Monday, January 4, 2010

Tanzania to clinch $700m Eurobond loan

Tanzania is set to receive a $700 million-plus long-term loan from the international market through Eurobond, and is only waiting to identify the right long-term credit rating firm.

The authorities say plans for the sovereign bond issue — among the few in Africa after Senegal and Gabon — are at an advanced stage.

The authorities are handling the entire process carefully to ensure they receive the right rating, which will lure private portfolio investment from aboard.

Eurobond is an attractive financing tool that gives the issuers the flexibility to choose the country in which to offer their bond, according to the country’s regulatory constraints.

The rating is crucial as it determines the amount of investment coming in. Fitch Ratings — a global rating agency that operates in 150 countries — uses long-term credit ratings on a scale from ‘AAA’ to ‘D’.

The rating was introduced in 1924 and was later adopted and licensed by Standard & Poors.

Moody’s also uses a similar scale, but names the categories differently.

Like S&P, Fitch uses intermediate modifiers for each category between AA and CCC, where the investment grade AAA is given to the “best quality” companies — those considered reliable and stable.

AA is for “quality companies,” considered slightly more risky than AAA; while A indicates that the economic situation can affect finance. BBB is given to “medium class companies” which are considered “satisfactory at the moment.”

The Bank of Tanzania expects to receive a high rating due to the country’s economic and political stability, and the economic reforms instituted over the past two decades. The bond was to have been issued earlier but the global credit crunch compelled the government to postpone the move last year.

With the global recession easing, the country has decided to seek Euros 500 million ($718 million) for infrastructure development.

Prof Benno Ndulu, Governor of the Bank of Tanzania, told The EastAfrican in Dar es Salaam in an exclusive interview that the process will not take long as the arrangements were almost complete before the cash crunch hit.

Prof Ndulu chairs the Eurobond Issuing Committee.

He said a number of rating agencies have been shortlisted and the government will appoint one firm to carry out the exercise this January.

“The risk is outweighed by the bond’s benefit. And economic growth will eliminate speculative motives,” he said.

BoT, which is the bond custodian and facilitator on behalf of the government, now needs only a go-ahead from the Ministry of Finance and Economic Affairs to pave the way for the rating.


Finance Minister Mustafa Mkulo confirmed from China last week that the bond issue is on track, adding that he did not want to comment much until the bond matures.He said all precautions have been taken to make it a success.

An economist with the Confederation of Tanzania Industries, Hussein Kamote, said sovereign bonds should be handled carefully to avoid speculation.

“Unlike foreign direct investments that create economic growth, private portfolio investments follow growth,” he said.

London is one of the centres of the Eurobond market, but Eurobonds can be traded throughout the world.



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