government of mozambique in collaboration with world bank and imf workshop
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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 - PowerPoint PPT PresentationTRANSCRIPT
GOVERNMENT OF MOZAMBIQUEIN 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
2
•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
Agenda
3
• Estimated Financing needsAnnual spending needs: ~US$ 100 billion (15% of GDP)
• Current sources of financing cover only half of this needBudget and off-budget spending: ~US$ 45 billion
• Funding shortfall is substantialWithout 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
Infrastructure Financing Needs in Africa are large
The potential for Bond financing is also largeLocally sourced infrastructure financing by financial instrument Amount outstanding at end-2006 or most recent available
Country (US$ million) Bank loans1 Government
Bonds2 Corporate
Bonds Equity Issues Benin 124 70% 0 0% 52 30% 0 0% Burkina Faso 85 68% 0 0% 39 32% 0 0% Cape Verde 108 100% — — 0 0% 0 0% Congo, Dem. Rep. 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% Namibia 117 28% 0 0% 298 72% 0 0% Niger 67 100% 0 0% 0 0% 0 0% Nigeria 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% South Africa 6,275 10% 763 1% 6,841 11% 48,149 78% Sudan 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%
Source: Local sources of financing for infrastructure in Africa, The World Bank March 2009
Majority of infrastructure financing in SS Africa from local sources is through bank loans.
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.
Financing Sources for the Housing Sector
Brazil
ChileChina
Colombia
Czech Rep
ublic
Hungary India
Korea, R
ep. o
f
Malaysi
a
Mexico
Poland
South
Africa
Thail
and
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Emerging Market Mortgage Funding
OtherMBSBondsDeposits
Note: ‘Other’ include Housing Provident FundsSource: Housing Finance Policy in Emerging Markets, Edited by Loic Chiquier and Michael Lea, The World Bank 2009
In SSA the use of bonds markets to support the housing finance needs has been negligible
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.
In 2007, 17% of mortgages in Europe were funded by covered mortgage bonds (CMBs)
6
• 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.
Benefits of Non-Government Bond Markets
7
Importance of Securities Markets for Development
Improved risk management
Financial sector diversification
Decreased vulnerability to external shocks
Increased access to infrastructure and housing
Increased production of goods and services Job creation Growth in domestic savings for further investment
Improved ability to cope with financial crises
GROWTH AND POVERTY REDUCTION
Productive Usesof Funds
DomesticSourcesof Funds
Securities Markets
Productive Usesof Funds
DomesticSourcesof Funds
Securities Markets
8
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
9
Ingredients for a Vibrant Bond Market
Enabling Environment
Macro EconomicEnvironment
Tax Regimes
Market Place
Trading, Clearing, Settlement, Depository
Pre-trade and post-trade transparency
Bond Market Structure
Capacity
Bankable Projects & Sponsors
Informed Intermediaries
Informed Investors
Difference between Equities and Bonds
10
Government Bonds Non Government Bonds Equities
Heterogeneity One clear issuer with clear risk/return
Many issuers with diverting risk/returnMany 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
Status of Bond Markets in Africa
12
Status of Bond Markets in AfricaType of Fixed Income Instrument Number of Countries
IssuingNo 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
13
Size of Equity and Bond Markets in Selected SSA Countries, 2006
Equity Bonds2
Equity Market Cap to GDP (%)
Number of public
companies
Govt Bonds Outstanding (USD Million)
Govt Bonds to GDP (%)
Non-Govt Bonds Outstanding
(USD Million)3
Non-Govt Bonds to GDP (%)
