Malawi currency swap or sovereign debt?

The other day (Nation, 12 February 2015) the Minister of Finance  Goodall Gondwe was quoted to have said that one of the reasons for the Kwacha’s appreciation in value was a currency swap deal that Treasury had done with the PTA Bank. The deal worth $250 million (about K18 Billion) was not according to the Minister an indication that Malaŵi had borrowed from the PTA Bank. It was simply a currency swap and that ‘nobody will lose out’.

Kwacha

Kwacha

The PTA Bank paid to the Reserve Bank in US Dollars on behalf of Treasury. This immediately raised some eyebrows amongst financial and economic experts who mostly agreed that this was not a currency swap but rather an issue of sovereign debt.

Currency Swap

A currency swap involves the exchange of principal and interest of a loan in one currency for the same in another currency. It is therefore essentially a foreign exchange agreement of a loan in one currency for equivalent aspects of an equal loan in another currency.

So let us apply this to our current situation in which the Minister is quoted to have said that we have entered into a currency swap with the PTA Bank. This would mean that the PTA Bank needed Kwachas and we needed Dollars under a loan deal arrangement. We then went into a deal to pay in Kwachas for Dollars in a reciprocal loan arrangement with an agreed interest rate for a set period. Is this what happened here?

Sovereign Debt

Sovereign debt refers to bonds (IOUs) issued by governments in a foreign currency. Sovereign debt is guarantee by the state. Debt from developing countries is usually perceived as riskier and to hedge against risks associated with it, may be sold only if the returns (dividends) are much higher. The term junk bonds is sometimes used to bonds considered of non-investment grade.

Analysis of the Minister’s words

Looking at what happened here, there seems to be confusion of corporate finance principles. The agreement with PTA Bank to provide $250 million is clearly a loan, involving sovereign debt. We are selling our national debt to the PTA Bank. The second and rather contradictory aspect is that Malaŵi and the PTA Bank have agreed to sell each other something.

PTA Bank has agreed to buy some unnamed Malaŵi assets for the price of $250 million. RBM is said to have bought the Dollars and PTA to have bought our assets. If this ‘asset’ is not sovereign debt, then what asset have we sold to the PTA Bank? If it is sovereign debt then there is no currency swap and the issue is settled. But even if it was not sovereign debt, would it still qualify as currency swap?

Further thoughts

Looking at what happened it is clear that this is not a currency swap. We have sold sovereign debt to the PTA Bank and there is need to disclose the full deal in terms of maturity and the interest (yield) that is payable and when this is payable. The agreement is not just a financial one, it is a legal one too. Legal rights and obligation arise from it. Considering that the Minister of Finance is an expert in finance, I can only conclude that he has been misquoted.

  •  The author is a lecturer in Corporate Finance Law

This is an abridged version. To read the full article visit: http://sunduzwayo.blogspot.co.uk/2015/02/currency-swap-or-sovereign-debt.html

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tuvitwana
Guest

This whole issue is beyond comprehension of LOMWEZ. Gondwe is cheating the Lomwe president, period

Sudu wateta
Guest
Madise?! mwateta/Mwanamiza anthu. In a swap there is no asset involved but liability (Loan) Assets are involved in Traded Options, therefore it is misleading deliberate or otherwise to question what asset we have. And how can you say without batting an eyelid that the asset is sovereign debt, we are not talking bonds here we are talking DEBT. Let me try and explain how a swap works, and let people decide if the Malawi government entered into a swap agreement or a loan. SWAP: Suppose that the Government would like to swap their Dollar debt for Malawi kwacha debt. In… Read more »
social economist
Guest
majority of Malawians who comment here are even struggling to understand the concepts of currency swap, foreign debt and let alone selling debt. i am not surprised that even the author is at pains to distinguish the concepts. nevertheless, for us who know him we are not surprised. The fact of the matter is, how can Malawians turn this into an opportunity? Appreciation of the Kwacha in these lean months have helped to lower costs of inputs at these production months hence low production costs. It is up to Malawians to invest these in productive use instead of purchasing more… Read more »
BOX 13 BILILA, N U
Guest

Some future government will suffer for this,mark my words,pts has nothing to do with such much kwacha s,this is a loan period.

jafar
Guest

i dont think is the way of fighting the poverty. think twice before you leap

Fathara
Guest

Kkkkkkkkkkkkkkk AMALAWI KUTELEKO MUMAFUNA PANOPA KWACHA KUTI INAKAKHALA ITAFIKA 1 TO 1000 NDI US DOLLA. KAYA BOMA LAPANGA CHANI IFE TILIBE NAZO NTCHITO, BOLA ZITHU ZIKUYENDA BWINO KKKKKKKKKK ASATANA KULILA. INU MUMAWONA NGATI MULUNGU SALINAFE?? ALINAFE MULUNGU WATHU YESU. PAJATU ANAWUKA KWAKUFA ALI KUMWAMBA KWA TATE AKE, ALI KUZANJA LA MANJA LA ATATE AKE AKUTI MENYELA NKHONDO USANA NDIWUSIKU. SIKUTISO MUYEMBEKEZE KUTI ZITHU ZISOKONEKELA. OLO PANG’ONO SIZISOKONEKELA ZIPITILILA KUYENDA BWINO. IFE KWATHU NDIKULI PEPHELELA BOMA LATHU LOKONDWEDALI.

Kenkkk
Guest
To me it is simple. Pta for whatever reasons wants kwachas and we want dollars to improve our dollar reserves. So we swap, we give them kwachas and they give us the dollar equivalent of our kwachas. The question is did we have enough kwachas to swap to the tune of $250mn? If we did, then that is a straight swap and we should believe the govt story but if we didn’t have the kwachas to swap with the $250m, then this govt is lying and we should get really worried indeed!!! So you dpp guys, give us the full… Read more »
bafuta
Guest

I really need to be schooled on this currency swap.

Nana Chione
Guest

CURRENCY SWAP WHEN YOU HAVE BORROWED BILLIONS OF $ FROM MOTA-ENGIL?????!!!!!! FOOLISH!!!!!!!!!!!!!!!

namatetule
Guest
Mr Madise has a point.Initially,when I heard about this I got curious.Naturally,Currency swap should not involve actual transfering of principal ,nominal or not.In my view,When PTA gave us $250 MILLION,this became a loan(sovereign debt indeed).We need to know for a fact all the terms of this loan.There is no due diligence in this transaction and we need to know whether PTA is a swap bank or not?What exactly are we hedging against when we do this currency swap?at what rates are we dealing on this deal?Is it LIBOR or fixed rates?Legally,this is a loan and not a currency swap because… Read more »
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