The Zimbabwe Stock Exchange (ZSE) is planning to revive a regulated bond market, which became dormant 15 years ago, in an attempt to diversify avenues through which entities could raise much-needed capital.
The bourse has now placed its proposals before the securities and capital markets regulator, the Securities Exchange Commission of Zimbabwe (SECZ), which is now assessing the possibility of re-introducing a bond market on the local exchange.
"We received the (bond market) concept from ZSE and we are still looking at it," Tafadzwa Chinamo, the chief executive officer (CEO) of SECZ, told the Financial Gazette's Companies & Markets last week.
A bond market involves the issuance and trading of debt securities in the financial market where participants can issue new debt in the primary market or buy and sell debt securities in the secondary market.
This is usually in the form of bonds but it may include notes and bills, with the primary goal being to provide a mechanism for long-term funding of public and private expenditures.
The revival of the bond market is expected to attract more capital to the market and ease a tight liquidity situation.
Given the current short-term nature of bank loans and serious liquidity constraints facing the country's productive sectors, analysts argue that there is need for a regulated platform for debt instruments that can avail long-term capital for the development of the economy.
Local banks, because of the high levels of non-performing loans, have been compelled to reduce lending to productive sectors. Focus has shifted towards individual lending, which has been consumptive.
In December last year, the ZSE proposed a bond pricing framework and amended bond market listing guidelines. These are currently under discussion with the regulator.
Plans are that the ZSE should be able to provide a platform for long-term funding to both public and private sectors by the end of next year.
Nightmare
The local bourse, once one of the best performing stock markets on the continent during the crisis decade to 2008, appears to have lost its glitter and has become fragile, with limited stocks currently giving value to investors.
The ZSE lost US$1,3 billion in market capitalisation last year.
Hopefully, the revival of the bond market would usher in new inflows for the local bourse at a time when daily average trading volumes have plunged by more than 40 percent since 2011.
Government supports the revival of the bond market and sees the debt instruments as a tool for plugging funding gaps arising from current fiscal pressures.
The country has been finding it difficult to access cheap loans due to a huge debt overhang of about US$8 billion.
Current problems
In 2014, the State-owned Infrastructure Development Bank of Zimbabwe floated a combined US$65 million worth of bonds for three power generation projects.
One of the bonds was meant to raise US$50 million for the Zimbabwe Power Company's two power generation projects, namely the Harare Power Station re-powering project which needed US$11,2 million and the Kariba Power Station refurbishment project which required about US$38,8 million.
Another bond, which was meant to raise US$15 million, was for the Zimbabwe Electricity Transmission and Distribution Company to finance the prepaid meter project.
Interestingly, government is currently seeking financial advisors to restructure and issue Higher and Tertiary Education Infrastructure bonds.
A notice inviting bids said: "Due to lack of fiscal resources that have continued to inhibit any provision of infrastructure in the institutions of Higher and Tertiary Education, Science and Technology Development, the Government of Zimbabwe hereby invites proposals from licenced financial advisors who are registered by Securities and Exchange Commission of Zimbabwe and wish to be considered for the appointment as lead financial advisor in the structuring and issuance of the Higher and Tertiary Education institutions' infrastructure bonds."
The ministry urgently requires investment in physical infrastructure that include staff and student accommodation, lecture theatres, laboratories, sporting facilities, administration blocks and student service centres.
Hurdles
But now, there is growing fear that government is too broke to borrow and repay.
The fact that it has defaulted on several of its commitments has meant that the market has become skeptical of lending to government or to support debt instruments in which it is a guarantor.
As a result, very few bonds issued by government have been successful.
There have also been pockets of successful bonds that the private sector has issued since 2009 when Zimbabwe dollarised.
These include Bindura Nickel Corporation's US$20 million bond issue last year to finance the restart of its smelter.
ZB Bank issued US$10 million Agri bills and CBZ Holdings had a US$20 million bond issue in 2012 to finance infrastructure development.
Experts say limiting investors to equities on the ZSE appears to exclude a significant portion of saving pools, among them local and international pension funds, insurance companies and foreign investors who naturally seek a home for long-term fixed return instruments.
What makes bonds attractive in a normal economy is the fact that borrowers make payments on a fixed and pre-determined basis and on a fixed schedule.
The International Monetary Fund (IMF) has noted that bond financing has grown compared to other forms of financing in emerging economies.
