bond last week, one clear unknown warning that the Government was sending to investors and particularly commercial banks was that time for them to seat and wait for Treasury Bonds to invest is over and that they have to start looking for other avenues for their huge money.
The central bank adopted a book building process in inviting bids for Treasury Bonds a while back as a means of gauging investors’ appetite for the bonds with success. Book building is a process which allows investors to quote their asking price for the Bonds. The ultimate issue coupon or rate of interest is then determined based on the quoted bids and the Government’s set limits mostly based on market sentiments. This is in contrast to the Government inviting bids with preset coupon or rates of interest.
The success of the book building approach has seen a steady decline in interest rates which ultimately reduces future Government liability, reduced price of money on the supply chain and when coupled with reduced Government’s appetite for money forces investors to look for alternative investments.
Going by the mere rate of oversubscription in the last two issues points to more money chasing same asset. For instance, when the Government issued a 7-Year Rwf10 billion Treasury Bond in November last year, the issue was oversubscribed by 178.14 per cent and settled at 12.40 per cent rate of interest. In the latest issue of Rwf15 Billion 5-Year Treasury Bond issued last week, the oversubscription was 263 per cent with a resultant interest rate of 11.80 per cent. Interestingly, another issue of 5-Year Rwf10 billion Treasury Bond issued in August last year had a coupon of 12.20 per cent.
This means that investors are willing to accept lower interest rates as a result of more money available. Although the National Bank principally attributes the current scenario to prudent microeconomic conditions, the plain reality is that the commercial banks which are the majority investors in such Treasury Bonds are not channeling money into more productive sectors of the economy like manufacturing and agriculture which are starved of capital due to the risks associated with those sectors.
The next issue is due in May and it will be interesting to see if investors are willing to accept less returns from the Government. Meanwhile, the questions will remain for how long will investors be willing to accept lower interest rates and is the current scenario the best and sustainable?
My take is that the current conditions in the country make it sustainable for the Government to attract more money at lower rates of interest and already there is more money in the economy and that National Bank will continue to receive offers for lower interest rates as commercial banks remain risk averse. This in my view is good for the economy in the long term. Ultimately and as investors find discomfort with Government Bonds they will be forced to channel their money into more productive sectors thus catalysing economic growth.
Taking the case of the last issue, more than Rwf 24.4 billion offered by investors was not taken by the Government. The question then remains where is that money and what will that money be doing between now and the next issue in May?
While some commentators have lamented at lack of investment options, in my opinion, that is not true. How can a growing economy lack investment options? The reality is that all investors are behaving in the same way, hence they cannot see the other opportunities presented by the Rwandan economy today. The investor in Rwanda is simply risk averse, period!! My understanding is that an investor who does not want to take risk should not expect a return and the Government should not abet such investors comfort in Treasury Bonds either.
For instance, why should investors complain that there are few listed stocks at the Rwanda Stock Exchange? Why should investors wait for companies to be listed at the Exchange to buy shares when there are equally higher return potential like in venture capital funds. There are so many good and profitable companies with potential that only require more capital to expand. Smart investors could set up venture capital funds to invest in growth companies and ultimately sell their stakes in the capital markets.
The only way to force investors shift focus to more productive sectors of the economy like manufacturing and agriculture is maintaining prudent macroeconomic policies that will ultimately bring further down interest rates on Government Paper that are unattractive to private investors. This will have ripple effect in the economy by reducing cost of money not only to investors but also citizens. The Government will also benefit from lower lending rates hence future domestic debt liability.