On April 25th 2013, Rwanda completed the issuance of a 10-year $400m on Irish Stock exchange market the first of its kind in East Africa. The bond was highly over-subscribed and priced to perfection.

The bond which carries a coupon (price) of 6.625%, recorded large order book with a total subscription of $3.5 billion, more than 8.5 times over and above the intended amount of $400 million with over 250 investors across the globe participating.

This underscores Rwanda’s economic maturity and its huge attractiveness to investors on the international bond market.

In the face of the declining funds in official development assistance and with bank lending almost at a standstill, a number of nations and companies have turned to the debt capital markets alternative methods of raising finance and, in particular, to Eurobonds as a more stable investment vehicle.

Ghana was the first sub-Saharan African country other than South Africa to issue an international bond. Since then, it has been joined by Gabon, Senegal, Ivory Coast, Congo Republic, Nigeria, Namibia, Zambia and now Rwanda.

The issuance of the bond reflects the country’s push towards reducing dependency on international aid, and loans from multilateral agencies to realize her long term dreams of becoming a middle income and self reliance nation.

What is a Eurobond?

A Eurobond is a promissory note, issued on the European money market by the government of Rwanda asking people or companies with money to lend us money on the promise that the Government will pay it back in ten years with interest.

Practically, the Rwandan government through the National Bank of Rwanda (BNR) gives these private investors (for they will make a huge profit out of it) a piece of paper known as a bond and in return the Governor collects on our behalf US$400 million cash in form of a loan.

Eurobonds are marketed to institutional investors on the international capital markets by specialized brokers or banks commonly known as lead managers on behalf of the bond issuer. For instance BNP Paribas SA and Citigroup were appointed by the government as lead managers for the 10-year bond offering.

In reality, Eurobond has nothing to do with the 'Euro'. In this context, the term 'Euro' refers to the international aspect of the relevant bonds, which are issued and traded outside the country in whose currency they are denominated, and outside the regulations of a single country.

Such bonds are free of withholding tax and traded electronically, rather than in physical form. They are denominated in a currency other than that of the country in which they are issued and are usually issued in more than one country of issue and traded across international financial centres.

Supranational organizations, governments, corporations including banks and multinational entities such as the World Bank are major issuers in the Eurobond market for many reasons but most especially financing for capital and other projects.

Eurobonds are not regulated by the country of the currency in which they are denominated. They are so-called “bearer bonds”, and not registered anywhere centrally, so whoever holds or bears the bond is considered the owner.

Their “bearer” status enables Eurobonds to be held anonymously.

The Eurobond market is largely a wholesale, institutional market with bonds held by large institutions. There are few individual investors in the Eurobond market, since many investors hold Eurobonds for a long time, these bond issues may not be frequently traded which will make it more difficult for an investor who wants to buy or sell a Eurobond to assess the market price.

What are the Benefits?

Like everything else in economics the choices we make have a cost and a benefit. The test is when the two cancel each other, whether it results in net benefits or net loss. What are the benefits?

There are numerous benefits associated with Eurobond as an alternative source of financing that nations like Rwanda want to tap in. Taxpayers perhaps have a right to ask and know benefits and risk associated government decision to borrow from international stock market and later spend your hard-earned tax Francs to pay back these loans of such kind.

The answer is quite straight forward and simple. Having laid the foundations for prosperity, the bond is a bold step on the path of economic maturity. Eurobonds are increasingly emerging as an attractive source of funding for many African countries because they are at historically low interest rates in hard currency markets.

Given the modest size of the economy and low external debt, $400 million is a meaningful amount for Rwanda to borrow.

US$400 million is a significant cash inflow into the Rwandan economy, roughly 16 per cent of our 2012/13 national budget. This is money that would otherwise not have been there out of our own productive efforts. This money will help take the pressure off taxpayers for additional taxes to finance public investments.

Rwanda's debut Eurobond issue will enhance the country's external debt profile, support GDP growth and help attract more investments. The proceeds of the Eurobond will partly be used to retire some of existing expensive shorter-term debt, a move that will increase Rwanda's fiscal headroom and debt management.

In additional to being cheap to borrow, unlike many concessional loans which are often tied to a particular project and procurement source, the Eurobond funds are not tied to any project and few conditions and strings attached; allowing the government complete discretion on how it applies the money. It is typically of a longer maturity and the rates are lower than local currency-issued debt.

Proceeds of the bond when used to finance strategic investment will no doubt help attract more investments in the country and create more employment opportunities for Rwandans. Once the funds from the bond begin to flow into the country and earmarked investment projects commence, this massive infrastructure projects will require more labour.

