eBusiness Weekly
Tawanda Musarurwa
Treasury will use Brady Bonds to expunge US$1,2 billion worth of external private sector legacy debts as Government moves to restore and increase investor confidence in the country, it has been learnt.
Several companies — especially foreign firms — in the country have a number of unsettled foreign obligations due to the prevailing foreign currency shortages among other factors. It was, however, not immediately clear when Treasury will issue the bonds — some of the most liquid securities used by developing countries. Zimbabwe’s private sector is saddled with external loans it has failed to service due to a crippling US dollar crunch, which has seen it reintroduce local currency and ban transactions in forex.
Questions had started to emerge about how the Government would settle the private sector US dollar denominated date at a time it is battling a cocktail of other US dollar obligations.
Further, Government is also still working on measures to settle external debt amounting to about US$8,5 billion, including to Bretton Woods institutions, AfDB, Paris Club and EIB.
Said Finance and Economic Development Minister Mthuli Ncube recently: “Government will assist the private sector with their legacy loans (to be assumed at a rate of 1 to 1 with US dollar.”
Legacy loans, more commonly known as ‘blocked funds’, is money generated by a company’s foreign operations that cannot be moved from one country to another because of one or more regulations in the country in which the money was generated.
In some instances, a government may place a limit on the maximum amount that may be moved out of a country over a given period of time.
Reserve Bank of Zimbabwe (RBZ) governor Dr John Mangudya, said one of the major ways in which the legacy debts will be purged is through the issuance of Brady Bonds.
“Legacy debts are basically blocked funds. We are working on that to ensure that there is confidence in the market. The Ministry of Finance and myself are looking at many ways of doing it (dealing with legacy loans), including the use of Brady Bonds,” he said.
“It has been done in many countries such as Argentina, Brazil, Bulgaria, Costa Rica, Mexico, Morocco, Nigeria, the Philippines, Russia, Venezuela, just to mention a few. So it’s basically a model that you can use to deal with blocked funds.”
Typical risks that investors face with Brady Bonds are interest rate risk, sovereign risk, and credit risk.
What is a Brady Bond?
According to Investopedia, Brady bonds are bonds that are issued by the governments of developing countries.
Brady bonds are some of the most liquid emerging market securities.
The bonds are named after former United States Treasury Secretary Nicholas Brady, who sponsored the effort to restructure emerging markets debts. Most issuers tend to be Latin American countries.
“The idea behind the bonds was to
allow commercial banks to exchange their claims on developing countries into tradable instruments, allowing them to get non-performing debt off their balance sheets and replacing it with a bond issued by the same creditor.
“Since the bank exchanges a non-performing loan for a performing bond, the debtor Government’s liability becomes the payment on the bond, rather than the bank loan.
“This reduced the concentration risk to these banks,” says Investopedia.
At the end of last month, Dr Mangudya announced that it would “direct banks to transfer to the RBZ the RTGS$/ZWL$s that they are holding as counterpart funds for the foreign currency historical or legacy debt that Government through the Reserve Bank, is assuming at the rate of 1:1 between the RTGS$ and the United States dollar.”
Some observers have, however, questioned the logic of subsidising private firms.
“With interbank above 1:6, it implies more than ZWL$6 billion will either be printed or expropriated from Treasury to subsidise this cost,” said economist Brains Muchemwa.
“But why? At whose cost? Why such brazen fiscal imprudence? We will pay through inflation.”
Meanwhile, University of Zimbabwe economics professor, Ashok Chakravarti has previously suggested that the monetary authorities should consider issuing a long maturity US dollar Brady-type Bond that can help in preserving the value of RTGS$ balances.
“To prevent the value of RTGS balances depreciating excessively, a long maturity United States Dollar Brady-type Bond can be created.
“This bond can be exchanged for a certain proportion of the TB’s held by the banking system at 1:1.
The banks can then allocate these to deposit holders who wish to extinguish a part of their RTGS balances.
“The new bond will have to supported by collateral, otherwise there is no difference between it and any other government debt instrument. For this purpose, a sinking fund can be created and invested in zero coupon US dollar STRIPS,” suggested Professor Chakravarti.
“Current price of 30 year STRIPS maturing in 2048 is 36,27, that is, $1 billion worth of this bond can be collateralised by purchasing 360 million worth of STRIPS today.
A 3 percent tax should be levied on the forex auction platform.
“This will generate $100 million a year to fund the sinking fund.”
Prof Chakravarti added that the Bond should be fully tradable within Zimbabwe, and to this extent the issue of sovereign risk would fall away.
