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Government to issue K3bn bond

Government will next week issue a K3 billion five-year fixed coupon bond at the rate of 12 percent to help restructure its ballooning domestic debt currently at around K1.1 trillion or 25.6 percent of gross domestic product (GDP) as at June 30.

However, analysts warned government to expect a lukewarm response to the bond as the market is still risky in the eyes of investors.

The government move comes barely three months after it issued a K20 billion two-year fixed coupon bond at a rate of 11 percent, which also received a feeble responses from the investing public.

Similarly, in 2016, government issued three bonds worth K109.2 billion on the local bourse, which included a three-year K107 billion bond with a coupon rate of 15 percent, a K1.5 billion four-year bond at a 9.5 percent coupon rate and a five-year K822 million bond at a coupon rate of 10 percent, but all three got mild response from investors.

In an interview yesterday, African Alliance Securities Limited chief executive officer Armstrong Kamphoni, while pointing out that the coupon rate at 12 percent is reasonable since interest rates have also come down, noted that the investing public remains nervous to invest in securities because of the volatility of interest rates.

He said: “Going long-term is better because this reduces the pressure of debt repayment and if the economy will remain stable, it is good that we should be moving in that direction [long-dated papers].

“However, the only problem that we see is the market is used to short-term paper, the 91-days to a year paper. My experience with the market is that they tend to be nervous with market dynamics and because this is a fixed rate coupon, it will surely depend on how the market looks at it,” he said.

Speaking separately, another market analyst said chances of the bond performing well are fifty-fifty.

“The fact that there has been no trading on the previously issued government bonds poses a liquidity risk for investors who may like the option of cashing in before the bond runs its full term.

“However, we cannot rule out the fact that the macroeconomic environment has largely been stable and this may instill some confidence in the market,” he said.

But Ministry of Finance, Economic Planning and Development spokesperson Davis Sado remains upbeat the long-term paper will perform well.

“Bonds give government ample time to plan in terms of debt management from long-term to short-term. We have looked into several options but still think this is a way to go. We are hoping to see this bond perform better,” he said.

For the past three financial years from 2014/15, government has intensified efforts to consistently restructure its domestic debt and reduce borrowing.

In economics, debt restructuring is a process that allows a private or public company, or a sovereign entity, in this case government, facing cash-flow problems and financial distress, to reduce and renegotiate its delinquent debts to improve or restore liquidity to continue its operations.

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