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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19 thoughts on “Malawi currency swap or sovereign debt?”

  1. tuvitwana says:

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

  2. Sudu wateta says:

    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 this case the Malawi Government can arrange with a bank to pay the Malawi Government the dollars that are needed to service the dollar debt and in exchange, the Malawi Government agrees to pay the bank the cost of servicing the Malawi kwacha loan.

    So Malawi has a $250 million loan, who with it does not matter.
    They enter into a swap agreement with a bank (PTA) for a Kwacha loan, the kwacha loan does not have to be a loan that the Malawi government made to PTA, it could be a loan by an international company based in Malawi.

    The issue is (read comment 17 i do not want to repeat what social economist said)

    Some people have talked about hedging, it is the bank will do the hedging, in case something goes wrong.

  3. social economist says:

    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 tooth picks and cars from abroad. Government is only creating a favourable ground for those who are serious about turning Malawi into a producing and exporting nation. If you cant utilise this window then dont blame government.

  4. 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.

  5. jafar says:

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

  6. Fathara says:

    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.

  7. Kenkkk says:

    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 story!!

  8. bafuta says:

    I really need to be schooled on this currency swap.

  9. Nana Chione says:

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

  10. namatetule says:

    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 a currency swap is a hedge against exchange rates volatility.we have the right to know what we are getting ourselves into.There is need for full disclosure on this deal.

  11. Tengupenya says:

    Ndi wadada Gondwe tu awo. He balances his book, no matter what.

  12. I’m not an economist but gondwe’s claims can be challenged. Don’t expect us to accept every lie. Grow up please.

  13. m'Malawi says:

    What has been done by RBM is a debt swap not a currency swap. RBM sold PTA bank the debt govt had in exchange for $250m which will be repaid in Kwacha. That’s a deal made in heaven!

  14. Shame says:

    Glad you brought this up. This is politicians playing their usual game, living for popularity at the moment, no care at all for what you and me will face tomorrow. We need clarity on the terms of this deal. Where will the dollars come from to repay PTA? How will a depreciation of the currency at the time of repayment be shielded. Who will pay the ultimate price and at what cost?

  15. Weni weni says:

    I just finished my Economics studies and I had the same view when I heard the ministers pronouncement.

  16. Ndikutelo says:

    I smell a roten fish in the thing done by the Muthalika’s administration,Malawi will pay a big price in the near future.

  17. Young Batile Tikuswera says:

    The usual tricks Goodall employs to trick the nation.

    He capitalises our financial illiteracy and yet there are so many economics graduates in Malawi let alone at the Ministry of Finance who have no balls to challenge this old idiot.

    We are doomed.

  18. Nkhombokombo says:

    Don’t cheat us, if there is no money, there is no money, full stop!! Do not lie to us that the Kwacha is appreciating.

  19. Mmodziyekha says:

    its swap indeed to talk about big! kk! Trading proposal!

Comments are closed.