RBZ debt base for bond market

Finance and Economic Development Minister Mthuli Ncube, says the conversion of the over $3 billion Reserve of Zimbabwe (RBZ) overdraft debt into a long term interest earning instrument, will help lay a strong foundation for the reintroduction of a viable bond or debt market.

This comes as Government on recent separate occasions, floated two sets of Treasury Bills to raise funds for Government programmes, test market appetite for fixed income or debt securities and define a yield curve.

In both instances, the separate batches of Treasury Bills of $30 million and $60 million, respectively were oversubscribed by investors, giving positive indication that a bond market in Zimbabwe could be successfully reintroduced and be viably sustained.

A bond market, which essentially, is a financial marketplace where investors can trade in government-issued and corporate-issued debt fixed income securities, could help the corporate sector and Treasury to raise funding for various programmes in the absence of foreign lines of credit.

The Zimbabwe Stock Exchange in 2017 established a fixed income board to facilitate the operation of its re-established debt market nearly two decades after it ceased operating. The platform is for the listing and trading of fixed income or debt securities such as Treasury Bills.

Minister Ncube said the conversion of the RBZ debt from the overdraft window to a long term financial instrument, was part of successful fiscal consolidation measures his ministry had instituted to contain wasteful spending by Government.

He made the remarks in an interview with

SABC TV in Cape Town, South Africa, on the sidelines of the World Economic Forum on Africa, further indicating that the economy was in transition and would require at least 18 months for results of his policies to start showing.

“In 2018, fiscal deficit was double digit, just above 10 percent of GDP (Gross Domestic Product), but that is in the past, since January 2019 to the last eight months, we have run a (budget) surplus every month.

“So, there have been very strong fiscal consolidation measures under the theme of ‘Austerity for Prosperity’, which really is targeted at Government to make sure that we really live within our means.

“We are doing that, we have right sized the civil service, we have cut down on Government waste, but also we have expanded the tax net by introducing an electronic transactions tax of 2 percent,” he said.

Minister Ncube said Government was now more efficient in terms of tax revenue collection, pointing out that the Zimbabwe Revenue Authority was now very effective, which has assisted fiscal consolidation.

“We have also shut down the use of the borrowing window at the central bank as Government, we are not borrowing anymore because we have enough resources as Government to finance Government programmes.

“And we have converted the RBZ overdraft into a long-term instrument, which is also very good because we can develop a bond market going forward. So things have gone very well on the fiscal consolidation front,” Minister Ncube said.

The RBZ overdraft window was part of funding sources used by Government to borrow and spend beyond its means, resulting in unsustainable national budget overruns, which also had a destabilising effect on the country’s financial sector and put pressures on inflation.

A Treasury spokesman, Clive Mphambela, said the conversion of the RBZ overdraft facility debt was part of domestic debt restructuring by Government into tenures of 3 to 15 years, which the minister made reference to in his midterm budget state.

Minister Ncube said the RBZ overdraft facility and cash advances were the main drivers of the dramatic increase of Government domestic debt in 2018, which also fuelled a budget deficit of over $2 billion.

Mphambela said the restructuring of the domestic debt into long-term instruments was the reason the debt came down from over $10 billion at the beginning of the year to about $8,8 billion by June.

“So part of that was the Reserve Bank overdraft being paid off and part of it being restructured into longer term Treasury instruments of between 3 years and 15 years tenure.

“The bond market requires a few things and one of them the yield curve, that is why the Government has embarked on this programme of issuing regular open market Treasury Bills,” Mphambela said this week.

He pointed out that while the Treasury Bills helped raise funding for key Government programmes, the main objective was also to establish a discernible
yield curve against which fixed income instruments and other assets in the economy can be priced off again.

Amid a number of ongoing economic reforms, Zimbabwe is seeking to revamp its investment markets and has thus far issued first and second treasury bills auctions with an eye to revamp capital markets.

The highest bid rate on the first batch of Treasury Bills was 47 percent and the lowest was 13 percent while the weighted average came in at between 16,5 percent and 19 percent.

Unrestrained Treasury Bill issuance under the previous administration worsened the country’s economic situation, as they were used to fund the government’s expenditures.

But secretary for Finance George Guvamatanga, said recently Treasury will soon come to the market with an infrastructure bond to be supported by a ring-fenced structure utilising Zimbabwe National Roads Authority (Zinara) cashflows for road construction.