Money raised through new bonds to cover part of budget deficit |17 February 2022
Mr Labonte flanked by Ms Preira and Mrs Mussard during the press briefing yesterday (Photo: Joena Meme)
The R500 million to be raised through the issuing of the three-year and seven-year bonds by government, through the Ministry of Finance, Economic Planning and Trade (MoFEPT), is to cover part of its expenses in this year’s forecasted budget deficit of R950 million (3.4% GDP).
The statement was made by the ministry’s chief debt analyst, Dick Labonte, during a press briefing on the operational aspects of the two bonds issuance and one to be issued by the Development Bank Seychelles (DBS).
The briefing was held at the Central Bank of Seychelles (CBS) yesterday afternoon in the presence of the chief executive of DBS, Jean Preira and CBS’s senior financial and risk analyst, Vanessa Mussard.
In parallel, the DBS will also be issuing a five-year bond worth R200 million to loan out for business purposes and which will be guaranteed by the government.
The issuance and management of the three bonds will be undertaken by CBS. They will be issued on March 10, 2022.
Mr Labonte explained that apart from R500 million to cover part of the deficit, government will seek other ways and means to cover for the remaining R450 million in deficit plus excess.
He said that government uses different financial instruments to finance its budget deficit and the bond issuance is among one of those instruments used.
He noted that bond issuance was projected in the 2022 budget and so will have no adverse impact on the budget.
He added that the method of using bond issuance to raise funds is getting common nowadays and it will be a method that will be adopted by government and used on a quarterly basis to replace the treasury bills issued on a weekly basis.
Speaking on the advantages of treasury bonds, Mr Labonte said that it is a long term investment which allows government a delay in its debt payments, in terms of getting enough time to collect money to pay out for the matured dividends.
He noted that government will at the end of March 2022 publish details on a revised strategy to finance its expenses and which will also help investors to better plan their investments.
He said that the cause of the budget deficit is a result of the adverse impact of the Covid-19 pandemic on the economy which has led to shortfall in revenue for the government.
He stated that although government is aiming to cover the R950 million in deficits, the overall gross issuance forecasted for 2022 stands at R2.2 billion.
As issued from the MoFEPT recently, all three Bonds will be available on auction basis, the allocation of which will take place on Monday March 7, 2022.
The application window for the auction will open one week prior to the allocation date, on Monday February 28, 2022 and will close at 8.30am on the allocation day. The bonds will be issued on March 10, 2022.
The three-year and seven-year treasury bonds will be earning a fixed interest rate of 2.50% and 5.00% per annum respectively. Interest payments for the two bonds will be done half-yearly, on April 15 and October 15, and calculated on a 365-day year.
The five-year DBS bond will be earning a fixed interest rate of 3.75% per annum and coupon payments will be on a quarterly basis, on January 15, April 15, July 15 and October 15, also calculated on a 365-day year.
The three bonds will be issued in multiples of R1,000, with a minimum value of R1,000.
Elaborating on the methods for allocation of bonds, Mrs Mussard said that they will be auctioned at a discount price with a fixed interest rate rather than with a fixed price rate as has been the case before.
Also under the previous method (TAP system) the bond allocation was on a first come, first serve basis and the allotment was allowed to carry on for several days and with the new auction method the allocation for the bonds is held in one day.
The auction method is divided in a competitive for financial institutions i.e banks including the Seychelles Credit Union, the insurance companies and the Seychelles Pension Fund (SPF), and a non-competitive stage for individuals, businesses and other legal entities.
Mrs Mussard said that those within the competitive category will be able to adjust their bids for preferable acceptance as the highest bidder while those in the non-competitive category will be allocated with the bonds on a first come, first serve basis. Their bid will be fixed based on the average prize that will be determined in the competitive stage.
She added that the committee overseeing the competitive bidding can agree on a cut-off point in the prize bidding.
She noted that the competitive bidding is held prior to the non-competitive stage. She said that investors issued with the bonds have to make payments three days after the auction.
For her part, Ms Preira said that DBS outsource its financing to loan out for business purposes, either through loans via the international and domestic markets or through bond issuance.
She added that issuing of bonds for this year as option to taking out a loan has been done in conjunction with the MoFEPT.
She stated that, with the aim of helping the government in its plan to diversify the economy, DBS will come out shortly with loan criteria and the list of the diverse business sectors to benefit for a loan.
Copies of the prospectuses and application forms can also be downloaded from the CBS website: https://www.cbs.sc/GovernmentDebt/treasurybonds.html.
Patrick Joubert