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The East African : December 16th 2013
SAVING THE NILE PERCH EA countries support recovery efforts of the multibillion dollar fish. Page 47 BUSINESS DECEMBER 14-20,2013 HIGH COST OF BORROWING EADB’s $125m regional bond put on hold over high interest rates The bank intended to use the cash to finance long-te≥m p≥ojects in the ≥egion By MARTIN LUTHER OKETCH Special Correspondent planned bond issue targeted at raising the equivalent of $125 million, in the face of sustained high interest rates. East African Development T Bank was widely expected to issue a corporate bond in the four EAC countries of Kenya, Uganda, Tanzania and Rwanda this year, but appears to have put the brakes on the issue due to the persistent high interest rates, despite policy interventions by the respective countries’ central banks. “The yields for government securities have remained high across East Africa. On average, long-term instruments have maintained yields above 10 per cent since last year. The yields do not reflect low inflation rates and low central bank rates,” said EADB director general Vivienne Yeda. “On account of high yields on money and capital instruments, the EADB had to maintain a less aggressive stance in its efforts to issue a regional bond in its four member states,” said Ms Yeda. Interest rates for commercial loans have remained relatively high in all the five EAC member states, averaging above 18 per cent, resulting in high costs of borrowing for business people. On the side of governments Treasury bill and bonds have averaged 10 per cent, keeping the cost of servicing domestic loans high. Yields on bonds are normally pegged at a premium above benchmark interest rates, meaning that overall high rates result in a higher cost of borrowing for issuers like EADB that use the instruments as a tool for mobilising long-term capital. he region’s main development financier has put on hold a FARMING FUNDS Land laws block private equity flow into region. Page 49 43 regional integration. In June this year, EADB was assigned a first-time rating of Ba1 by Moody’s on long-term foreign currency debt with a stable outlook. The Kampala-based development bank and regional financier, an organ of the EAC, was due to list a third corporate bond on the USE. Leo Oswald, an economist at EADB, told The EastAfrican that being a development bank, it was “technically hard” for the institution to list corporate bonds on the four stock exchanges in the current high interest rate environment. “The $125 million bond was to be divided equally among the four partner states depending on the needs of a particular country, but we are temporarily putting a halt on it as we study the levels of interest rates,” he said. Evans Osano, head of Efficient Securities Markets Institutional Development, a project of the International Finance Corporation, said that the picture on the ground indicates that governments continues to be the largest issuers of fixed income securities in East Africa. 18pc REGION’S PIONEER ISSUER EADB pioneered corporate bonds in East Africa, with the issuance of a Ksh820 million ($9.5 million at current exchange rates) instrument on the Nairobi Stock (now Securities) Exchange in 1996. In January 1998, the Uganda Securities Exchange started formal operations following the listing of its then only instrument — a Ush10 billion ($4 milion at current exchange rates) EADB bond, which had been initialled at the close of the previous year. Towards the end of 2000, the regional DFI issued a Tsh10 billion bond ($6.2 million at current rates), the first of its kind on the Dar es Salaam Stock Exchange. EADB has remained an active player on the regional bonds market, raising an equivalent of $140 million through nine local currency bonds within the EAC — four in Kenya, three in Tanzania and two in Uganda. Road under construction in Molo, in Kenya’s Rift Valley. Infrastructure development is part of EADB’s strategic focus for 2011-2015. Pic: Jimson Ndung’u Ms Yeda argued that throughout 2013, East African states experienced relatively low inflation rates, averaging around 5.6 per cent as compared with 2011 and 2012, when the rates averaged 11.62 per cent. However, other price indicators such as interest rates have not moved in tandem. Interest on government securities in Kenya averaged 11 per cent, while in Uganda, they ranged from 12 to 15 per cent, despite recent policy actions by central banks to bring the rates down. Ms Yeda is the patron of USE’s bonds, equity and related instruments forum which seeks to develop Uganda’s capital markets as well as provide longterm financing to the government and the private sector. The regional bank provides a broad range of financial services in its member states with the objective of strengthening socioeconomic development and Average interest rates for commercial loans in the five EAC member states He said that the high inflation and interest rates, was a serious problem in most African countries some 30 years ago, but is now on a downward trend. Currently, the volume of government securities in the region is roughly $11 billion, with Kenya having the highest figure of about $7 billion, Tanzania $3 billion and Uganda $1 billion. The other option to mobilise resources is through pension reform, which in EAC, is still largely a work in progress. EADB, which has been undergoing a period of relatively low activity due to a poorly funded kitty and a potentially debilitating court battle with Tanzanian firm Blueline — which has since been resolved — intended to use the bond to raise cash to finance long-term projects in the region. The bank is known to harbour ambitions of playing a prominent role in the region’s infrastructure market, where its continental peer and shareholder African Development Bank has recently taken on a high profile. It is understood that the issue is likely to be reviewed next year.
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