The Rwf12.5bn Treasury Bond, issued by the government at the end of last month, was over-subscribed by local investors, showing how the public is ready to tend to government and also ability of the government to raise money for its annual budget implementation.The bond market, however, is still relatively small and inactive at both primary and secondary levels unlike in other countries where the markets are more developed, according toCelestin Rwabukumba, the CEO of Rwanda Stock Exchange. In an exclusive interview with The New Times’ Ben Gasore last week, he explained why government made the move, saying with the favourite economic policies that government has put in place, the future is bright for this undertaking. Below are the excerpts.
Why did the government engage in this bond issuance programme?
The government wanted to resume the issuance programme of government bonds to channel the proceeds into the national budget geared towards infrastructure development while at the same time help ing in the revival of the capital market.
Also, for a long time, Rwanda has had no benchmark for the price of money. There has been no yield curve showing someone that if I place money here, it can yield this amount after five years.
In that case, the safest means everywhere in the world, you need the government to issue paper bonds because it is risk-free.
If I&M Bank want to issue a bond, they cannot just do it without knowing what the government is charging.
So what debt instruments has the government been using and what made it opt for the bond market?
The government has been using short-term money market instruments like three month Treasury Bills. So once the government decided to use long-term instruments which in some countries go up to 40 years, they needed to set up the benchmark so that investors know how much they will get after a certain period of time.
And for it to succeed, the issuance programme has to be continuous.
We started the capital market with the debt market instruments and have been investing in bonds of Rwf2.5bn each since 2008. However, in the middle of 2008, we hit a snag and couldn’t issue more because of the global financial crisis. Prior to that, investors and local companies had expressed interest in joining the market but government stopped them because it would affect the liquidity of the private sector.
The government resumed slightly in 2010 with a small issuance, replacing the previous of Rwf10bn which had expired.
Were there any returns after the first issuances?
Yes, there were fair returns but the challenge with the Rwf10bn issuances was that it was being done in bits. When you do not issue them at the same time, the returns are meagre because one investor can buy it thereby making little impact on the market.
Actually, the market has always been dominated by banks which make about 80 per cent of the participation. So we advised the government to embark on the current programme you see today.
If you advised the government to start issuing larger bonds, why has the first issuance taken long?
In 2011, the government continued issuing slightly and in 2012 and 2013, there was nothing issued as the government was issuing treasury bills for monetary purposes in the central bank as a result of suspended donor aid and the Eurobond issuance last year, so there has been a lot going on in this regard.
Does the government need to borrow from the public anyway, considering Rwanda’s debt level at 29 per cent of its Gross Domestic Product (GDP)?
We are not yet even at 30 per cent of GDP. At 50 per cent of GDP is when a country raises the red flag.
Capital market is there to help the government look at the country’s own resources as long as it is able to sustain its debt levels. In fact, our debt sustainability level is better than that of other countries in the region because of good leadership.
Considering the fact that we are landlocked, have limited natural resources, small market and high illiteracy levels, we would have suffocated in debt if it wasn’t for the good economic policies.
The Rwandan franc is well managed as the central bank has very good policies that have helped curb inflation.
Now is the time we have to start issuing bonds so that people get used to it. Because if we are talking of funding our own economy, we cannot talk in terms of aid, we have to talk in terms of investments.
By the public buying the paper bonds, it shows that people are putting their faith in the government of Rwanda and, in turn, the government is planning for them.
Eventually this issuance programme will become monthly, then weekly once the programme starts taking effect and the people start getting used to it.
Remember, also when you are using the capital market, you are not only using the money from Rwandans. You also get direct investments from the region and beyond.
Foreign investors are attracted by stability of the economy, currency as well as diversification of investments.
Rwanda was given a B in the latest Fitch credit rating. Should this also serve as an encouragement to investors?
Yes. Rwanda’s positive outlook on long-term debt shows that the economy is moving in the right direction thanks to good policies.
If you look at the relationship between the Ministry of Finance and the National Bank of Rwanda, there is coordinated policy making, unlike in some countries where the central bank considers itself as an independent institution from the other government entities. At the end of the day, you have to work closely to see that the debt levels remain in check.
If things continue at this pace, I foresee this economy being self-sustaining by the year 2020.
The government projected to fund 60 per cent of its budget in June last year and I am sure the projection will be higher come this June.
Has the government already devised means of paying back this debt?
Such government bonds are called general obligation bonds meaning that once they are issued, they have to be paid back with interest.
The government as the issuer, therefore, has an obligation to know what the money is going to do and where it is going to get the money to pay back. This money can be got from budget revenues.
These bonds help the government to get money at ago so as to be able to fund specific projects.
It works just like one would get a mortgage financing facility from a commercial bank so as to avoid spending on rent.
What kind of multiplier effect does such a bond have to the public?
Apart from the public benefitting from trading of the bond in the secondary market (RSE), the government spends these funds to invest in infrastructure such as roads, schools, hospitals which directly benefit the public.
The multiplier effect from the Rwf12.5bn received from the bond can be enormous because, at the end of the day, the investments increase the livelihoods of people who live around the areas where the money is invested as they are able to start income generating businesses like transport taxis and hair salons.
The regular Treasury Bond issuances programme has also come at a good time where the current bonds in the market were getting outdated and people needed to know that when they get their salary, they can save through government securities or corporate bonds.
They also need to know that it is a tradable instrument when one needs money and can also be used as collateral when securing credit from banks.