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Government is set to undertake the development and implementation of a study on the corporate bond dealing landscape over the long term as a way of expanding the capital markets.
This has been made a long-term priority due to the necessity of enhancing the government bond market before the corporate bond market can develop, according to the Capital Markets Master Plan (CMMP) recently launched by President Hakainde Hichilema.
The Securities and Exchange Commission (SEC) and the Pension Insurance Authority (PIA) will conduct primary research across cross-sectional sample of businesses on their financing needs and reasons for lack of corporate bond activity.
“The reason for this is that corporate bonds, being inherently more risky than government bonds, derive their pricing (yields) from the yields of government bonds, plus a risk premium to compensate the investor for taking on the additional risk.
“As a result, it will not be possible for accurate price determination to take place within the corporate bond market until the yield curve for government bonds is well established and transparently communicated to the market,” the CMMP stated.
According to the CMMP, this view was supported by stakeholder consultations, which revealed that the underdeveloped nature of the corporate bond market was primarily due to the illiquid secondary market for government bonds.
In addition, it further stated, corporate bond market development was held back by the current macroeconomic landscape, which involved high interest rates.
The CMMP stated that: “given that corporate bonds are by definition more risky than government bonds, the effect of high interest rates would be emphasised for corporate debt.
“Overall, while there is no clear need for regulatory intervention in the area of government bonds, it will be useful for the SEC to better understand the financing needs of the broader Zambian business environment in order to understand how corporate bond activity may better be encouraged.”
SEC and PIA would conduct primary research across cross-sectional sample of businesses on their financing needs and reasons for lack of corporate bond activity
Over and above the need for improvement of the government bond landscape, which will be developed over the short and medium term, a SEC-led, primary research study of a cross-sectional sample of businesses would be undertaken to understand their financing needs and reasons for use or lack of corporate bond listings.
According to the CMMP, “the result of this initiative will be the completion of a corporate bond dealing landscape study, with a target state of publishing the study and commissioning a task force to implement the recommendations.”
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