Bridging the gap: Infrastructure bonds as the key to economic revival

In recent years, Zimbabwe’s banking sector has primarily focused on financing residential developments, particularly cluster housing projects.

Despite the initial promise of these investments, the outcomes have fallen short of expectations.

High prices and unrealistic mortgage terms spanning just 18 to 24 months have rendered many of these housing units unsold.

The market clearly demonstrates a mismatch between supply and demand, with potential homeowners unable to afford these properties.

Consequently, it is imperative for Zimbabwean banks to reconsider their investment strategies and pivot towards infrastructure bonds, especially for critical projects like roads and bridges.

Such investments not only promise better returns but also bring substantial economic value, fostering sustainable development.

Infrastructure bonds are long-term investment instruments used to fund public infrastructure projects such as roads, bridges, and ports. These bonds offer several advantages over traditional real estate investments.

They provide stable and predictable returns. Infrastructure projects generate consistent revenue streams; for instance, tolls from bridges and roads provide a steady cash flow that can be used to service the bonds.

This predictability contrasts sharply with the volatility seen in the real estate market, where demand can fluctuate significantly.

Investing in infrastructure has a significant multiplier effect on the economy. Improved transportation networks reduce costs for businesses, enhance trade, and attract foreign investment.

The modernisation of the Beitbridge Border Post, a vital gateway for trade between Zimbabwe and South Africa, exemplifies the transformative impact such projects can have.

Through reducing transit times and improving efficiency, this project can significantly boost economic activity in the region.

Furthermore, infrastructure projects generate employment opportunities both during the construction phase and through the subsequent economic activities they enable. This helps to alleviate unemployment and stimulate local economies.

Enhanced infrastructure also improves the quality of life for citizens by providing better access to services, reducing travel times, and improving safety.

While these social benefits are not directly quantifiable in financial terms, they contribute to a more stable and prosperous society.

For banks, infrastructure bonds offer several compelling benefits, unlike short-term housing mortgages, infrastructure bonds are typically long-term investments.

This aligns well with the long-term liabilities and investment horizons of banks, allowing for better asset-liability matching and reducing liquidity risk. Additionally, by investing in infrastructure bonds, banks can diversify their investment portfolios.

This diversification reduces the risk associated with over-reliance on the real estate sector, which has proven to be volatile and subject to market saturation.

Another advantage is the enhanced credit quality of infrastructure bonds as these bonds often have a lower risk of default compared to housing loans, especially when backed by government guarantees or revenue-generating assets. This enhances the overall credit quality of the bank’s portfolio.

Supporting critical infrastructure projects enhances a bank’s reputation and demonstrates its commitment to national development, improving stakeholder relations and potentially attracting more business.

However, the benefits of infrastructure bonds cannot be fully realised without the critical role of the government. One of the primary concerns for banks is the repayment of these bonds, especially in light of Zimbabwe’s planned de-dollarisation by 2030.

Currently, most investments are made in US dollars due to the stability and acceptance of the currency.

Banks need assurance that even after de-dollarisation, repayments will continue in US dollars or another stable currency to mitigate currency risk.

The Government must commit to transparent and consistent policies regarding currency stability, assuring banks that repayments on infrastructure bonds will remain in US dollars post-de-dollarisation.

This assurance is essential to provide the confidence needed for banks to invest heavily in these long-term projects.

Additionally, the government should provide supportive policies and regulatory frameworks to facilitate the issuance and trading of infrastructure bonds.

Offering tax incentives for investments in infrastructure bonds can make them more attractive to banks and other investors. Establishing clear and enforceable legal frameworks for public-private partnerships (PPPs) and bond issuance is also critical.

This ensures that all parties understand their rights and obligations, reducing the risk of disputes and defaults. Ensuring that infrastructure projects are managed transparently and efficiently is crucial for maintaining investor confidence.

It includes regular audits, progress reports, and adherence to international best practices in project management.

The shift from cluster housing to infrastructure bonds represents a strategic pivot that can unlock significant economic potential for Zimbabwe.

Through investing in infrastructure, banks can achieve better returns, diversify their portfolios, and contribute to national development.

However, the success of this strategy hinges on the government’s commitment to maintaining currency stability and providing a supportive regulatory environment.

As Zimbabwe navigates its economic challenges, infrastructure bonds could be the key to fostering long-term growth and prosperity, benefiting both the financial sector and the broader economy.

Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this in his own capacity. @willoe_tee on twitter and Tapiwanashe Willoe Mangwiro on LinkedIn-ebsuinessweekly