Download Status of Bond Markets in Africa

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