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:

– Three months T-Bills (91)

Second Stage:

– 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 FINANCESBUDGET DEFICIT - MTPBSGOVERNMENT FINANCESBUDGET DEFICIT - MTPBS

-3.2

-4.5

-8.3

-9.1

-5.1-4.5 -4.6

-3.8

-2.3-2.0 -2.0

-1.5 -1.4

-2.4 -2.4 -2.3

-10-9-8-7-6-5-4-3-2-10

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

GOVERNMENT FINANCES PUBLIC SECTOR BORROWING GOVERNMENT FINANCES PUBLIC SECTOR BORROWING

31.8

25.9

7.7 7.5 7.9

15.9

26.9 32.7

4.85.2

4.5

3.4

0.9 0.8 0.81.4

0

5

10

15

20

25

30

35

ZAR

(bn)

0

1

2

3

4

5

6

(%)

PSBR (LHS) PSBR as (%) of GDP (RHS)

GOVERNMENT FINANCES DEBT AS A % OF GDP

48 48.346.6

43.7 42.9

39.437.8 37.6 37.3

100

150

200

250

300

350

400

450

500

550

600

1998 1999 2000 2001 2002 2003 2004 2005 2006

20

25

30

35

40

45

50Foreign DebtDomestic DebtTotal Debt as a % of GDP

DEBT SERVICE COST AS % OF GDP

Debt Services Cost as % of GDP

5.78

5.40

5.12

4.70

4.22 4.18

4.00

3.80

3.5

3.7

3.9

4.1

4.3

4.5

4.7

4.9

5.1

5.3

5.5

5.7

1999 2000 2001 2002 2003 2004 2005 2006

Year Ending 31 MARCH

Prec

enta

ge

COST TO SERVICE DEBT IS DECLINING

13%

15%

17%

19%

21%

23%

25%

91 92 93 94 95 96 97 98 99 00 01 02 03 04

AS % OF TOTAL REVENUE

AS % OF TOTALEXPENDITURE

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

DOMESTIC CAPITAL MARKET REMAINS ROBUST

THANK YOU