Kigali plans to raise funds from institutional and foreign investors through the capital markets in the face of faltering donor aid.
The Treasury is expected to resume borrowing on the local market at the end of this month by issuing a bond worth Rwf10 billion ($14.5 million) with a maturity of 10 years, to finance infrastructure projects mainly in energy and roads.
The bond will have a market-determined fixed coupon rate, and the bids are expected between May 25 and 27. Interest on the new bond will be subject to withholding tax at five per cent to East African Community residents and 15 per cent to non-EAC members.
Analysts say the bond should attract solid interest given the country’s good credit rating. In March, Standard & Poor’s rating revised Rwanda’s long-term credit outlook upwards from a “B” to “B+”rating, giving it a stable outlook.
The rebound of the Rwandan economy to 7 per cent growth in 2014 from 4.7 per cent registered in 2013 is also expected to boost investor confidence. In 2015, growth is projected at 6.5 per cent.
This will be the inaugural long-term maturity security issued by government as it seeks to boost the nascent Rwanda Stock Exchange (RSE), whose market capitalisation currently stands at just $4.1 billion.
The government plans to issue another 15-year bond in the course of the fiscal year 2016/17 though the amount is yet to be disclosed.
In the 2015/16 budget, the Treasury is expected to borrow at least Rwf30 billion ($43.5 million) through the sale of securities to allow book building to extend the yield curve to longer maturities for private listing and boost activity on the secondary market.
Specifically, the benchmark rates for longer maturities is expected to promote listing of corporate bonds. The central bank plans to introduce a structure of market shares for government debt securities that will be used to price on a daily basis the outstanding bonds in the primary and secondary market.
Currently, RSE has two corporate bonds — one local eight-year corporate bond worth Rwf10 billion ($14.5 million) issued in 2010 by I&M Bank (previously Commercial Bank of Rwanda).
Last year, the International Finance Corporation floated a bond worth Rwf15 billion ($22 million) with a maturity of five years, opening up international private bond listing on the RSE.
“We are already mobilising investors from the region. Institutional investors always have an appetite for long-term securities,” John Rwangombwa, the Governor of the National Bank of Rwanda, told The EastAfrican.
He sought to allay fears about heavy government borrowing saying the current level of liquidity in the market is sufficient.
Under the government’s quarterly issuance programme launched last year, the Treasury has so far issued bonds to the tune of Rwf42.5 billion ($61.8 million) with a maturities of three, five and seven years.
RSE chief executive Celestin Rwabukumba said frequent issuance of bonds by the government could help attract the private sector to borrow money through the RSE bond market. He added that frequent issuance will provide a benchmark for the private sector.
However, business executives caution that aggressive domestic borrowing by the government could slow down credit to the private sector due to competition for funds triggering high interest rates.
“There is enough liquidity. Interest rates should remain stable — but if inflation is rising, there is a risk that the direction will be upwards,” said Maurice Toroitich, the managing director of KCB Rwanda.
Rwanda’s inflation climbed slightly to 0.9 per cent year on year in April, up from 0.8 per cent in March, mainly driven by rising prices of food and non-alcoholic beverages.
The cost of borrowing has remained high, between 19 per cent and 17 per cent in April, according to central bank figures. This is in spite of the central bank keeping its lending rate unchanged at 6.5 per cent in March.