HomeBusinessLiquidity crunch affects bonds uptake: Analysts

Liquidity crunch affects bonds uptake: Analysts

Finance minister, Tendai Biti, recently announced that the large infrastructure funding requirements could not be met from the current levels of fiscal revenues, given the disproportionate demands on government arising from both discretionary and non-discretionary recurrent expenditures.

Zimbabwe’s dilapidated infrastructure network requires an estimated US$16 billion for rehabilitation and upgrading but government is not in a position to raise this amount, owing to investor apathy and insufficient financial resources.

Biti noted that the state of the country’s infrastructure is so critical to the extent that it calls for immediate interventions. It is against this background that Biti said government would mandate the Infrastructure Development Bank of Zimbabwe to issue Infrastructure Development Bonds to the tune of US$50 million in order to complement budget resources set aside to finance the rehabilitation of infrastructure.

Key features of the bonds include a five-year tenor, 10% interest rate per annum, government guarantee, prescribed asset status, liquid status and tax exemption, among others. Biti also said that a Sinking Fund would also be established to facilitate interest and principal payments.

Economic analyst, Eric Bloch said that while the bonds have the advantage of prescribed asset status, where insurance companies and pension funds can invest in government portfolios, the issue of institutional liquidity is of paramount importance.

“The bonds should have been introduced many years ago. Although they have favourable interest rates and are tradable, under normal circumstances they should be snapped up, but institutional liquidity may serve as the main impeding factor,” Bloch said.

Although government brought about economic stability through the introduction of a multi-currency regime in February 2009, investment has not been as forthcoming into the country’s infrastructure network, owing largely to government policy inconsistency.

Economist David Mupamhadzi told Standardbusiness that the introduction of the bonds was a commendable move that would help revive the interbank market.
“One of the biggest challenges was that the interbank market was almost dead due to the lack of tradable assets. The move is a noble idea meant to revive interbank activity hence this will resuscitate the interbank market,” said Mupamhadzi. “The bonds can be used as a risk-free asset therefore chances of default risk are minimal as it is guaranteed by government,” he said.

 

Addressing liquidity crisis boost confidence: Chinyama

 

Economist Witness Chinyama said the bonds were representative of a long-term solution, but issues that matter have to be dealt with first. “The prevailing liquidity challenges have to be addressed first because this serves as a function of confidence in the financial sector. The lender of last resort issue has to take root while the risk aspect needs to be looked at,” he said.

“The tenor of these bonds is one weakness. Given the prevailing economic environment which has many risks, investors prefer short- term investments, they want to stay close to their money,” said Chinyama, adding that the market’s appetite would ultimately determine the success of the bonds.

 

 

 

 

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