Importance of Strong LCBM & Trade off Between Borrowing Domestically vs. International Markets 9 TH FORUM ON AFRICN PUBLIC DEBT MANAGEMENT AND BOND MARKETS Presenter: Thembi Mda | Senior Analyst: Debt Issuance and Management, National Treasury | 15 May 2015

Increased Foreign Bond Issuance in Sub-Saharan Africa 2

Growing foreign bond issuance in SSA Sovereign bond issues for sub-Saharan Africa (SSA) have surged since the global financial crisis of –with particularly strong levels of issuances in 2013 and Source: IMF WEO Bar chart: SSA sovereign bond issuance (US$ billions) Line graph: median public sector debt level (% of GDP) General government foreign currency & FC-indexed debt as a % of total government debt Source: Moody’s Statistical Handbook

Driving factors Strong investor demand because of loose monetary conditions in advanced economies creating a “search for yield” Many Improved macroeconomic fundamentals in issuing countries –Fast growing economies –SSA growth second only to SE Asia Underdeveloped local debt markets –Lack of depth and capacity to meet domestic demand 4 Average real GDP growth (%, 2015 – 16) SSA GDP (% World GDP) Source: IMF WEO

Ratings a major factor in ability to issue foreign bond Many countries now have ratings issued by international agencies 5 Source: Moody’s Ratings factor assessments across SSA

Benefits of foreign bond issuance Diversification of funding sources International markets have more capacity than local markets –Ability to raise large amounts for longer maturities than in local markets Debt restructuring and rescheduling –Can have a positive effect on a country's debt profile –Lower interest and straightforward repayment Provides benchmark for domestic private sector to also borrow from international markets Infrastructure finance to support economic growth International markets impose no restrictions on how money is spent –Unlike multi-lateral and bilateral lenders Speed with which issue can be packaged vis. a vis months spend negotiating a multilateral/bilateral loan 6

Risks of foreign bond issuance Exchange rate risk –Although foreign issuance may look cheaper (lower interest rate) than local debt, the borrowing cost increases significantly when national currency depreciates –Between , average annual currency depreciation in SSA was 3-4%, amounting to 44% cumulatively. Vulnerability to shocks –Many countries are dependent on commodities for revenue and foreign exchange –Swings in commodity prices affect the government revenue and ability to service debt 7 Commodity Price (Jan 2013 – May 2015)Currency depreciation (Jan 2013 – May 2015) Source: Bloomberg

Risks of increased foreign bond issuance Although African countries have fast growing economies with improved macroeconomic environment, their economies remain vulnerable to external socks. –Low foreign reserves –High current account deficits –Volatile currencies 8 Foreign exchange reserves Source: IMF, REO Average current account balance Source: Moody’s statistical handbook

Outlook for coming years 9 Emerging market spreads: Jan 2013 – Mar 2015 Global interest rates on increasing path as Fed increases rates –Increase in future cost of financing in international markets –Dollar strength: increase in repayment and roll-over risk Emerging and frontier market spreads have increased back to the levels last seen at the time of the May 2013 “taper tantrum” and have become more volatile. –In particular, spreads began to increase in October 2014 as oil prices started to decline –Since December 4014 have spiked several times by up to 200 basis points

Risk mitigation is important Risk mitigation strategies are needed to manage risks associated with foreign bond issuance. These strategies are highly technical and require high level of expertise –Hedging strategies such as swaps The recent Argentina case has highlighted the need to strengthen the legal framework to protect sovereign issuers in the event of foreign debt default and restructuring –pari passu clauses –Collective action clauses 10

Other options in foreign capital markets The are alternatives to international sovereign issuance especially for infrastructure or project finance. Although these are more lengthy to negotiate, a country is more likely to exercise more discipline in execution of project and how money is spent. –Export credit agency: provide AAA rating to the deal thereby reducing cost –Public private partnerships –Combination of concessional and syndicated loans 11

12 Importance of Local Currency Debt Capital Markets

Benefits of LCBM Development A well-functioning and liquid bond market provides: – government with a stable source of funding at reasonable costs and desirable maturity. –Sustainable market-oriented debt management strategy. –Creates an additional tool for countercyclical policies and policy space at times of crisis. –Provides insulation against various shocks. –LCBM help the corporate sector finance its investment needs and generate economic growth. –Provide outlet for domestic savings –Facilitating risk management and reducing risk exposure of the private sector –Facilitate the implementation of key policies such as monetary policy –Improves the transmission of monetary policy. 13

Role of government is important A number of countries issue government securities despite having budget surpluses. This is done in order to development the local market: –provide a benchmark yield curve for the corporate debt market; –support liquidity management operations of the central bank; –provide an investment alternative with little or no risk of default for investors; –maintain and develop smooth functioning and efficient financial markets; and –provide market infrastructure through a robust payment and settlement system and a strong legal framework (i.e., collateral and bankruptcy laws). Strategy implies fiscal cost in form of negative carry – but cost is low against benefits listed above. 14

Building blocks for LCBM development A strong high-level government commitment to upgrade and reform LCBM is necessary to ensure sustainability of the reform efforts. –Fiscal, monetary and macroeconomic policy discipline –Building capacity and technical skills in the public debt management office –Development of market infrustructure –Inter-institutional effort and policy coordination is required across fiscal, monetary, and regulatory authorities. –Coordination across agencies and interaction with private sector participants –Gaining credibility through continual implementation of policies –clear communication to build and foster credibility among market participants 15

The South African Experience 16

Brief History of South African Market 1994 South Africa was in a debt trap. Government focused on getting policies implementation –Monetary and fiscal discipline –Strengthened tax collection and cash management Development of local currency market –Consolidation of yield curve –Creation of benchmark bonds –Introduced risk benchmarks –Strengthened investor relations RSA able to fund predominantly in local market (only 9% in foreign market). Able to implement counter cyclical fiscal policy during economic downturn 17 Budget Balance & Debt as a percentage of GDP Source: National Treasury,

18 Closing Remarks

Development of LCBM a national priority Global interest rates on increasing path as advanced country monetary policy normalises –Increased cost of funding in international markets –Dollar strength – increased repayment risk National commitment to develop local market is imperative –Capacity building within government –Intergovernmental cooperation –Development of market infrastructure –Building credibility with investors and local market players 19

Thank You 20