Analysts: Local capital sourcing shields against shocks

DAR ES SALAAM: THE overwhelming demand for the government’s 25-year bond highlights growing opportunities to tap into local capital markets, reducing exposure to currency volatility and strengthening public finances, analysts say.

The Bank of Tanzania last week, auctioned 25 years Treasury bond that ended up at 464.85 per cent overly subscribed with bids exceeding 1.2tri/- against 264.31bn/- offered.

The Wealth Capital Fund Chief Executive Officer, Mr Beatus Mlingi, told the `Daily News’ on Wednesday the massive investor interest provides the government with a strong local financing base, reducing its reliance on external borrowing.

“Reducing reliance on costly foreign debt, which becomes more expensive when the shilling weakens, helps stabilise public finances and debt servicing costs,” Mr Mlingi said.

Mr Mlingi said that the shift toward domestic capital signals fiscal sustainability by allowing the government to raise funds without exposure to currency risks and volatile global conditions.

“Local financing offers greater stability, safeguards essential spending and boosts investor confidence in Tanzania’s economic outlook,” the CEO said.

According to Mr Mlingi, this aligns with IMF, World Bank and development partners’ advice to deepen domestic capital markets and reduce external debt reliance.

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“These institutions emphasise that local financing lowers exchange rate risk, enhances fiscal discipline and builds resilience to global shocks,” he said.

The IMF promotes longterm local bond markets for sustainable debt management, while the World Bank highlights local investors’ role in mobilising savings and supporting stable public investment.

“Tanzania’s record bond oversubscription reflects strong investor confidence and marks progress toward these goals,” Mr Mlingi said.

However, the surge in government bond sales has raised concerns about credit allocation, as banks and institutional investors increasingly prefer risk-free government securities over lending to businesses and households.

“This crowding-out effect is evident,” Mr Mlingi, “with private sector credit growth slowing from 18 per cent to 15 per cent year-on-year, potentially hindering entrepreneurship, job creation and financial sector development.” Despite strong demand pushing yields down, the country’s longer tenure bonds still carry high fixed interest rates of around 15 per cent, which could raise future debt servicing costs.

With interest payments projected to absorb 16 per cent of government revenue in this fiscal year, concerns about longterm debt sustainability and fiscal flexibility persist.

Alpha Capital Head of Business Development and Customer Service Mr Geofrey Kamugisha said a sustained reduction in long-term yields, if mirrored in corporate borrowing rates, which it most likely will be, lowers the cost of capital for investment projects.

That said, this is conditional on the Bank of Tanzania sustaining the lower-rate regime and on banks/pension funds passing through lower funding costs and interest rates respectively, Mr Kamugisha said.

Furthermore, strong appetite for long tenors gives the fiscal authority more room to extend maturities, lengthen the debt profile, and reduce rollover risk, important for debt sustainability metrics.

The analysts said if the Treasury can regularly access 20–25-year funding at lower yields, the public debt service profile becomes more predictable.

They have it that the 25- year bond’s oversubscription signals strong investor confidence, especially from domestic institutions like pension funds, banks, and insurers, attracted by high, tax-exempt returns and perceived low risk.

Mr Kamugisha said some investors even paid above face value, expecting falling inflation and interest rates to boost the appeal of current long-term yields.

Sustained demand for 20 and 25-year bonds confirms their status as safe, profitable investments in the country’s relatively shallow capital market.

Despite overwhelming demand, BoT accepted only the original 264.31bn/-, reflecting fiscal discipline and market prudence.