In a report released recently, the IMF indicated that equity finance dropped from 1,7 percent of emerging economies' combined gross domestic product (GDP) in 2008 to 0,5 percent last year.
At the same time, bond issuances increased from about 0,8 percent of emerging markets' GDP in 2008 to 3,3 percent in 2015.
In many countries, government securities are risk free as the State rarely default on repayment obligations.
High risk
Investors have placed Zimbabwe as a high risk destination for financial investments such as bonds.
Interest rates on government bonds have gone up to compensate for this risk. This has been worsened by its failure to honour debt repayment obligations on bonds, particularly those issued during the hyperinflationary period.
This has resulted in investors treating local bonds as "junk".
The slowing economic growth, which makes Zimbabwe more vulnerable to capital outflows and rising budget and current account deficits, among many factors, has supported the junk status for locally-issued bonds.
This discourages investment and such bonds cannot be held by investors with strict investment-grade criteria.
The ZSE, has, however, been working hard over the last few years to establish enabling infrastructure for the return of a fully-fledged debt market.
This includes the introduction of the electronic trading system, - the electronic clearing settlement and depository system, which is expected to drastically rationalise some key elements on the capital market, - making settlement efficient.
The Insurance and Pensions Commission (IPEC), a body governing the insurance and pensions industry in the country, indicated that players were holding bonds with prescribed asset status worth more than US$400 million.
When a bond is accorded prescribed asset status, it enables portfolio managers in insurance and pension funds to fulfil their obligations in terms of the law, which requires that a certain percentage of their investments should be in the form of prescribed assets.
Due to the shortage of prescribed assets in the country, IPEC has since recommended to the Ministry of Finance and Economic Development that all future bonds should bear prescribed asset status in terms of section 26 of the Insurance Act and Section 18 of the Pensions and Provident Funds Act.
Consequently, the ambit of prescribed asset has been broadened and the projects must be of national importance and should have benefits that are shared across a number of stakeholders at national level and fall within the realm of infrastructure development, such as low cost housing, energy or agricultural projects.
To encourage foreigners to participate in the bond market, the Reserve Bank of Zimbabwe has removed the 40 percent participation limit on the primary issuance as well as the inhibition to participate in the secondary market.
The central bank has also removed restrictions for foreigners to remit proceeds and coupons.
The ZSE lobbied for foreign underwriters to be allowed to participate in local security issues and the central bank granted that these could underwrite up to US$10 million.
Government has also removed withholding tax on interest payable to non-residents.
Potential impediments
While the proposed return of a bond market sounds like a logical solution in terms of attracting long-term capital, there are many potential impediments which need to be sorted out.
These include the absence of reliable price benchmarks, tax issues, trading costs, unstable interest rates and an illiquid secondary market.
Analysts believe it is a crucial prerequisite for bond markets to have a reliable government bond yields rating as this affects the pricing of new corporate bond issues.
Many experts have noted that bond markets fail to take off largely as a result of unstable or unpredictable interest rate regimes; the imposition of withholding tax on interest payments as this complicates the calculation and adjustment of accrued interest between the seller and the buyer as well as high trading costs.
This, consequently, impedes bond trading.
An illiquid secondary market can also have an impact on the primary market.
This is so when investors know that an existing option is limited; they may not participate in the primary market.
Buyers of corporate bonds, particularly in emerging markets, hold on to them until maturity, resulting in the pool of securities available for sale in the secondary market being small.
Thapelo Tsheole, the deputy CEO of Botswana Stock Exchange, which developed its bond market in the late 1990s, spoke about the importance of centralising bond markets at bourses than having governments and individual corporate institutions doing it on their own in a smaller way.
"Worldwide, bond markets are being centralised," said Tsheole.
"There is need to promote efficiencies in the bond market by improving information dissemination, transparency in trading, price discovery and ultimately liquidity in the bond market."
He added: "In this context, centralisation of the bond market at the (stock) exchange has become a key priority."
Botswana's bond market has grown from P2,5 billion to over P10,5 billion in the past five years.
ZSE CEO, Alban Chirume, said: "We believe the environment is ripe for the re-launch of the debt market as appetite from issuers and investors is high."
Chirume said the fixed income market in Zimbabwe is estimated to be over US$1 billion, which could grow with the revival of the regulated ZSE trading platform for bonds.
