VFEX a capable conduit of debt financing
DEBT financing has been mulled as a conduit to fund national development and analysts and economists are unanimous that the Victoria Falls Exchange (VFEX) is capable of raising the much needed funds for economic development.
Late in 2022, Finance and Economic Development Minister, Professor Mthuli Ncube, said Zimbabwe would try to raise US$200 million in a debut domestic US dollar bond sale on the VFEX.
“We may have it in small tranches, rather than a single big issuance,” Mthuli said in September 2021, from New York, where he was on a roadshow to attract investment into the country. “We might put it in US$30 million tranches of about six issuances.”
According to Mthuli, they were targeting a yield of 6 percent to 9 percent on the bonds.
A Government bond is a debt security issued by a government to support its spending and obligations in return paying interest to bond holders. Government bonds issued by national governments are often considered low-risk investments since the issuing government backs them.
The foreign currency denominated bourse has seen two companies raising over US$45 million from the Victoria Falls Stock Exchange (VFEX).
Barely two years after its launch, the VFEX’s primary objective for productive sectors to raise foreign funding is on track and notable companies that have managed to raise funds from the market in the form of hard cash include mining firms, Karo Resources and Caledonia.
The entities have raised the funds by floating bonds to their investors for project expansion and new productive units.
Economist Tinevimbo Shava said; “Primarily, one of the functions of the VFEX is to raise money due to its hard currency platforms for expansion, the exchange is less than three years old and so far it has raised over US$45 million for companies.”
Shava added that the bourse can be used to even raise more money for development in communities or for the central government to use debt and reduce the risk of overprinting money.
Investment analyst, Tafara Mtutu, believes that the market has already proven that the country is not liquid enough to drive us forward, but acknowledges that the route is proven.
“Theoretically, it can be conduit for economic development. Zimbabwe needs USD capital to rebuild capacity and an exchange’s main role is to provide a platform that links funders with people who need cash to invest in value-add projects,” he said.
However, Mtutu believes that practically, this is unlikely as we have had products that have tested the market already.
Mtutu added that; “If the recent Capital raise projects (Karo and WestProp) are anything to go by, Zimbabwe does not have much USD in the formal channels that could be material enough to drive economic development through the VFEX. So the VFEX has to fight for international capital and it is not competitive enough to win against South Africa’s capital markets, for example.”
Another analyst, Dr Alfred Mthimkhulu, believes the bourse is the way to go in terms of raising money to re-build the economy, and it still has a long way to go in order to be a force to reckon with but has done well so far. “As young as it is, VFEX has some world-class listings. Take for instance the bond listing by Karo Mining Holdings plc: impressive in many ways, not just the amounts raised given the infancy of VFEX but significant participation of foreign investors,” Dr. Mthimkhulu said.
He said for a country to truly be on a growth trajectory, it must attract foreign capital over and above what it has onshore, and bonds are a smarter way of doing that than equity.
“In any case, ours is a market starved of quality fixed income securities. I foresee numerous listings of debt instruments on VFEX in the medium term and that’s the way to go. A growing economy feasts on debt, not equity,” he added.
Equity is expensive and Dr. Mthimkhulu said in time the bond market must dwarf equities if we are to move at a faster pace than we currently are moving at.
He said: “That’s what a vibrant capital market must look like. All that must be ensured by regulators and players is that only quality offerings are brought to the market because such listings will boost the profile of VFEX and make it easier for others, including SOEs that could seek privatisations and municipalities, to raise capital.”
The country last saw a municipal bond listing 22 years ago when bonds were floated in 2001 on the Zimbabwe Stock Exchange.
Development economist, Gerald Amon, said urban councils have a critical need for capital funds to respond to citizens’ demands for new and upgraded municipal infrastructure.
“And as the traditional sources of funds for these purposes, central government funds and donor loans decline relative to the ever-expanding need for investment, the understanding has grown that new, more sustainable sources of financing are required.
“Clearly the best approach for the long term is to raise capital funds through the Zimbabwean financial markets. This approach has successfully been used to a limited extent in Zimbabwe in the past,” he added.
In Zimbabwe as around the world, urbanisation is increasing at a rapid rate, thus increasing the pressure on cities to provide services.
At the same time, local governments are recognised as important players in the development agenda for the national economy. Thus, cities require capital investment to adequately meet demands for water, power, sanitation, roads and other infrastructure.