Central Bank to Introduce Secondary Bond Market, Corporate Bonds

The National Bank of Ethiopia (NBE) is to introduce a secondary bond market and corporate bonds in the second Growth & Transformation Plan (GTP II) period starting in the next fiscal year. The secondary bond market allows primary bond holders to sell their bonds to third parties without having to wait for the bond maturity date, according to Yohannes Ayalew, chief economist & vice governor of the central bank. Corporate bonds are also to be allowed for any corporate entity, which has a legal personality and fulfills the eligibility conditions, which will be provided in the directive the National Bank will issue in the near future, said Yohannes. This is to introduce an alternative way of financing, Yohannes Ayalew, chief economist & vice governor of the central bank Said. NBE will serve as the regulatory body for the resale and a directive will be issued for the secondary bond market, said Yohannes, adding that the bank will put forward and supervise the eligibility conditions in issuing such bonds in the future. The interest rate on the bonds will be determined by the market, i.e., through the negotiations between the sellers and the buyers. Currently, there is a primary bond market in the country, trading only in treasury bonds and the Grand Ethiopian Renaissance Dam (GERD), which is a long-term capital market. Treasury bonds have a maturity date of less than one year. Ethiopia had also started issuing sovereign bonds for the international capital market after the Ministry of Finance and Economic Development (MoFED)’s decision last year. Since then, the country has sold one billion euro bonds as a sovereign bond to obtain funds that can help it to finance its infrastructure development programs. The studies the central bank has conducted recently indicate that a secondary market is more important than a primary market in creating an active market daily, increasing the financial flow and encouraging savings, Yohannes said. Corporate bonds, which are also coming soon, are bonds issued by corporations. They are more profitable than shares bought in the stock market because unlike the stock market, with corporate bonds, the profit is not determined by the share of the profit of the company, which is expected to encourage people to move to capital market investment, according to Yohannes.  There should be an overall reform and strict, liquid and vibrant financial sector, which can generate resources to create an active and effective secondary market, an anonymous macroeconomist explained to Fortune. Stable macroeconomic conditions with stable price, liberalised interests, a transparent and predictable legal system, simple exit strategy and a tax free bond market are mandatory preconditions to create a vibrant secondary bond market, the macroeconomist added, noting that the legal system was essential to create confidence in private investors. In Ethiopia, all these mandatory preconditions are not yet present. Currently, the financial sector does not fit with the growth ambition of the government and the Treasury bond market is dormant. The NBE plans to start a secondary bond market not out of conviction but rather due to lack of adequate financial resources from the banking sector as the investment projects in the country are huge and the banking sector is drying up to meet their demand, the macroeconomist said, also adding that the Treasury bond market should be active and liberalise itself to bring about a vibrant secondary bond market.