Bond market: "The illiquidity risk stems from too much local concentration”

Times look good for the bond market in America. Bonds are entering a rising rates cycle for the first time since the 1940s. And when bond yield rises, the opportunity cost of investing in other assets, including equities, equally goes up. This makes stock investments less attractive. What is the current situation in Mauritius? Jeremy O’Friel, founder and Managing Director of Belmont Investments, is of opinion that the market is illiquid because there is too much local concentration. That is too much capital is allocated to few corporates/investors. For Saurav Chatterjee, Chief Executive Officer of CARE Ratings (Africa) Private Ltd, the market is not vibrant yet and there is more than ever a growing need to attract more investors



"Creating liquidity in the bond market will take time”, said Pariskshat Tulsidas, Senior Executie of the Treasury & Markets at AfrAsia Bank, to BIZweek, last year. Still at a nascent stage, things have not evolved much, except for a growing number of corporates turning more and more to bond issues to raise money.

“I landed in Mauritius in March 2016. At that time there was hardly any activity in the bond market. I was very surprised that very few corporates had raised money through bonds. In the last one and a half year, we have seen corporates raising money, and some issued bonds,” says Saurav Chatterjee, Chief Executive Officer of CARE Ratings (Africa) Private Ltd. You name it: ENL Commercial, Sun Limited, SBM Group, IBL Limited, New Mauritius Hotels and Commercial Investment Property Fund (CIPF) among others were the first structured bond in Mauritius.

Recently, the MCB has raised bonds at a rate of 3.5%. “It was a bit surprising that they were able to raise money lower than the G-Sec rate which was around 4.07% in December for 5-year bond. When they raise money below the government rate, we do not know how the market takes it, but it does not happen in a mature market. The government is the benchmark. Raising money at a rate below the government rate is something I have not seen in countries like India, Europe or USA. But the credit goes to the MCB that they have been able to do so,” adds Saurav Chatterjee.

Same problem as in Central America

According to him, this situation however suggests that there are still some irregularities in the bond market in Mauritius. Probably because it is at a “very nascent stage” and that it is “just beginning to pick up.”

Nevertheless, he finds it surprising that despite Mauritius is projecting itself as an international financial centre, he does not see lots of foreign money coming in. In other words, there is practically no investor to invest in this market. “Probably there is a requirement that government needs to attract more foreign investors to come and invest. Right now, it is only the local money which is changing hands, between banks to the capital market, and vice-versa,” he affirms.

The founder and Managing Director of Belmont Investments shares the same point of view. “Illiquidity is an issue, and that is one thing I do worry about for a country like Mauritius.” For him, a very high percentage of the Mauritian debt is owned by local Mauritian individuals and companies.

He had witnessed the same problematic in Central America where countries like Costa Rica and Columbia have made a concerted effort over the last five years to diversify the holders of government debt. In Costa Rica, he explains, they came to the conclusion that too much of the local government debt was held by Costa Ricans and that this could imply any form of Ponzi Scheme. Therefore, they have really gone out of their way to make it easier for Costa Ricans to invest money overseas and indirectly to reduce their exposure to the government debt. Columbia has done something similar.

Stock Exchange heavily dependent

“Certainly countries like Costa Rica and Columbia felt that they had too much local concentration. And I think Mauritius may have the same problem. I’ll be interested to know what the Finance Minister will say to that for example. What are their thoughts on the fact that it seems to be a very close loop? There is also the capital market concentration. The Mauritian Stock Exchange is so heavily dependent on two or three stocks. The MCB, IBL Ltd and SBM for example”, points out Jeremy O’Friel.

Hence, as a capital market, the illiquidity stems from the fact that too much capital is allocated to so few. “The illiquidity risk stems from the fact that the concentration of the holding is quite high.”

And he would like to see a certain diversification of this concentration.

“You can make the bond market go from illiquid to liquid by attracting more participants. That’s the solution. But how do you get there? You need to attract more participants, probably from overseas, and that’s difficult. You have got to make a case why your bonds are better that those of similar countries,” he pursues.

For Saurav Chatterjee, all the prospects are there to attract investors. The Bank of Mauritius is considered to be one of the best in Africa. The Stock Exchange of Mauritius provides dual listing and that of bonds. Africa is a growing market and because it is emerging, the growth prospect is much more. “All factors are here to attract investors to raise money on your platform. African corporates who turn to their banks for money can actually come to this market to raise their money. Proper due diligence has to be done for which our rating agency is here.”

Trading doesn’t attract investors

According to a local financial analyst, the bond market is not dynamic yet. Same applies, for him, to the SEM bond market. “Not many bonds are listed. I have personally tried to buy some bonds for a client, but the stockbroker said it was not available.” He finds that investors prefer to ‘buy and hold’ rather than indulge in trading. The reasons behind this attitude? A lack of motivation, and the fact that the primary dealers charge a fee on each trade. At the end of the day, investors do not find the return as interesting. “Here, people wait for the price to go up to sell and get a good return. Globally, the market is more efficient. It is easier to trade bonds.”

Nevertheless, the bond market represents an important one. Pension funds and insurance companies invest in bonds, be it government papers or corporate bonds.

Can things change for the better? “Yes. Maybe the primary dealers should reduce their fees. Companies should be encouraged to issue bonds. As regards government papers, they should be listed on the Stock Exchange to gain more visibility”, suggests our financial analyst.


How important is a bond market to the economy?

Right now, investors – especially in the United States of America – fear that the stock market will become less attractive. Bonds and their yields seem to spell more positive vibes because of the rising interest rates cycle.

How important is a bond market to the economy?

“A bond market is very important to an economy. It’s a fantastic source of capital for corporates, for governments. I don’t think the financial market can function without it”, says Jeremy O’Friel of Belmont Investments.

For an economy to strive, suggests Saurav Chatterjee of CARE Ratings (Africa) Private Ltd, it cannot only depend on the banking system. “What is the return you get when putting your money in banks? 1.8%? If someone issues a 1-year or 4-year bond, you get 2.5-3%. Obviously, if the bond market develops, retailers like the SMEs can also benefit from it. Maybe they are not aware of this opportunity”, he explains.

Break monopoly of banks

The latter further adds that the bond market also helps to mobilize funds for various types of projects. Once you have a vibrant bond market, you can reduce the cost of borrowing and this increases your profitability. The bond market is very critical, he pursues, because the money which is lying in the banking system – if it gets channelized into proper corporates for their future projects – it will help in the growth of the economy. Recently, the Bank of Mauritius came up with a concept on ‘Commercial Paper’; the latter being a very popular tool used by corporates across the world to fund their working capital at a cheaper rate, and the risk is reduced to a certain extent.

“The National Pension Fund (NPF) is there, as well as insurance companies. Once they start participating in the market, the rates will depend on the demand and supply factor. It will, to a certain extent, break the monopoly of the banks in funding the corporates. What I find over here is more of name lending rather than cash-flow based lending”, he concludes.


  Saurav Chatterjee

  Chief Executive Officer

  CARE Ratings (Africa) Private Limited


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