Why Rwanda Must Keep Borrowing

In 2016, the Rwandan Government issued four government bonds; two 5 year bonds, one 3 year bond, and a 15 year bond. Presently the total value of outstanding government bond issues is approaching USD 200 million. About 55% of these bonds are held by institutional investors, 40% by banks, and 5% by retail investors.

But really none of that is as interesting or as important as the fact that the government has committed itself to keep issuing government bonds of various maturities on a quarterly basis. Why does this matter? Because of the Yield Curve.

The Yield Curve is the sometimes overlooked and underappreciated backbone of finance and investing. Using the Yield Curve, you can make assumptions about what the Risk-Free Rate (RFR) is for various maturities. And it is almost impossible to overstate how important the RFR is to sound financial investment analysis.

In an environment with no yield curve, people will default to the Deposit Rate as an indication of what the Risk Free Rate is. In Rwanda it hovers around 8%. So any investor will require at a minimum a return on investment in excess of what they would obtain by depositing their money in a bank. The problem is, investments are rarely made over a one year time horizon. Meaning that for any period exceeding one year, the Deposit Rate becomes wholly inadequate. And so for someone making a long term investment in RWF, it is then difficult to infer what the baseline rate of return for that long term investment should be.

Because the government could theoretically print money to pay debts it holds in its own currency, any outstanding RWF sovereign bonds are for all intents and purposes default-risk free. So plotting the rates at which these bonds are issued against their respective maturities gives us a rate of return ‘floor’ that all other non-sovereign (implicit non-zero risk of default) long term capital market investments of comparable maturities will be expected to surpass, i.e. a Yield Curve. As of February 2017 the Rwandan Yield Curve looks like this:

And thanks to that simple looking curve, if you’re investing or raising capital in the RWF financial markets, you now have a starting point from which to make your projections and calculations. That little line, if updated frequently enough, will be key in building the foundation of Rwanda’s capital markets.