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GOVERNMENT OF MOZAMBIQUE IN COLLABORATION WITH WORLD BANK AND IMF WORKSHOP Expanding Access to Local Currency Non Government Bond Markets and their Role in Economic Development: The African Experience Hotel Xisaka - Namaacha, Mozambique 24 March 2010 Presented by: Evans Osano, Program Manager, ESMID, IFC/World Bank Agenda • Importance of Non-Government Bond Markets • Status of the Bond Markets in Africa • ESMID’s role Reforming Local Currency Bond Markets in Africa • Case Studies – Kenya, Nigeria • Conclusion 2 Infrastructure Financing Needs in Africa are large • • • Estimated Financing needs Annual spending needs: ~US$ 100 billion (15% of GDP) Current sources of financing cover only half of this need Budget and off-budget spending: ~US$ 45 billion Funding shortfall is substantial Without efficiency gains, annual funding shortfall: ~US$ 55 billion -Africa’s Infrastructure: A Time for Transformation, The World Bank 2010 Key recommendation for closing the infrastructure funding gap: ……most of this finance takes the form of relatively short-maturity commercial bank lending, often not the best suited for infrastructure projects. A need exists to further develop corporate bond markets and to create regulatory conditions for greater participation by institutional investors in funding infrastructure investments. -Africa’s Infrastructure: A Time for Transformation, The World Bank 2010 3 The potential for Bond financing is also large Majority of infrastructure financing in SS Africa from local sources is through bank loans. Locally sourced infrastructure financing by financial instrument Amount outstanding at end-2006 or most recent available Country (US$ million) Benin Burkina Faso Cape Verde Congo, Dem. Rep. However, in 2006 20 percent of outstanding corporate bonds in South Africa were issued by infrastructure providers. And in Chile, on average US$ 1 billion of infrastructure bonds a year were issued between 1996 and 2003, equivalent to 50 percent of all issues. Bank loans 124 1 Government Bonds2 0 70% 0 Corporate Bonds Equity Issues 0% 52 30% 0 0% 0% 39 32% 0 0% 0 0% 0 0% 85 68% 108 100% 6 100% 0 0% 0 0% 0 0% — — Côte d'Ivoire 335 72% 0 0% 0 0% 133 28% Ethiopia 248 100% 0 0% 0 0% 0 0% Ghana 178 100% 0 0% 0 0% 0 0% Kenya 575 14% 0 0% 65 2% 3,408 84% Lesotho 21 100% 0 0% 0 0% 0 0% Madagascar 68 100% 0 0% 0 0% 0 0% Malawi 17 100% 0 0% 0 0% 0 0% Mozambique 61 82% 0 0% 13 18% 0 0% 117 28% 0 0% 298 72% 0 0% 67 100% 0 0% 0 0% 0 0% Namibia Niger 2,444 98% 47 2% 0 0% 0 0% Rwanda 26 100% 0 0% 0 0% 0 0% Senegal 286 13% 93 4% 67 3% 1,827 80% 6,275 10% 6,841 11% 48,149 78% 5 0% — — 2,302 100% Tanzania 93 100% 0 0% 0 0% 0 0% Uganda 75 91% 0 0% 7 9% 0 0% Zambia 73 91% 0 0% 7 9% 0 0% Nigeria South Africa Sudan 763 1% — — Source: Local sources of financing for infrastructure in Africa, The World Bank March 2009 Financing Sources for the Housing Sector In SSA the use of bonds markets to support the housing finance needs has been negligible Emerging Market Mortgage Funding 100% 90% However, countries such as Chile, the Czech Republic and Hungary meet over half of their mortgage funding needs through simple debt instruments such as covered bonds. 80% 70% 60% 50% Other 40% 30% MBS Bonds Deposits In 2007, 17% of mortgages in Europe were funded by covered mortgage bonds (CMBs) 20% 10% 0% Note: ‘Other’ include Housing Provident Funds Source: Housing Finance Policy in Emerging Markets, Edited by Loic Chiquier and Michael Lea, The World Bank 2009 Benefits of Non-Government Bond Markets • Non-government bonds definition: – The term “non-government” is used to encompass bonds and asset-backed securities issued by entities other than the federal government, including corporations, municipalities, as well as project finance companies created for specific infrastructure projects. • Benefits of local currency bonds – ability to minimize or avoid exchange rate risks – ability to provide long maturities suitable for long-term infrastructure or projects – potentially lower cost of funding – ability to attract and mobilize savings directly from long-term institutional investors, who are best suited for bond investments. 