On Friday, January 22, 2010 the Rwanda Over-The-Counter (ROTC) market received yet another government boost through the listing of a fourth government treasury bond in a spell of roughly two years.

The Rwf2.5 billion bond with an interest rate of 9.5 percent per annum (the highest amongst all debt securities listed on the ROTC market) replaces the two year Rwf5 billion treasury bond that expired on January 14, 2010.
Government also plans to issue Rwf10 billion in bonds this year.  

To direct the debate, a treasury bond is a long-term debt instrument with a fixed interest rate that is issued by government. It is backed by government’s "full faith and credit”.

When an investor buys a treasury bond, it means that he/she has lent money to government and government is obliged to pay-off that debt upon maturity.

These bonds offer enormous benefits, especially in terms of development of the stock exchange as well as distribution or transfer of savings in an economy.

The development of a government bond market in Rwanda is seen as a crucial step in providing the infrastructure for the development of the overall bond market in terms of volume, risk-free benchmark price signal and market liquidity for active secondary market trading.

It is also important for the stock exchange in Rwanda to build a yield curve that gives the relation between the interest rate (or cost of borrowing) and the time to maturity of the debt for a given borrower in a given currency.

This yield curve is used as a benchmark for other debt like mortgage rates or bank lending rates in the market. It also provides the paramount guide to the future behavior of inflation and interest rates. And that can only be attained if more bonds are listed.

However, much as government has ambitious plans of developing the stock exchange through increased liquidity, more bonds could also exert pressure on the country’s debt status. 

Statistics reveal that the listing of the fourth bond puts the total outstanding government debt in form of bonds at Rwf12.7 billion.

This figure could rise to Rwf22.7 billion if government succeeds in issuing its planned Rwf10 billion bonds by the end of this year.

Already official figures suggest that Rwanda’s debt has seen a significant rise since 2005. In 2005 it stood at $218.7 million, then to $263.9 million, to $323.8 million in the subsequent years until it rested at a lower level of $284.1 million in 2008.

So the surge in the supply of government bonds will exacerbate the figure. 

Since the inception of the Capital Market Advisory Council (CMAC) and the ROTC market in 2008, Rwanda’s domestic bond market has also grown progressively, dominated largely by the government bond market.

Since these securities offer the safest investment vehicles (because they are backed by the full faith and credit of government), they appeal to a wide range of investors, including banks, insurance companies, pension bodies, as well as individuals.

This excellent credit risk explains why the recently floated treasury bond on the ROTC market was over subscribed by Rwf1 billion.

This means that most institutions like banks that are always at the helm of providing liquidity into the economy are likely to hold back lending to the private sector in favour of the less risky treasury bonds.

However, this may not be good news for the private sector that exhibited high pressing need for money throughout last 2009.

As a result, the large influx of treasury bonds could also possibly increase the market interest rates for individuals and institutions, which may lead to further drops in local lending because the private sector will find it too costly to borrow. 

So the issuance of these bonds seem to be too soon given the fact that the economy has not yet fully recovered from the liquidity crunch that dragged on throughout last year.

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