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WORKSHOP ON
DEVELOPMING GOVERNMENT
BOND MARKETS IN SUB-SAHARAN
AFRICA
PRESENTED BY: Phakamani Hadebe
17 – 19 June 2003
WHY GOVERNMENTS ISSUE SECURITIES

Deficit Financing

Development of Financial Market
Primary Reason for Issuance Impacts demand for Securities
ESSENTIAL ELEMENTS

Continued Macroeconomic and Financial Sector
Stability

Credibility of the Government as an issuer of Debt
Securities

Credible and Stable Government

Sound Fiscal and Monetary Policy

Prudent Legal Framework

Effective Financial Operations Systems e.g Clearing
and Settlements
LACK OF ESSENTIAL ELEMENTS (WORST
CASE SCENARIO)

No demand for Government
Securities
SHOULD INVESTORS STILL DEMAND
GOVERNMENT PAPER, THERE ARE COSTS
INVOLVED

High Risk Premiums

Demand only for Short-Term T-Bills

Illiquid Market

A very Underdeveloped Market with very few Participants
 Preference for equity Market if it exists

Cost of Servicing Debt that is sticky in the Downward
direction
WHAT SEPARATES DEVELOPED CAPITAL
MARKETS FROM DEVELOPING /
UNDERDEVELOPED MARKETS?

What determines demand for Governments Bonds: At
Macro level
–
Macroeconomic Story
–
Legal System
–
Systems
–
Credibility and Transparency
DOES IT MEAN THAT A COUNTRY THAT HAS BEEN
SUCCESSFUL FOR OVER THE SHORT-TO-MEDIUM
TERM CANNOT IMPROVE DEMAND FOR ITS
SECURITIES

There will be demand only in the Short Term

T Bills and possible Short-Term Variable Rate
Bonds demand
MAIN CHALLENGES FOR SUCH A DEBT
MANAGEMENT OFFICE
Increasing Demand at Micro level for NASCENT Government
Securities Market

Using T-Bills Market as confidence boosting tool

Openness and Transparency

Information Sharing

Basic Information such as Announcing on Budget Day:
–
Government Funding Requirements
–
Dates of Auctions
MAIN CHALLENGES FOR SUCH A DEBT
MANAGEMENT OFFICE

Assessing which maturities have higher demand

For any New Approach / Plan, decision, invite Market Views OR
inform them

Separation of Debt Management from Monetary Policy

Continuous Interaction with Market

No Shocks
WELL ARTICULATED DEBT MANAGEMENT
OBJECTIVES N.B

Market Participants know what to Expect
OBJECTIVES OF DEBT MANAGEMENT INDICATE
LEVELS OF SOPHISTICATION FOR DMOS’

EVOLVING PRIMARY OBJECTIVES OF DEBT MANAGEMENT

Primary Objectives of Developing DMOs:
–
Finance Government Deficit
–
Develop Government Securities Market
–
Establishing Credibility of Government as an Issuer of Debt Securities
OBJECTIVES OF DEBT MANAGEMENT INDICATE
LEVELS OF SOPHISTICATION FOR DMOs’

No Go Zone
–
Taking Interesting Position
–
Emphasizing Costs reduction
–
Shocks
–
Consistency i.e. borrowing more than the announced auction
OBJECTIVES OF DEVELOPED DMOs’
Reduce Debt subject to acceptable Risk Levels
–
Demand for paper no longer Primary Concern
–
Possible failure to finance deficit no longer Primary
Concern
OBJECTIVES OF DEVELOPED DMOs
Reduce Debt subject to Acceptable Risk Level

Use of Derivatives

Diversification of Debt Portfolio

Synthetic products e.g. Strips

Risk Management
KEY MICRO ELEMENTS THAT INVESTORS
CONSIDER

Yield Curve (Inflation)
–
Maturity (Short or Long)
–
Volatility (Relatively Stable)
KEY ELEMENTS THAT INVESTORS CONSIDER

Budget Deficit during past 6-10 years

Budget Deficit
–
Spikes
–
Projected versus Actual Budget Deficit
(Budget)
5 STAGE PROCESS INTO FIXED – INCOME
BONDS

First Stage:
–

Second Stage:
–

Three months T-Bills (91)
Issue 6 Months (180)
Third Stage:
–
Issue 1-2 year T-Bills
5 STAGE PROCESS INTO FIXED-INCOME
BONDS

Fourth Stage
–
Issue 2-3 variable rate bond

1-4 Stages would build Credibility

Fifth Stage
–
Issue 2-3 Fixed Income Bond
–
Higher Coupons Induce Investors to Buy these Fixed
Income Bonds
MARKETING OF GOVERNMENT BONDS

