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High Level Seminar: Panel 4 The Financial Crisis and Access to Financing African Development Bank Annual Meetings 2009 Stuart Culverhouse Chief Economist 12 May 2009 [email protected] Contents Impact of crisis on Sub-Sahara Africa Policy responses Funding strategies International markets Domestic markets Innovative solutions 02 Conclusions Key messages: Markets closed for the time being for most sub-Investment Grade issuers, which precludes most Sub Saharan countries (but may be not all) from international sovereign bond issues Appetite will return, investors cash rich, underinvested in EM Borrowers will need to be ready when conditions allow - perceived credit risk will depend on how policymakers respond to the crisis and facilitate inward investment in the meantime, financing options exist for both the public and private sector On the bright side, Africa is showing more resilience than in the past, thanks to reforms, has better developed domestic markets to fall back on and funding needs are lower than other regions 03 Synchronised global recession World and Regional Growth Real GDP growth (% y/y) 15 10 5 0 -5 World SSA CEE CIS Developing Asia Western Hemisphere -10 -15 Source: IMF WEO April 2009 Database. Shaded areas indicate (approx.) periods of global recession. 04 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 -20 Transmission mechanism of credit crunch to Africa Main channels: Trade Export demand Export prices Oil and other commodity prices Remittances Donor flows Capital account Has been crucial in previous EM crisis episodes Impact on FDI Impact on portfolio flows Key impacts on current account and fiscal balances as well as economic growth 05 Impact on Africa Downward revisions to Sub Saharan Africa GDP growth: Macro impact of global recession on SSA April 2008 October 2008 January 2009 April 2009 Real GDP growth (%) 2008 2009 2010 6.6 6.7 6.1 6.3 5.4 3.5 5.0 5.5 1.7 3.8 Source: IMF World Economic Outlooks 06 Fiscal impact Fiscal balances 15 % of GDP 10 SSA Oil exporters MIC (ex. SA) LIC 5 0 -5 -10 2006 2007 2008 Source: IMF Regional Economic Outlook, April 2009. *Including grants 07 2009f 2010f Current account impact Current account balances 15 % of GDP SSA Oil exporters 10 MIC (ex. SA) LIC 5 0 -5 -10 2006 2007 2008 Source: IMF Regional Economic Outlook, April 2009. *Including grants 08 2009f 2010f nJa 08 nJa 08 nFe 08 bFe 08 bM 08 ar M 08 ar Ap 08 r-0 Ap 8 r M - 08 ay M -08 ay Ju 0 8 nJu 08 n0 Ju 8 l-0 Ju 8 l-0 Ju 8 lAu 08 gAu 08 gSe 08 pSe 08 pO 08 ct O 08 ct N 08 ov N 08 ov D 08 ec D 08 ec D 08 ec Ja 08 nJa 09 nFe 09 bFe 09 bM 09 ar M 09 ar Ap 09 rAp 09 r-0 9 Ja Impact on financial markets (1) - currencies Indexed (2 Jan 2008 = 100) Selected African Currency Movements 160 150 140 130 120 110 KES UGX MUR ZMK GHS NGN AOA MWK 100 90 80 Source: Bloomberg 09 Source: Bloomberg 010 Apr-09 Apr-09 Mar-09 Mar-09 Feb-09 Feb-09 Jan-09 Jan-09 Dec-08 Dec-08 Dec-08 Nov-08 Nov-08 Oct-08 Oct-08 Sep-08 Sep-08 Aug-08 Aug-08 Jul-08 Jul-08 Jul-08 Jun-08 JPM EMBIG (basis points) 1000 Jun-08 May-08 May-08 Apr-08 Apr-08 Mar-08 Mar-08 Feb-08 Feb-08 Jan-08 Jan-08 Jan-08 Impact on financial markets (2) – EM sovereign spreads Emerging Market Bond Spreads 900 800 700 600 500 400 300 200 100 0 Impact on financial markets (3) – African eurobonds Sovereign eurobonds in SSA (ex SA) 120 Mid-price 110 100 Gabon yield = 11.1% 90 80 70 60 50 Ghana yield = 13.6% 40 Ghana 8.5% 2017 30 Gabon 8.2% 2017 20 REPCON 2.5% 2029 REPCON yield = 20% 10 8 b0 M 8 ar M 08 ar -0 Ap 8 r-0 Ap 8 rM 08 ay M 08 ay -0 Ju 8 n0 Ju 8 n0 Ju 8 l-0 Ju 8 l-0 Ju 8 lAu 08 gAu 08 gSe 08 pSe 08 p0 O 8 ct -0 O 8 ct N 08 ov N 08 ov D 08 ec D 08 ec D 08 ec -0 Ja 8 n0 Ja 9 nFe 09 bF e 09 bM 09 ar M 09 ar -0 Ap 9 r-0 Ap 9 r-0 9 8 Fe Fe b0 8 n0 Ja n0 Ja Ja n0 8 0 Source: Exotix/Bloomberg 011 Impact on capital flows Capital inflows to Sub Saharan Africa 012 Policy responses 1) Monetary policy • • Lower policy interest rates in Nigeria, Botswana, Kenya, Mauritius • Despite still generally high inflation But in some countries, market rates have risen (Uganda, Zambia) 2) Currency adjustments • • Pegged/fixed rates have been devalued: Nigeria, Angola Elsewhere, floating rates have been the shock absorber 3) Fiscal policy • • • Room for fiscal expansion/counter cyclical fiscal policy? e.g. Gabon, Tanzania, Mozambique (IMF Regional Economic Outlook, April 2009) Scope for financing larger deficits? 