East African bond window yet to take off three years on

A regional bond issuance window created by East Africa’s capital markets regulators in 2014 is yet to register a single transaction to date. The bond was expected to facilitate fundraising activities by international lenders.

Industry players cite high interest rates and a shortage of lending avenues for commercial banks due to a lack of transactions.

Under the regional bond window, issuers are permitted to float a multi currency, multi country bond instrument co-ordinated by a single regulator across the bloc’s five regional member states as opposed to seeking traditional country-by-country transaction approvals, which are tedious and often take very long to obtain.

The bond would minimise transaction costs incurred by international financial institutions, raise the profile of East Africa’s capital markets among global investors and increase incomes for market intermediaries such as transaction advisors and stockbrokers.

Funds raised from these transactions are often invested in credit lines especially to private businesses mainly through commercial banks for onward long-term lending averaging seven years. Targeted international financial institutions include the African Development Bank, the International Finance Corporation and the PTA Bank.

Increased government borrowing in the domestic markets for infrastructure projects and tax revenue shortfalls experienced in recent times have also put pressure on interest rates earned on Treasury bills and bonds — key pricing benchmarks for corporate bonds and commercial bank loans.

“Governments have been borrowing a lot over the past two years, crowding out the private sector from the credit market due to costs,” said Kenneth Kitariko, chief executive at African Alliance Uganda, a stock brokerage and asset management firm.

Treasury bills and bonds have remained in double digit territory, with interest rates earned on many government securities registering notable increases in recent months.  

This translates into higher interest rates on corporate bonds that offer fixed and floating rates and higher lending rates levied by commercial banks that rely on the 91-day Treasury bill to determine borrowing rates, experts say.

For example, Uganda’s 91-day Treasury bill posted a yield of 13.3 per cent last week while the five-year and 10-year Treasury bonds recorded yields of 16.7 per cent and 16.6 per cent respectively. Kenya’s 91-day Treasury bill stood at 8.7 per cent last week while Tanzania’s 10-year bond registered a yield of 18.6 per cent, according to financial market reports.

Slow economic growth also triggered revenue deficits in all member states in the 2015/16 financial year.

The task of driving growth in this product window lies with the issuers and not the capital markets regulators, said the chief executive of Uganda’s Capital Markets Authority, Keith Kalyegira.

He added: “Investors should also stop viewing regional capital markets more as avenues for exiting investments than for raising new capital.”

Investors also shy away from borrowing during election cycles for fear of losing their assets in the event of chaos. While Tanzania held a generally peaceful general election in 2015, there were allegations of irregularities in Uganda’s poll in February last year. Kenya and Rwanda are scheduled to hold elections this year.

“The high default rates across the region since last year have also discouraged international lenders from raising funds in the local capital markets,” said Dr Alexis Rwabizambuga, chief country economist at the AfDB Uganda country office.

The Financial Stability Report for the period ending June 2016 shows that non-performing loan ratios for Uganda, Kenya, Tanzania, Rwanda and Burundi stood at 8.3 per cent, 8.5 per cent, 8.7 per cent, 7.0 per cent and 18.5 per cent respectively.