Finance Minister scraps plans for US$100m bond
ZIMBABWE’S attempt to raise funds through a treasury bond offering on the Victoria Falls Stock Exchange (VFEX) has hit a snag, leaving authorities looking for alternative sources of finance.
In his 2022 National Budget, Finance, Economic Development and Investment Promotion Minister Mthuli Ncube announced plans to issue a US$100 million bond which he said would be used to cut borrowing costs and develop capital markets, with the specific goal of creating the Victoria Falls Offshore Financial Services Centre to attract more foreign investment.
However, such plans have been scrapped after the issuance failed to attract sufficient interest from international investors, primarily due to two key factors: limited demand and the hefty cost of a guarantee provided by the African Export-Import Bank (Afreximbank), according to Mthuli.
The proposed Afreximbank guarantee, set at a staggering 30 percent of the bond’s face value, significantly increased the overall funding cost, deterring potential buyers.
“The issuance of treasury bonds on the Victoria Falls Stock Exchange was not successful due to the limited appetite by potential international subscribers and the high cost of the Afreximbank bond guarantee fee (30 per cent of the face value of the bond,” said the Treasury in the latest debt report released end of November last year.
“Going forward, the Government will explore cheaper options of issuing a US$ bond which will be listed on the VFEX, to enhance its tradability.”
In addition, international investors expressed limited appetite for the bond amid ongoing concerns about Zimbabwe’s economic stability and debt burden.
The shift to a US$ bond reflects an attempt to tap into a larger and more liquid market, potentially offering more favourable interest rates and attracting international investors who may be hesitant to invest directly in Zimbabwean currency.
However, experts caution that even a US$ bond will require careful structuring and competitive terms to entice investors considering Zimbabwe’s economic challenges.
During period January to September 2023, Government, through the issuance of Treasury Bills, managed to mobilise resources amounting to $305,9 billion, against a revised borrowing plan target of $276,3 billion.
The target was surpassed during the first half of 2023, as the Government made deliberate efforts to mop up excess liquidity in the market, to curtail the growth in money supply and in the process the rate of inflation, as well as for budgetary cashflow smoothening.
The issuances were done through private placement, with 90-day and 180-day having an average coupon rate of 81 and 82 per cent respectively, while 270-day and 365-day had average coupon rates of 83 per cent and 88 per cent, respectively.
Ninety-nine (99) per cent of these resources were raised from the banking sector, while the non-banking sector provided only 1 percent.
This is notwithstanding the requirement that pension funds should comply with the prescribed asset status of 20 percent, against current levels of 7 percent.