Africa-Press – Eswatini. Today I am going to discuss the concept of bonds and what it means for the Government of Eswatini to list a bond at the Johannesburg Stock Exchange (JSE). I found it fitting to weigh in on the issue because traditionally, sovereign debt is raised through debt instruments from the Central Bank and we are used to sovereign debt coming in through the channel of multilateral institutions. The use of economic jargon is deliberate in today’s article because part of the intent of the column is to educate the nation on basic economic issues and terms, while breaking the issues down to a level where humans can relate to the economy. Sovereign debt is the government debt of a country, a sovereign nation. It is also referred to as government debt, national debt, public debt, or country debt.
Government bonds
Government bonds are issued by governments to raise money to finance projects or day-to-day operations. In the case of Eswatini, the Ministry of Finance will list the bonds with the Central Bank of Eswatini (cbe) and often it is large banks that can buy these bonds because of the minimum purchase requirements. Essentially, bonds are a machinery for the government to raise money from the public. In simple form, we can think of it as an I owe you agreement or a promissory note in which the government borrows money from the public, with a promise to pay a certain amount of interest periodically and pay back the lumpsum after a period of time lapses. These are the bonds that the Government of Eswatini was listing in the CBE. Bonds constitute some of the instruments through which the government finances its deficit or rather the shortfall of revenue against planned spending in an economy.
Primary and secondary bond markets
Government bonds can also be traded in the secondary market. Individual investors, working with a financial institution or broker, can buy and sell previously issued bonds through the marketplace in this case, the Johannesburg Stock Exchange. The primary market is the new issues market and the transactions occur directly between the bond issuer (Government of Eswatini) and the bond buyers. In the case of market listed bonds, the marketplace is the stock exchange in which the bond is listed. Bonds are traded on the primary market and the secondary market. The primary market is the ‘new issues’ market and transactions occur directly between the bond issuers and the bond buyers. This offering is known as the primary distribution. The primary market holds brand-new debt securities not previously offered to the public. By definition, what the government has at the JSE is a primary issue. Next we need to disentangle the divergence from the norm by the government of Eswatini. I am sure the question lingers, why has the government shifted to market bonds instead of the norm of listing a bond within thee Central Bank.
Deviation from the norm
Diversifying the government’s debt portfolio is a remarkable way to insulate the domestic market, while expanding the horizon for capital acquisition. The first reason the government lists a bond in private markets is to raise money from a broader pool of investor. The debt instruments listed on active stock exchanges such as the JSE can be traded by a lot of investors compared to a bond issued by the Central Bank. This increases the probability of raising the money required to finance the deficit compared to locally issued bonds.
Advantages
Listing in open markets enables the government to raise money, which does not come with restrictions, conditions and requirements. The government has more flexibility to use the funds to finance the local developmental agenda, while retaining pure sovereignty. The only requirement for market listed bonds is that you must pay the interest when it is due and also you must pay back the capital when the bond matures or comes to term. Secondly, African economies tend to attract a higher interest compared to western economies when raising debt through the multilateral institutions.
This discrimination has led to a strong voice calling for the recalibration of multilateral institutions to ensure equity. In the markets, your bond needs to pay a competitive interest to attract investors and this is usually close to the obtaining rate in the markets. Lastly, listing in the JSE insulates the fiscus since the unit of exchange in the JSE is the Rand which is pegged at a one to one basis with the lilangeni hence the repayments will not fall prey to exchange rate fluctuations. Also, it is a way to protect the local banking system. Currently public domestic debt stands at E17.64 billion, which is equivalent to 18.83 per cent of GDP. Ideally this ration should not exceed 20 per cent, to ensure that the government pays back the money without exerting to much pressure on the fiscus. In the event of sovereign default, the domestic financial system would suffer severely.
Caution
Though the advantages of market driven debt instruments are huge, it is imperative that the funds are spent prudently. In the end this is debt that must be repayed.
Source: times
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