Regional Snapshot of Government Bond Markets, Sub Saharan Africa Johannesburg, June 17-19, 2003 David Wilton, Vidhya Rustaman The World Bank

Objective To provide snapshot of government securities (GS) markets in the region Follows Handbook framework Based on survey responses from some Central Banks, Treasuries, and Ministries of Finance of ten countries Preliminary study for an upcoming report and is currently in Draft form Part of on-going study of challenges facing the region ’ s public debt markets

Summary - Main characteristics of the market Public debt securities development still in early stages in most countries Disparity in level of development among markets External > Domestic debt, except in South Africa, Mauritius and Namibia Domestic debt is mostly local currency denominated GS are mainly short term and fixed term, except in South Africa and Botswana (recently) Mid-long term market is developing

Size of the market Wide disparity in size of markets in the region Note:Data for 2002 except Tanzania, South Africa, Swaziland, Botswana 2003, Kenya & Nigeria 2001

Size of the market Most countries in the region rely on external debt Note:Data for 2002 except Tanzania, South Africa, Swaziland, Botswana 2003, Kenya & Nigeria 2001

Size of the market Reliance on external debt still widespread Note: Data is based on simple averages of countries included in the World Bank/IMF Survey, during

Domestic GS composition Limited non-marketable GS Non-marketable securities consist of : Tanzania – Government stocks ;Ghana – Tema Oil Refinery bonds (stocks not included) ; South Africa – Former Homeland Bonds ; Nigeria T-bonds

Note: Data for 2002 except Tanzania, Uganda, South Africa, Swaziland, Botswana 2003, Nigeria 2001 Domestic marketable GS T-bills are dominant

Domestic GS composition Fixed rate securities dominant in EAP and MENA Note: Data is based on simple averages of countries included in the World Bank/IMF Survey, during LAC T-bill breakdown unavailable.

Domestic GS by tenor Short term securities dominant Note: Data for 2002 except Tanzania, Uganda, South Africa, Swaziland, Botswana 2003, Nigeria 2001

Domestic GS by tenor Longer term securities most common in EAP Note: Data is based on simple averages of countries included in the World Bank/IMF Survey, during

Summary - Institutional framework & primary markets Most countries formalize debt management objectives in the legal framework, Namibia has a draft debt management strategy Debt management responsibility generally shared by Ministries of Finance and Central Banks Supervision responsibility generally resides with Central Banks, and specialized authorities Central Bank issues its own securities in 5 markets

Debt management responsibility Debt management responsibility is generally shared by Central Bank and Debt Management Units in Ministries of Finance or National Treasury In South Africa, Reserve Bank is only responsible for auctions DMU newly created in Mauritius, and Nigeria 2000 Fiscal and monetary policy coordination is done through formal committees in six countries

Limits on borrowing Survey responses reveal clear limits on borrowing are specified in the legal framework. Limits on borrowing from or selling securities to the Central Bank are common In South Africa, it is not allowed. Botswana & Namibia only allow with special permission. Nigeria-no restrictions on selling securities

Legal limits on borrowing

Market supervision Central Banks mainly supervise the GS market

Primary markets Auctions are main method of primary issuance Most countries publish auction schedule, Central Banks are generally auction agents Some have limits on participation in auctions Primary dealer (PD) arrangements of varying kinds are being developed

Annual GS issuing plan Annual issuance plan used, and securities issued at a pre- announced regular schedule Other issuing plan Mauritius, South Africa, Namibia, Botswana, Nigeria Ghana-weekly (T-bills) Tanzania-monthly (volume is divided per week) Uganda- bi-weekly (T-bills) Zambia-weekly (T-bill) and monthly (bonds) Swaziland-no publicly announced issuing plan

Placement technique Auctions predominate Auctions are the only method of placement In Ghana, tap sales are used but only for the securities not taken up by auction Multiple price auctions are most common Only South Africa, Mauritius and Botswana use uniform price Ghana uses both (uniform price for GGILBs) Swaziland uses pre-announced fixed rate, but is moving towards uniform price. Non competitive bids allowed in Ghana, South Africa, Zambia, Uganda and Nigeria

Primary dealers PD arrangements are being developed Primary dealer arrangements of varying kinds are used in 6 countries Ghana, Mauritius, South Africa, Tanzania, Botswana Nigeria has appointed PDs for GS Most are obliged to take a portion of GS at auctions (except SA). Only in South Africa do the PDs have exclusive right to bid at auctions (also Botswana).

