Multi-Asset Class Trading and Infrastructure Development Garth Gruebel, Chief Executive Officer, Bond Exchange of South Africa

Looking back over 2005 The year ahead Structural issues and challenges Developments

2005 Looking Back Volume peaked in 2001/2, but now appearing to flatten out, with annual volume of R8.1trn (2005) 2005 Velocity of R674bn per month Have we seen the bottom of the cycle – volumes for 2006 YTD up on 2005

2005 Review: New Issuance Remain dominated by government issuance – 68% SOE – 11% Corporates – 22% Continued and strong growth in corporate and securitisations

2005 Review: New Issuance In excess of 150% growth on prior year 6 new originators entered the market Biggest sector RMBS (41%) and vehicles (24%)

The Year Ahead: Budget Implications Net borrowing for 05/06 = R10,3bn, increasing to R24,4 billion over the next 3 years. R10.3bn is R43,2 billion lower than the projection made in the 2005 Budget Net loan debt decreased to a projected 30,8% of GDP for 05/06, from 33,2% (04/05). Expected to continue to decrease, averaging 28,7% over the next 3 years. State debt costs continue to decline. Although government debt is declining, the last three years has shown an increase in government issuances

The Year Ahead: Future Infrastructure Spend Government infrastructure spending is supplemented by major investment commitments by state-owned enterprises. Will increase over the next 3 years, totalling R32bn. Public sector borrowing projected to increase to 2,4% of GDP in 08/ Budget adds R34bn to capital and infrastructure spending over the medium-term expenditure framework (MTEF) Creates room for capital market borrowing particularly Eskom & Transnet. Additional funding for the Gautrain & other transport projects more than R14bn over the next 3 years. National roads agency to spend R9,5bn over this period.

The Year Ahead: Corporate Bonds Continued growth in securitisations, particularly banks– such as R/CMBS, credit card & vehicle. Banks are re-packaging their balance sheet risks and off-laying those risks in the general market. It takes credit risk off balance sheet and reduces Basel II reserving an capital cost requirements Bank lending remains the biggest source of lending to corporates, Basel II requirements will make it onerous for banks to incur corporate credit risk on balance sheet. As such debt originators may encourage listings as opposed to direct lending Unlisted corporate debt: BESA’s trade capture system is already available to participants to facilitate and capture unlisted money market instruments and unlisted capital market instruments. At end 2005, BESA facilitated one unlisted bank issue for a nominal value of R1bn. High yield bonds: this provides the small to medium entities to raise funds on the capital markets. Inward listings may encourage off-shore corporates to list on BESA to enjoy the benefits of a broader investor base.

Challenges & Opportunities Declining volume Low, stable rates; (relatively) low inflation; low volatility – bad for volumes Significant off-shore market in SA bonds Regional expansion of debt capital markets Small buy-side due to lack of national savings Inadequate curves

Market Structure UK gilts market introduced a formal 2 tier structure in 2002 Significant increase in turnover in both inter-bank and retail sectors of market SA comparison to UK market: UK – mature economic environment SA – maturing economic environment Period of declining volumes De facto, Informal 2 tier market

BESA Developments OTC derivative trade matching (& reset) platform Listed FI derivatives Expanding our family of indices – money market index (jointly with IMASA), hedge fund index Actively encouraging High-yield instruments Exploring a trading platform

Garth Greubel