6 Importance of Securities Markets for Development Improved risk management Domestic Sources of Funds Securities Markets Productive Uses of Funds Financial sector diversification Decreased vulnerability to external shocks Increased access to infrastructure and housing Increased production of goods and services Improved ability to cope with financial crises Job creation Growth in domestic savings for further investment GROWTH AND POVERTY REDUCTION 7 Benefits of Well Functioning Local Bond Markets Expanded housing and infrastructure finance Better risk management for borrowers: • Lower interest rates • Reduced foreign currency risks • Reduced refinancing risks Improved yields for institutional investors Improved ability to deal with financial crises Financial sector diversification Accelerated private sector development This generates growth and reduces poverty 8 Ingredients for a Vibrant Bond Market Enabling Environment Market Place Capacity Macro Economic Trading, Clearing, Settlement, Depository Bankable Projects & Sponsors Pre-trade and posttrade transparency Informed Intermediaries Bond Market Structure Informed Investors Environment Legal & Regulatory - Issuance Process - Market Rules Tax Regimes 9 Difference between Equities and Bonds Government Bonds Non Government Bonds Equities Heterogeneity One clear issuer with clear risk/return Many issuers with diverting risk/return Many different types of bonds per issuer One form of equity per issuer Fungibility Benchmark bonds fungible. New issues not fungible with previous issues: different amount, coupon, maturity, and (possibly) credit rating. New issues fungible with outstanding shares Issuance Very Frequent Frequent Less frequent Price Discovery Price movements mostly respond to macroeconomic developments. Trades carry some firm-specific info. Price movements mostly respond to macroeconomic developments. Trades carry significant info about firms’ prospects Maturity Finite Finite. Most < 20years Infinite Liquidity Highly liquid Similar pattern across bonds: high post issuance (two weeks), but eventually buy-and-hold and illiquid Depends on stock type Type of Investor Institutional investors Institutional investors Diversified – includes retail Market Model OTC OTC or Hybrid Exchange Traded 10 Status of Bond Markets in Africa Status of Bond Markets in Africa Type of Fixed Income Instrument Number of Countries Issuing No of issuers as % of total Treasury Bills 39 74 Government Bonds 26 49 Municipal Bonds 3 6 Corporate/Parastal 21 40 Source: African Development Bank, May 2007 Bond Markets at nascent stage – Only half the countries have government bond markets Corporate bonds underdeveloped compared to bank loans and government bond markets 12 Size of Equity and Bond Markets in Selected SSA Countries, 2006 Bonds2 Equity Equity Market Cap to GDP (%) Num ber of public com panies Govt Bonds Outstanding (USD Million) Govt Bonds to GDP (%) Non-Govt Bonds Outstanding (USD Million)3 Non-Govt Bonds to GDP (%) 280 401 66,029 26 30,588 12 Mauritius 57 42 998 16 Kenya 50 54 3,301 14 117 1 Botswana 36 18 300 3 349 3 Ghana 25 32 0.12 0 25 0 Cote d'Ivoire 24 36 326 2 61 0 Nigeria 22 289 8,218 6 258 0 Senegal 19 1 86 1 105 1 Togo 13 1 69 3 13 1 Zambia 11 14 645 6 8 0 Namibia 8 8 984 15 112 2 Swaziland 7 6 7 0 13 0 Tanzania 4 6 885 6 69 0 Mozambique 1 1 205 3 744 11 Uganda 1 5 493 5 37 0 South Africa 0 African Development Bank, andta Estimates 1.Source: Due to l a ck of a ce ntra l da ba s e for a nd s ca rce a va i l a bi l i ty of ca pi ta l ma rke ts i nforma ti on for SSA countri e s , the ta bl e provi de s a n a pproxi ma te pi cture of the ma rke ts i n 2006. Unfortuna tel y, more re ce nt fi gure s a re not a va i l a bl e for a l l the countri e s . Be ca us e a va ri e ty of s ource s we re us e d, da ta ma y not be di re ctl y compa ra bl e . 