4) IMF to the rescue • • • • ESF: Malawi, Senegal, Tanzania (SLA) SBA: Gabon (was already in place), Seychelles PRGF: Zambia (already in place, but recently augmented) Possible support for Kenya, Ghana 013 Local interest rates Local rates Treasury Bill rates Kenya Nigeria Mauritius Uganda Zambia Ghana Latest 91 day Change since dec 08 (%) (basis points) 7.4 -110 3.6 -157 4.6 -406 11.6 na 13.8 -10 25.7 100 Bond Yields Latest Auction date Tenor Change since dec 08 (%) (basis points) 12.0 Sep-08 10 year na 11.9 Apr-09 5 year 140 7.7 Apr-09 4 year -250 13.5 Feb 09* 5 year na 19.5 Feb-09 5 year 160 21.0 May-09 2 year 0 Source: national central banks 014 Funding strategies Are markets so dislocated that nothing will help give access to finance at the moment? Bad news: International bond market closed to all but highly rated EM names for new issues May take some time for appetite to return for SSA (ex SA) issues But risk appetite will return, first for new sovereigns issues already seen market rally but still too expensive to issue in primary market under current conditions secondary market yield on single B-rated sovereigns is about 12-13% When appetite returns, conditions will not be so favourable to the borrower as before Good news: African governments should benefit from improvements in domestic debt markets made in recent years to raise finance locally in domestic currency. They now have something to fall back on. However, still some questions about domestic debt markets: Issuance capacity Crowding out Foreign investors no longer present Which is why fiscal discipline will be needed to bring financing needs down to available sources. 015 Loss of market access How significant is loss of access anyway? Who wanted to borrow? A few sovereigns had aspirations but not clear that many, if any, corporates in SSA where coming to the debt market and refinancing needs are low. Among the pool of SSA names, both middle and low income countries, only “frontier emerging markets” would have had access anyway, so loss of access is not going to affect many countries. But those without access will be even more aid-dependent. Among frontiers with aspirations of coming to the market, crisis has delayed plans, probably for several months but this appetite should return Also, many SSA corporates raised equity cheaply rather than debt, providing some insulation from the deterioration in debt markets. International banks have also reduced loans to Africa and Middle East according to BIS reporting data for 2008Q4 Down US$20 billion (exchange rate adjusted basis) although for SSA (ex SA), decline in lending was only US$7 billion. For Nigeria, decline was US$4 billion. 016 Pre-crisis issuance plans Were not expected to return soon to market after 2007 issues Ghana Gabon Had plans for bond issues, at various stages (problem for 2010?) Uganda Zambia – needs a rating first Tanzania – needs a rating first Angola? Had no plans for issuance Nigeria – no need, but plan for naira issue announced in Sept. 08 Mauritius? Who was hit hardest then? Kenya – bond issue was key plank of 2008-09 financing strategy Seychelles – crisis brought on default, but was already vulnerable 017 New issues (1): what does the market look like? EM eurobond issuance (sovereign and corporate) has revived in 2009 after being dead in 2008Q4 Perhaps opportunistic to take advantage of more favourable conditions. Get financing done early. Needs must - refinancing But market only open to highly rated credits Sovereigns but also some sub-Investment Grade corporates have come to market Yields higher than pre-Lehman collapse But also the case that new issues have more favourable terms to the lender, including PRI, offshore DSA, poison puts, calls, change of ownership clauses for corporates. So borrowers cannot secure the generous terms seen in the 2005-08 bull market. 