South Africa 280 401 66,029 26 30,588 12
Mauritius 57 42 998 16 0
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
3. Non-government bonds outs tanding may not include a l l private placement issues .
Source: African Development Bank, and Estimates
Significant differences in the level of development in the countries and regions
14
• Better macroeconomic management
• Lower Inflation
• Lower interest rates
• More stable exchange rates
• More sustainable budget deficits
• Development in government bond markets
• Tenor extension
• Yields flattening in some countries
…However, environment is becoming more favorable for debt capital markets in Africa
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100
5
10
15
20
25
30
35
GhanaKenyaMozambiqueNigeriaTanzaniaZambia
Inflation Rates in Selected African Countries
2000 2001 2002 2003 2004 2005 2006 2007 2008 20090
5
10
15
20
25
30
35
40Ghana
Kenya
Mozambique
Nigeria
Tanzania
Zambia
Short Term (91-day) Interest Rates in Selected African Countries
Role of ESMID in Reforming Non-Government Bond Markets
16
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
ESMID Africa – Current Operations
ESMID Africa largely works with clusters of countries where changes have the potential to reverberate across several nations, i.e. East Africa
• Kenya• Uganda• Tanzania• Rwanda
• Nigeria
East Africa
(Regional Approach)
Country Approach
ESMID Comprehensive Approach
Assistance to Regulators
Strengthening the Marketplace
Capacity Building
Transaction Support
Enabling Environment
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
Regionalization
ESMID-Africa
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
A comprehensive and integrated approach to developing local bond markets
Transactions Support
• Active support to issuers and intermediaries for demonstration transactions
• Introduce new & innovative products
Case StudiesKenya
21
• 1997 - First floating rate T-bond issued
• 2001 - Lengthening of domestic debt maturity gains momentum
• Significant change in domestic debt profile in 7 years
• Share of T-bonds rise from 28% in 2001 to 72% in 2008
• 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
…Restructuring of Domestic Debt in Kenya
2000 2001 2002 2003 2004 2005 2006 2007 20080
2
4
6
8
10
12
14
Kenya Public Debt 2000 -2008 (USD Billions)
DomesticExternal
2003 2004 2005 2006 2007 2008 20090
100
200
300
400
500
600
Kenya Composition of Domestic Debt
T-billsT - Bonds
22
Treasury Yield Curves Kenya
91 Day
182 Day
1 Year
2 Years
3 Years
4 Years
5 Years
6 Years
7 Years
8 Years
9 Years
10 Years
11 Years
12 Years
13 Years
14 Years
15 Years
16 Years
17 Years
18 Years
19 Years
20 Years
0
2
4
6
8
10
12
14
16
20062009
Kenya Government Treasuries Yield Curve 2002-2009
Yields have flattened
• Treasury yield curve lengthened to 20 years
• Yields flattened due to improved investor confidence
23
Corporate Bond Issues - KenyaKenya Industry Ksh (M) Gurantee Year of Issue Tenor Coupon
East African Development Bank (EADB) DFI 800 None 2004 7 7.5% Fixed
Faulu Kenya 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 5,700 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
Shelter Afrique Housing DFI 1,000 None 2009 311.00% Fixed, Floating (182 day T-bill +1.50%)
KenGen Infrastructure 25,000 None 2009 10 Fixed 12.5%
Safaricom Infrastructure 7,500 None 2009 5Fixed 12.25%, Floating 182-day T-bill +1.85%
51,546
24
East Africa Cumulative New Corporate Bond Issues (US$M)
2004 2005 2006 2007 2008 2009 -
100.0
200.0
300.0
400.0
500.0
600.0
700.0
Kenya
Uganda
Tanzania
Global Credit Crisis
Kenya has had record issuance of US$500 million in 2009, over 90% infrastructure
related KenGen (US$330
million) and Safaricom (US$100 million)
“The results clearly show that we can raise most of the funds needed to realise the goals of Vision 2030 through our own capital markets,” Kenya’s Prime Minister Mr Raila Odinga on the issue of KenGen bond.
25
…Role of Pension & Insurance Sectors in Kenya
Pension reforms effected in 2001 – significant growth in assets under management to date
Pension & Insurance funds accounted for 55% of Investments in Corporate bonds and 42% Treasury
Bond holdings in 2009
50%
36%
5%5% 4%
Kenya: Corporate Bond Holding by Investor Class Jun 2009
Pension Funds
Banks
Investment Companies
Insurance Companies
Individuals
Pensions Industry
Insurance Industry
Unit Trusts0
50
100
150
200
250
300
Estimated Institutional Investor Assets (Ksh.Billion)
Assets estimated at 20% of GDP
Case StudiesNigeria
27
• 2003 – Restructuring of external and domestic debt
• 2003 – First FGN Bond issued
• 2005 – Regular monthly issuance of FGN bonds
• 2008 - Tenor extended to 20 years
– Reduces roll over and refinancing risks
– Reduces interest rate volatility in the money market
– Ensures better asset/liability match
• 2010 – Renewed priority for corporate bond market development
…Restructuring of Domestic Debt in Nigeria
Up to 2 yrs63%
2-5 years7%
5-10 years6%
Over 10 Years24%
Nigeria Profile of Domestic Debt 2003
Up to 2 yrs33%
2-5 years38%
5-10 years12%
Over 10 Years18%
Nigeria Profile of Domestic Debt 2007
Source: Central Bank of Nigeria
28
…Corporate Bond Issues in NigeriaIssuer Amount (N’bn)
Access Bank* 13.5
Access Bank 200.0
Crusader* 4.0
Federal Mortgage Bank of Nigeria* 27.0
Guaranty Trust Bank* 200.0
C & I Leasing 2.2
Diamond Bank 200.0
FCMB 100.0
Fidelity Bank 200.0
First Bank 500.0
NAHCO 5.0
Oando 200.0
Thomas Wyatt 2.0
UBA 500.0
UPDC 30.0
Zenith Bank 200.0
TOTAL 2,383.5
In 2009, 3 state governments raised N85.5 billion (USD 0.5bn) from the local bond markets to
fund infrastructure development
Pipeline of corporate bond issues in 2-3 years
estimated at N2.4 trillion (US$ 16bn)
Many of the issues (including banking sector)
to fund infrastructure
* Issued fully or in tranches Source: AFRINVEST West Africa
29
• 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.
…Role of Pension Fund Reforms in Nigeria
Deposit Money Banks
39%
Discount Houses
10%
Pensions Funds22%
NBFI's19%
Other Insti-tutional In-
vestors2%
Foreign Investors
8% Individuals0%
Nigeria Bond Market Investor Profile 2009
Deposit Money Banks72%
Discount Houses
7%
Pensions Funds6%
NBFI's10%
Foreign Investors
5%
Individuals0%
Nigeria Bond market investor Profile 2008
Source: AFRINVEST West Africa
30
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