2. Ba s e d on 2006 FX ra te 3. Non-gove rnme nt bonds outs ta ndi ng ma y not i ncl ude a l l pri va te pl a ce me nt i s s ue s . Source: AfDB Fixed Income Guidebook 2007, Central Bank annual reports, Economic Intelligence Unit, Bloomberg, selected papers, and staff calculation Significant differences in the level of development in the countries and regions 13 …However, environment is becoming more favorable for debt capital markets in Africa • Better macroeconomic management Inflation Rates in Selected African Countries 35 30 Ghana • • Lower Inflation Lower interest rates 25 Kenya 20 Mozambique 15 Nigeria Tanzania 10 • More stable exchange rates Zambia 5 0 • 2000 More sustainable budget deficits 40 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Short Term (91-day) Interest Rates in Selected African Countries Ghana 35 • Development in government bond markets Kenya 30 25 Mozambique 20 • Tenor extension 15 Nigeria 10 Tanzania 5 • Yields flattening in some countries 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Zambia 14 Role of ESMID in Reforming Non-Government Bond Markets ESMID Africa ESMID: • Efficient • Securities • Markets • Institutional • Development A partnership between: • Swedish International Development Cooperation Agency (Sida) • World Bank • International Finance Corporation (IFC) Aims to foster development of well functioning securities markets to: • Broaden availability of local-currency investment instruments • Enable private sector development • Improve financing for housing & infrastructure • Create jobs and improve livelihoods 16 ESMID Africa – Current Operations • Kenya • Uganda East Africa • Tanzania (Regional Approach) • Rwanda • Nigeria Country Approach ESMID Africa largely works with clusters of countries where changes have the potential to reverberate across several nations, i.e. East Africa ESMID Comprehensive Approach Programs draw on full range of WB/IFC tools: • Global product expertise + in-country knowledge/presence • Public and private engagements • Enabling environment plus transaction support Enabling Environment Assistance to Regulators Strengthening the Marketplace Capacity Building Regionalization Transaction Support ESMID-Africa A comprehensive and integrated approach to developing local bond markets Regulatory Assistance • Improve approval process • Market structure • Framework for new products Capacity Building • Certification/Licensing program • Securities Training modules • Develop regional provider Strengthening Market Infrastructure • Market Structure • Clearing , Settlement & Depository • Transparency & Information Dissemination Regionalization • Broadening & deepening markets • Minimum common standards • Consolidated infrastructure • Cross border issues & investors Transactions Support • Active support to issuers and intermediaries for demonstration transactions • Introduce new & innovative products Case Studies Kenya …Restructuring of Domestic Debt in Kenya • 1997 - First floating rate T-bond issued Kenya Public Debt 2000 -2008 (USD Billions) 14 12 • 2001 - Lengthening of domestic debt maturity gains momentum 10 8 Domestic 6 • Significant change in domestic debt profile in 7 years External 4 2 0 • 2000 Share of T-bonds rise from 28% in 2001 to 72% in 2008 2001 2002 2003 2004 2005 2006 2007 2008 Kenya Composition of Domestic Debt 600 • • Maximum tenor extended from 6 years in 2002 to 20 years Composition of domestic debt rise from 33% in 2001 to nearly 50% in 2008 500 400 300 T-bills 200 T - Bonds 100 0 2003 2004 2005 2006 2007 2008 2009 21 Treasury Yield Curves Kenya • • Treasury yield curve lengthene d to 20 years Kenya Government Treasuries Yield Curve 2002-2009 16 14 2002 2005 2008 2006 2009 2007 12 10 Yields flattened due to improved investor confidence 8 6 Yields have flattened 4 2 0 91 182 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Day Day Year Years Years Years Years Years Years Years Years Years Years Years Years Years Years Years Years Years Years Years 22 Corporate Bond Issues - Kenya Kenya Industry East African Development Bank (EADB) DFI Faulu Kenya Ksh (M) Gurantee Year of Issue Tenor 800 None 2004 7 7.5% Fixed Microfinance 500 AFD 2005 5 91 day T-bill + 0.5% PTA Bank DFI 800 None 2005 7 7.80% Fixed Athi River Mining Cement 800 None 2005 5 91 day T-bill + 1.75% Shelter Afrique Housing DFI 200 None 2005 7 91 day T-bill + 1.0% CFC Stanbic Bank (Private Placement) Banking 600 None 2005 7 182 day T-bill + 1.5% PTA Bank DFI 1,000 None 2007 7 182 day T-bill + 1.0% Barclays Bank of Kenya Banking 1,206 None 2007 7 91 day T-bill + 0.6% Barclays Bank of Kenya Banking 740 None 2007 7 182 day T-bill + 1.0% Sasini Tea & Coffee Agriculture 600 None 2007 5 11.75% Fixed Mabati Rolling Mills Manufacturing 1,200 None 2008 8 182 day T-bill + 1.75% Mabati Rolling Mills Manufacturing 800 None 2008 8 13.00% Fixed I & M Bank (Private Placement) Banking 