This would enable more people to get employed and more companies created and hence more jobs created for Rwandans hence reducing unemployment levels. This fits well with government target of creating 200,000 off farm jobs each year.

The bond would raise the profile of the country on international investors and markets. This will improve Rwanda’s credibility and encourage more reputable investors to invest into the country an issue that will have further long run positive impact one being increase of foreign direct investments.

With Rwanda’s young financial sector, an alternative external source of financing is a wise move in attempt to reduce pressure that governments put on domestic money markets. This leaves space for young private sector to have access on few loans within our domestic financial and non financial institutions.

With Rwanda’s strong ratings based on macro economic growth and stability, friendly business environment among others in recent past, Eurobonds has been long overdue given benefits that come along with long term foreign capital borrowing in form of Eurobonds.

However, the real benefit of this loan will only be known when the politicians decide how it must be used; therefore, it is only as good as its use.

In economics, it must generate more benefits to the economy than the cost of repaying it with interest. This depends largely on the efficiency with which the money is allocated, so-called allocative efficiency. Principally, at the least, it should lead to some people getting better off without anyone getting worse off.

What are the Challenges?

However, there are risks, one of the key challenges will be to use the proceeds entirely and efficiently, notably to support an increase in the narrow export base, strengthen external finances and allow faster accumulation of forex reserves.

The burden of foreign-currency deficit fluctuates with the exchange rate swings that can make repayment more expensive however; this can be mitigated by lower yields and longer-term maturities.

There is as well the risk whereby some nations tend to borrow excess even when there are no earmarked projects just for the sake of qualifying for the $500 million benchmark.

At less than $500 million, Rwanda's bond was ineligible for JP Morgan's emerging market bond indices that would have triggered demand from index trackers and ensured increased secondary market liquidity.

However, Rwanda was smart enough for having not carried away by oversubscription of the bond to increase the size. This demonstrated government commitment towards stable debt management.

It is risky for the government to borrow more than it needs without concrete earmarked projects. Some nations fall in this trap for the sole purpose of meeting the minimum index league and ended up in an increased debt service costs and refinancing risks.

Prerequisite for Eurobond issues

Announcing Eurobond does not come from nothing and it’s not something that can be achieved over night. It requires coordinated macro economic reforms by the issuer. Many countries have been trying this but all in vain.

The success of Eurobond does not depend on country’s reserves in terms of natural resources like oil and others, but how stable a nation’s macroeconomic and governance policies are. Eurobond success largely depends on the information investors have on the issuer and this is in most cases revealed by credit rating.

Before issuing a bond, countries hire prominent credit rating firms to assess the performance of the country in various disciplines. It’s from these credit rating results that most investors use to take a decision on where to invest.

Having grown consistently at an average of 8.2% over the past five years with low debt (22.8% of GDP in 2012), a track record of structural reforms, macroeconomic and political stability, reputation for being business-friendly, less corrupt nation among others, Rwanda’s debut Eurobond has been long overdue.

Timing

The timing of the bond was really perfect for Rwanda in a sense that part the bond proceeds will be used to speed up completion of ongoing projects that will have a spill-over effect on other developmental government agenda. The fact that this money comes at the time when we are launching EDPRS II is also something Rwanda will have to take advantage of.

What needs to be done?

Issue of Rwanda bond is a big moment and a turning point to Rwanda’s financing mechanisms. It is good for the confidence that investors have shown to Rwanda but how we manage this is key to ensure growth.

As we go into these Eurobond markets it requires us to continue to strengthen our debt management departments and fix any leakages that may still exist in tax systems, to properly channel these resources we borrow to avoid going back into the debt trap we were in 1980s.

Furthermore, taping in outside markets calls for the right policy response and institutional frameworks, a more business friendly policy and regulatory environment, and public sector investments that enhance growth by improving the efficiency and competitiveness of private investments.

We need to actively involve the private sector through dialogue in initiating developmental projects and work together in implementation of those projects for the benefit of all Rwandans.

We need as well to have a clear plan of investment and infrastructure that will have long-term economic benefits, rather than using the bond proceeds to finance our recurrent budget expenses.

Rwanda has set the standard and hence need to live up to the expectations. The transition from bilateral and multilateral borrowing suggests that Rwanda has moved from the political arena where debts are written off or rescheduled, ideologies and philosophies are traded against loans, and international political alliances offer pay-offs.

Accordingly, we must now be prepared to play by the international rules and recognize the opportunities and threats that lie ahead. The international bond arena is one where we must meet our deadlines, honor our commitments and be prepared to stake our reputation.

As donor flows significantly continue to be curtailed, East African Countries should strategize on how to get more access on the global capital markets to finance joint infrastructure projects.