Short-term securities worry AfDB, analysts

 The African Development Bank (AfDB) has decried the Malawi Government’s preference for short-term debt securities with relatively high interest rates, saying this is worsening the country’s debt vulnerability.

In its 2023 Africa Economic Outlook, the pan-African bank said the domestic bond market is characterised by short-term securities with interest rates averaging 20 percent, attracting high repayments for the government.

Reads the report in part: “While this is good for commercial banks, it is a cause for concern because it may increase roll-over risk and borrowing costs which may exacerbate debt vulnerabilities as government may be tempted to turn to the restructuring of domestic debt.”

AfDB said with such a development, restructuring of domestic debt, currently hovering at K4.43 trillion as of December 2022, could become more frequent in future.

Currently, government securities, mostly Treasury bills (T-bills), have risen by an average of five percentage points across all the three tenors from the second half of last year to date.

Reserve Bank of Malawi data shows that T-bills rate for the 91 days increased to 13 percent from 9.47 percent while the 182-days average yield rose to 17.5 percent from 12.99 percent and the 364-days average yield rose to 19.5 percent from 15 percent.

Speaking in an interview yesterday, money market analyst Cosmas Chigwe said the development coincides with Treasury’s heavy borrowing

 from the domestic market and rising inflation rate currently at 28.8 percent as of April this year.

Despite indicating that it is normal for interest rates, especially T-bills rates to be rising when inflation rate is also rising, he said government borrowing pattern is what has mostly contributed to the situation.

He said: “It is a tough situation as the Treasury does not have the money to retire its debt instruments, therefore all maturing debt instruments will have to be refinanced at higher interest rates, further limiting fiscal space.

“Further, the Treasury bills rate is a key rate in calculating commercial banks’ reference rate, which determines at

 which rates banks lend. This entails that these rising interest rates will eventually be transferred to borrowers.

On his part, financial services strategist Misheck Esau said in an interview yesterday that with a lot of borrowing by government to finance this year’s national budget pegged at K3.7 trillion, the rise in interest on government securities is not surprising.

“On the other hand, inflation is on the run. As a result, authorities are forced to raise interest rates to tame runaway inflation,” he said.

In the end, Esau said, rates have to go up because government has to make borrowing expensive to tame inflation, but also raise T-bills rates to entice investors to invest to meet its huge borrowing appetite.

Meanwhile, Malawi’s sovereign debt stood at K7.9 trillion as at December 2022 from K7.3 trillion in September 2022, with K4.43 trillion comprising domestic debt, which is 114 percent of the total budget while K3.47 trillion is external debt, an equivalent of 90 percent of the total budget.

On the other hand, available data shows that in the five years to the 2023/24 financial year, for instance, Treasury will have paid an accumulated K2.2 trillion in debt service, which is the amount needed to repay the principal and interest on a debt, according to the draft 2023/24 financial statement.

The statement further showed that in terms of domestic debt, it has increased over the past years due to the high deficit financing and debt refinancing