ARE PRIMARY DEALERS ESSENTIAL?
–
At a start banks might be reluctant to join
Primary Dealers Panel

IN ABSENCE OF PDs, WHO INTERACTS WITH
MARKET
–
DMO should establish a team whose
responsibility is Market interaction
MARKETING OF GOVERNMENT BONDS

WHAT DOES THIS TEAM DO?
–
Information Sharing
–
Road-shows
–
Marketing Government Securities
–
Relationship Building
–
Contact Point
WITHOUT PDs SHOULD GOVERNMENT MAKE A
MARKET TO ENHANCE LIQUIDITY

No
–
Possible Huge Losses
–
Liquidity will build over time
IN A SUCCESSFUL NASCENT MARKET,
FINANCIAL INSTITUTIONS MIGHT BE
ATTRACTED i.e. BROKING FIRMS AND PDs

Confidence from Market build over time

ARE PDs ESSENTIAL
–
Where PDs are possible - Yes
SHOULD THIS BE SUCCESSFUL FINANCIAL
INSTITUTIONS MIGHT BE ALTERED i.e. BROKING
FIRMS AND PDs

WHY?
–
Market Making
–
Research
–
Interaction with Market Participants
–
PDs who have Global access sell bonds internationally
–
Enhanced Liquidity means Low Costs
SNAPSHOT OF RSA CAPITAL MARKET
DEVELOPMENT


EARLY 1980’s
–
Early 1980’s No Liquidity
–
Government issued Ad-Hockley
–
No yield curve and many Small Bonds with Different Maturities
LATE 1980’s
–
Importance of liquidity recognised
–
Small Bonds consolidated into Benchmark Bonds
–
Liquidity Enhanced
A CHANGE IN HIERARCHY OF DEBT
MANAGEMENT OBJECTIVES

PRE 1999

PRIMARY OBJECTIVE
–

Market development considerations
SECONDARY OBJECTIVE
–
Maintaining creditworthiness and promoting balance maturity structure
A CHANGE IN HIERARCHY OF DEBT
MANAGEMENT OBJECTIVES

POST 1999

PRIMARY OBJECTIVE
–

Minimizing cost of Debt Subject to acceptable risk level
SECONDARY OBJECTIVE
–
Ensure government access to financial markets
–
Diversification of funding instruments
GOVERNMENT FINANCES
BUDGET DEFICIT - MTPBS
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
-1 0
-2 .3
-2 .0 -2 .0
-1 .5 -1 .4
-2 .4 -2 . 4 -2 .3
-3 .2
-3 .8
-4 .5
-5 .1
-4 . 5 -4 .6
-8 .3
-9 .1
91 92 93 9 4 95 96 97 98 99 00 01 02 03 04 05 06
GOVERNMENT FINANCES
PUBLIC SECTOR BORROWING
35
30
26.9
4.8
32.7
5.2
4.5
5
25.9
4
20
3.4
15.9
15
10
7.7
7.5
7.9
5
0.9
0.8
0.8
2
1.4
1
PSBR (LHS)
19
99
/2
00
0
20
00
/2
00
1
20
01
/2
00
2
20
02
/2
00
3
19
98
/9
9
19
97
/9
8
0
19
96
/9
7
0
19
95
/9
6
3
PSBR as (%) of GDP (RHS)
(%)
ZAR (bn)
25
6
31.8
GOVERNMENT FINANCES DEBT AS A %
OF GDP
Foreign Debt
Domestic Debt
Total Debt as a % of GDP
600
550
48
48.3
46.6
500
43.7
50
45
42.9
450
40
39.4
400
37.8
37.6
37.3
350
35
300
30
250
200
25
150
100
20
1998
1999
2000
2001
2002
2003
2004
2005
2006
DEBT SERVICE COST AS % OF GDP
Debt Services Cost as % of GDP
5.7
5.78
5.5
5.40
5.3
5.12
Precentage
5.1
4.9
4.7
4.70
4.5
4.3
4.22
4.1
4.18
4.00
3.9
3.80
3.7
3.5
1999
2000
2001
2002
2003
Year Ending 31 MARCH
2004
2005
2006
COST TO SERVICE DEBT IS DECLINING
25%
23%
21%
19%
17%
AS % OF TOTAL REVENUE
15%
AS % OF TOTAL
EXPENDITURE
13%
91
92
93
94
95
96
97
98
99
00
01
02
03
04
DOMESTIC CAPITAL MARKET REMAINS
ROBUST
Challenge: Enhancing liquidity amidst declining supply
1997 Annual turnover was R3.4 tn (Before PDs)
2000 Annual turnover was R9.8 tn
2001 Annual turnover was R11.6 tn
2002 Annual turnover was R11.7 tn
THANK YOU