600 None 2008 7 91 day T-bill + 2.5% Zain Kenya (Private Placement) Telcom Parent Co 2008 3 182 day T-bill + 1.75% CFC Stanbic Bank Banking 98 None 2009 7 182 day T-bill + 1.75% CFC Stanbic Bank Banking 2,402 None 2009 7 12.50% Fixed 5,700 Coupon Shelter Afrique Housing DFI 1,000 None 2009 3 11.00% Fixed, Floating (182 day T-bill +1.50%) KenGen Infrastructure 25,000 None 2009 10 Fixed 12.5% 5 Fixed 12.25%, Floating 182-day T-bill +1.85% Safaricom Infrastructure 7,500 None 2009 51,546 23 East Africa Cumulative New Corporate Bond Issues (US$M) 700.0 Kenya has had record issuance of US$500 million in 2009, over 90% infrastructure related KenGen (US$330 million) and Safaricom (US$100 million) 600.0 Global Credit Crisis 500.0 400.0 Kenya 300.0 Uganda 200.0 Tanzania 100.0 2004 2005 2006 2007 2008 2009 “The results clearly show that we can raise most of the funds needed to realise the goals of Vision 2030 through our own capital markets,” Kenya’s Prime Minister Mr Raila Odinga on the issue of KenGen bond. 24 …Role of Pension & Insurance Sectors in Kenya Estimated Institutional Investor Assets (Ksh.Billion) Kenya: Corporate Bond Holding by Investor Class Jun 2009 Pension Funds 300 Assets estimated at 20% of GDP 250 5% 4% Banks 5% 200 50% 150 36% 100 Investment Companies Insurance Companies Individuals 50 Pension reforms effected in 2001 – significant growth in assets under management to date 0 Pensions Industry Insurance Industry Unit Trusts Pension & Insurance funds accounted for 55% of Investments in Corporate bonds and 42% Treasury Bond holdings in 2009 25 Case Studies Nigeria …Restructuring of Domestic Debt in Nigeria • 2003 – Restructuring of external and domestic debt • 2003 – First FGN Bond issued • 2005 – Regular monthly issuance of FGN bonds • 2008 - Tenor extended to 20 years – – – • Reduces roll over and refinancing risks Reduces interest rate volatility in the money market Ensures better asset/liability match 2010 – Renewed priority for corporate bond market development Nigeria Profile of Domestic Debt 2003 Over 10 Years 24% 5-10 years 6% Up to 2 yrs 63% 2-5 years 7% Nigeria Profile of Domestic Debt 2007 Over 10 Years 18% Up to 2 yrs 33% 5-10 years 11% 2-5 years 38% Source: Central Bank of Nigeria 27 …Corporate Bond Issues in Nigeria Issuer Amount (N’bn) Access Bank* 13.5 Access Bank 200.0 Crusader* 4.0 Federal Mortgage Bank of Nigeria* 27.0 Guaranty Trust Bank* 200.0 C & I Leasing 2.2 Diamond Bank 200.0 FCMB 100.0 Fidelity Bank 200.0 First Bank 500.0 NAHCO 5.0 Oando 200.0 Thomas Wyatt 2.0 UBA 500.0 UPDC 30.0 Zenith Bank 200.0 TOTAL 2,383.5 In 2009, 3 state governments raised N85.5 billion (USD 0.5bn) from the local bond markets to fund infrastructure development Pipeline of corporate bond issues in 2-3 years estimated at N2.4 trillion (US$ 16bn) Many of the issues (including banking sector) to fund infrastructure * Issued fully or in tranches Source: AFRINVEST West Africa 28 …Role of Pension Fund Reforms in Nigeria • • • • • 2004 - Pension reforms in Nigeria Assets under management have grown rapidly (average 30% p.a.) to US$10 billion in 2009 Assets forecast to triple to US$30 billion in next five years - increased compliance (coverage ratio still low) Pension funds becoming important investors in the bond market. Share of the market rose from 6% in 2008 to 22% in 2009. Pension Assets expected to fund infrastructure and other corporate issues. Nigeria Bond market investor Profile 2008 IndividualsForeign Investors Other Institutional 0% 5% Investors NBFI's 0% 10% Pensions Funds 6% Discount Houses 7% Deposit Money Banks 72% Nigeria Bond Market Investor Profile 2009 Foreign Investors Individuals 8% Other Institutional 0% Investors 2% Deposit Money Banks 39% NBFI's 19% Pensions Funds 22% Discount Houses 10% Source: AFRINVEST West Africa 29 Conclusions • Africa’s housing & infrastructure financing needs are enormous • Bulk of infrastructure undertaken by public sector using foreign currency loans • Private sector can help bridge the financing gap • Capital Markets can raise long-term local currency financing for priority sectors such as infrastructure and housing • Equally important to develop government securities markets and the institutional investor base – e.g. through pension reforms 30 Thank You Evans Osano [email protected] 31