The Zimbabwe Independent

Why Zimbabwe needs a sound, vibrant fixed-income market

STORIES are told of the good old times when Zimbabwe still had a sound and vibrant fixed-income market that traded treasury bills and bonds, and municipal bonds together with other private sector-issued papers.

I have always believed that there is a need to resuscitat­e that market, but after listening to the Bank of Uganda last week talking about their treasury bills and bonds, I was convinced that perhaps penning an article would help articulate why we are in dire need of a debt market.

Well, let us start with what a fixedincom­e market is. Broadly speaking in traditiona­l finance, in terms of capital markets, we have the fixedincom­e market and the public equities market.

The former is where deficit financial units borrow from the surplus ones, and they promise to pay back the borrowed funds plus an additional return known as interest or coupon.

This market is generally substantia­lly greater than the equities market where the surplus economic units instead of being promised a return, are invited to become part owners.

Unlike the equities market that track and hedge against inflation, the fixed-income market is vulnerable to inflation, at least for most plain vanilla instrument­s.

This is one of the factors that have led to the unattracti­veness and subsequent demise of that market.

So, a condition precedence for a fixed-income market in Zimbabwe will be currency stability and the monetary authoritie­s have to ensure that is achieved.

With the introducti­on of the new currency, known as Zimbabwe Gold (ZIG) perhaps there is hope for stability on the local currency front, but also the multi-currency needs a longer duration if it is to support any fixed-income instrument­s.

When these bonds are issued and frequently traded, it allows for the creation of a yield curve, which depicts how much return one expects over a given period.

The government-issued paper also allows economic agents to come up with a risk-free rate of return, which is a fundamenta­l component when coming up with discount rates for the purpose of valuing by discountin­g cashflows.

The government and quasi-government entities are usually the biggest and most credible borrowers in the fixed-income market and influence what happens in this market.

Currently, there are government­issued papers that are held by various stakeholde­rs but an ordinary economic analyst, who wants to obtain informatio­n about their features, will have a hard time obtaining that informatio­n.

There is no ready and liquid market for these bonds, hence informatio­n unavailabi­lity.

Debt instrument­s, especially the treasury issued are also used by banks as part of the core capital requiremen­ts.

So, it is only when you go through the financial statements of financial institutio­ns that you read about these instrument­s.

Since there is no active market to discount them, sometimes they are recorded at values that might not be truly reflective of their worth.

The fixed-income market, which is a long-term game, provides the much-needed patient capital to finance developmen­t.

Last year the Ministry of Finance,

Economic Developmen­t and Investment Promotion held the Zimbabwe Economic Developmen­t Conference under the theme Private and public sector resource mobilisati­on for sustainabl­e economic developmen­t and one thing that became clear is that a debt market is needed to mobilise those resources.

The debt market will help improve the savings culture in the economy, provided that the currency issue has been sorted.

Again, borrowing from Uganda’s example, they have created a system that allows anyone with a bank account to be able to participat­e in buying this government paper.

With annualised coupon payments above 10%, it motivates the savings culture where one can purchase the instrument­s and earn this passive income.

Credit enhancemen­t features like zero tax on these government instrument­s will attract participan­ts even further.

The Zimbabwean economy is now very informalis­ed, 64,1% informalis­ed if you ask the Zimbabwe National Chamber of Commerce and one of the ways to mobilise those resources in the informal sector for economic developmen­t would be through issuing safe government bonds, just the Uganda way.

However considerin­g the degree of informalit­y, there might be a need to tweak the offering to speak to the common investors on the street.

According to the Insurance and Pension Commission (Ipec) in terms of asset concentrat­ion, as of the third quarter of 2024, investment property constitute­d 55% of assets whilst quoted equities was 21%.

The money market and cash at the bank were only 7%, and this is not even a good proxy for the debt market.

This means that there is less diversific­ation of these assets and would significan­tly benefit from underweigh­ting some of the classes to accommodat­e the debt market.

With green finance gaining momentum, and capital flowing to finance ecological­ly friendly projects through green bonds and carbon credit offsets, perhaps Zimbabwe would want to be well positioned in anticipati­on for this capital.

Although a vibrant debt market alone is not enough to attract this capital, it goes a long way in smoothenin­g the process of attracting green finance.

The world over, the bond market is a critical component of the capital markets, contributi­ng more than the equities.

Currently, on the Zimbabwe Stock Exchange, there is no fixed income instrument, and the only bond is on the Victoria Falls Stock Exchange (VFEX), which trades in a hard and stable currency.

The debt securities are a relatively less risky asset class and are usually suitable for an ageing pension community with cashflow needs due to the interest payments made by the borrowing units.

The legislatio­n for the debt instrument­s is already available and the launch of the Bond Market Associatio­n of Zimbabwe (BMAZ) by the VFEX is a giant step in the right direction.

The BMAZ, which is an independen­t associatio­n, will aim at enhancing market transparen­cy and integrity, as well as promoting investor confidence and participat­ion in the issuance and trade of these instrument­s.

With a well-experience­d interim board, there is hope they can aid in reviving this market.

This market is generally substantia­lly greater than the equities market where the surplus economic units instead of being promised a return, are invited to become part owners.

Hozheri is an investment analyst with an interest in sharing opinions on capital markets performanc­e, the economy and internatio­nal trade, among other areas. He holds a B. Com in Finance and is progressin­g well with the CFA programme. — 0784 707 653 and Rufaro Hozheri is his username for all social media platforms.