018 New issues (2): volumes and ratings Distribution of new EM sovereign eurobond issues in 2009 Q1 6 Number of issues Total issuance $18.3bn Value: $4.8bn 5 Value: $5.8bn 4 3 2 Value: $4.8bn Value: $2.8bn AA A 1 0 Source: Bloomberg. Excludes Lebanon (B-) swap BBB Rating bucket 019 BB External Financing Requirements Modest financing needs in SAA compared to other regions, but problem is everyone is competing for funds. Other borrowers (governments/quasi governments and corporates) in EM and developed world crowding out African borrowers or investors/banks cutting back lending/investments Current account balances in SSA likely to worsen this year. Deficit for region projected at US$67bn. Nearly 8% of GDP, up from 2% in 2008. But overall gross external financing needs in the region should remain relatively modest because amortisation – given extent of concessional debt – is low. Amortisation “only” US$12bn. So gross financing needs are some US$80bn. Compare this to Eastern Europe and CIS with current account deficits and large amortisation falling due, producing massive financing needs. Stems mainly from rapid increase in private external borrowing. 020 EM financing requirements Em erging Markets Sub Saharan Africa $ bn $ bn 800 100 700 80 600 60 500 40 400 20 300 0 200 100 2009 2010 -40 0 -100 2008 -20 2008 2009 2010 -200 -60 -80 Current account Amort isat ion GEFR Current account CEE and CIS Amort isat ion GEFR Western Hem isphere $ bn $ bn 400 250 350 200 300 150 250 200 100 150 50 100 50 0 2008 0 -50 2008 2009 2010 -100 2009 2010 -50 -100 Current account Amort isat ion GEFR Current account Source: IMF WEO database 021 Amort isat ion GEFR Developing domestic debt markets (1) Factors important to international investors Transparency/communication Primary dealer network Gives different incentives and encourages a market Length of yield curve Larger issuance sizes, less regularly Local institutional investor base Separates good from bad markets Responsibilities go with privileges Benchmarks Auction results and history, auction calendar Post information on websites Care not to lengthen too soon, need domestic savers Other issues: such as tax, currency convertibility, custody Disincentive if need certification for every transaction One year restrictions are significant opportunity cost Encourage local institutions to compete with foreign banks 022 Developing domestic debt markets (2) Role of international investors Played a prominent role in 2006-2007 Accounted for 11% of Ghana market (3% of GDP), 20% in Nigeria, 17% in Malawi and 14% in Zambia Allowed borrowers to lengthen maturities and lower rates But international investors are fickle Supranational local-currency linked issues, such as AFDB Funding operation for MDBs with externality of developing local market Some investors cannot take local custody or sub investment grade So take currency risk via AAA credit instrument, with easier settlement Brings new investors, e.g. if no previous issues or if capital controls But can crowd out (substitute) foreign investment in some local markets Is it more suitable to those markets that are less developed? 023 Innovative financing solutions terms – borrowers need to be prepared to give more away syndicated loans private placements – perhaps first to return to select Africa-focused foreign investors collateralised loans granting guarantees – role for AFDB? financing backed by offshore payments targeted/specific bond issues diverse offshore payment flows, such as remittances, FDI and export-related revenues, can be monetised. This type of structure can offer significant investor protection and represents an innovative way for the larger African banks to raise funding even in the current environment. Infrastructure bonds. Tend to be long dated. Are they only really viable to those with more mature domestic markets? (e.g. Kenya) Diaspora bonds. Tap dedicated investor base who may look more favourably at buying African debt at affordable rates to the issuer (e.g. Sri Lanka Development Bonds) state contingent claims for sovereigns and corporates (e.g. GDP or commodity price-linked warrants) Data issues and trust Exotix’s experience in Yemen with Jabal Salab in a US$120 million project financing deal to develop zinc deposits financed through a high yield bond and “kicker” linked to zinc prices 024 Disclaimers © Copyright 2009 Exotix Limited and affiliated companies ("Exotix"). This Material is provided for informational purposes only. 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