Monday, February 22, 2016

DRC to issue Treasury bonds… is it the right time?

The government of the Democratic Republic of the Congo has decided to issue Treasury Bonds to finance its short/long term operations. The main reason for a government (or a company) to issue bonds is to diversify its sources of funding. Central bank regulation limits the amount any bank can lend to a single borrower. This amount is particularly true in the DRC where banks balance sheet are too small to finance big infrastructure projects even through credit syndication.

The maturity to be offered are 3,6 and 12 months for “bons du trésor” and above 12 months for « Obligations ».  “Bons du trésor” can be regarded as T-Bills in other countries although they won’t be auctioned off to investors at a discount to par. The “obligations” will be working more like your regular T-Bonds. The bonds will be issued in Congolese Francs.

There are several issues in my opinion in issuing bonds in the current situation. The most obvious one is the lack of trust in the local government. What will happen if the government fails to pay its debt at maturity? The treasury could print more money to fix the issue, right? The issue with printing more money is that the currency will lose its value and the investors their money. As a consequence, the investors will request higher yield to compensate the potential inflation.

Another issue is linked to the purpose of those bonds. What will the money be used for? The reason I am asking that is that the bonds will be issued in the local currency but the country is dollarized at more than 85%!  If the government raises money to pay for expenses that will be probably in USD dollars then they will increase the demand for foreign currency on a market that is already extremely tense (we will come back to this in a different article)           


My last observation and I am sure that we could find many more is related to the political situation in the DRC. It is difficult to imagine investors purchasing DRC long-term debt not knowing what will happen in the near future. Uncertainty is very bad for business in general and it will certainly be a major factor on either or not these issuances are a success or not…

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