Summary-Secondary market Banks are dominant holders of GS, as well as public sector. Securities to retail investors issued in Botswana, planned in South Africa & Nigeria Secondary market liquidity still shallow Few restrictions on forwards, short selling and borrowing/lending securities Repo markets are active in most countries Withholding taxes still generally imposed

Investor Base Banks are the primary holders of GS in the region Note: Kenya includes government stocks (mainly held by “Other”), Swaziland – Other holders are primarily institutional investors

Investor Base Direct and indirect requirements to hold GS are commonplace Note: Data is based on simple averages of countries included in the World Bank/IMF Survey, during

Note: Turnover is calculated as Annual trading volume/Year end marketable securities outstanding. *Based on estimated annual trading volume 2002 Secondary market liquidity GS trading activity is developing TurnoverRepoOutrightDescription South Africa Zambia Mauritius Uganda0.11* -Secondary trades started Feb 2003 Tanzania---Two transactions reported (US$14,000 est.) Ghana---Approx. US$2.2m in repos, US$24,000 secondary trades

Note: Turnover is calculated as Annual trading volume (outright and repos) /Year end marketable securities outstanding. Data is based on simple averages of countries included in the World Bank/IMF Survey, during 2001 and 2003 (which have provided data varying from end ) Secondary market liquidity Average trading of GS highest in East Asia

Note: Turnover is calculated as Annual trading volume (outright and repos) /Year end marketable securities outstanding. Data is based on simple averages of countries in the World Bank/IMF Survey, Secondary market liquidity Outright trading in GS still shallow OutrightRepoTotal EAP - Singapore EAP - Korea MENA - Morocco LAC - Mexicon.a LAC - Braziln.a. 8.5 ECA - Czech Republicn.a. 7.8 EAP – China SSA- South Africa

Repo markets Repo markets still developing in the region In Mauritius and Tanzania, only the Central bank uses repos;Namibia has no repo market

Trading possibilities Few restrictions on trading but limited activity Note: *only in FX

Tax regime Neutral and simple policies most desirable Capital gains tax Withholding Taxes (WH) Non resident investment Turnover tax GhanaNo*NoExemptNo MauritiusNo ExemptNo South AfricaNo ExemptNo NigeriaNoNARecoverable WH taxNo TanzaniaNoYesRestrictedNo SwazilandNoYesRecoverable WH taxNo ZambiaNoYesRecoverable WH taxNo NamibiaNo ExemptNo BotswanaNoYesRecoverable WH taxNo *soon to be introduced

Summary - Infrastructure OTC trading dominates. Three countries also use stock exchange trading of GS. South Africa uses bond exchange. Securities accounts are predominant. Some countries use RTGS with delivery vs. payment Most countries use the Central Bank as the main securities depository.

Settlement arrangements Real time gross settlement developing *SDS = same day settlement

Depository arrangements Swaziland intends to phase out issuance of paper certificates Central Bank is the central depository for GS, S. Africa is exception (central depository) In Tanzania, Central Bank and DSE act as central depository for GS Securities accounts predominant, except: <15% of outs. GS in S. Africa and Mauritius Bonds in Namibia (only T-bills are dematerialized)

Achievements Increasing emphasis on debt management in the region Strengthening of the regulatory framework (laws on debt issuance, and creation of DMUs) Improvements in infrastructure for GS ongoing

Challenges Enhancing public debt and cash management Stimulating a more diverse investor base, especially term investors Reduce reliance on non marketable debt Lengthening maturities and developing a benchmark yield curve

Thank you