1. G OVERNMENT OF M OZAMBIQUE IN COLLABORATION WITH W ORLD B ANK AND IMF W ORKSHOP 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. 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. 3 Estimated Financing needs Annual spending needs: ~US$ 100 billion (15% of GDP) Current sources of financing cover only half of this need Budget and off-budget spending: ~US$ 45 billion Funding shortfall is substantial Without 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

4. The potential for Bond financing is also large 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.

5. Financing Sources for the Housing Sector 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. 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. 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

8. 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. 9 Ingredients for a Vibrant Bond Market Enabling Environment Macro Economic Environment Legal & Regulatory - Issuance Process - Market Rules 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

10. Difference between Equities and Bonds 10 Government BondsNon Government BondsEquities HeterogeneityOne clear issuer with clear risk/return Many issuers with diverting risk/return Many different types of bonds per issuer One form of equity per issuer FungibilityBenchmark bonds fungible. New issues not fungible with previous issues: different amount, coupon, maturity, and (possibly) credit rating. New issues fungible with outstanding shares IssuanceVery FrequentFrequentLess frequent Price DiscoveryPrice 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 MaturityFiniteFinite. Most < 20yearsInfinite LiquidityHighly liquidSimilar pattern across bonds: high post issuance (two weeks), but eventually buy-and-hold and illiquid Depends on stock type Type of InvestorInstitutional investors Diversified – includes retail Market ModelOTCOTC or HybridExchange Traded

11. Status of Bond Markets in Africa

12. 12 Status of Bond Markets in Africa Type of Fixed Income InstrumentNumber of Countries Issuing No of issuers as % of total Treasury Bills3974 Government Bonds2649 Municipal Bonds36 Corporate/Parastal2140 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. 13 Size of Equity and Bond Markets in Selected SSA Countries, 2006 Source: African Development Bank, and Estimates Significant differences in the level of development in the countries and regions

14. 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

15. Role of ESMID in Reforming Non-Government Bond Markets

16. 16 ESMID Africa ESMID: Efficient Efficient Securities Securities Markets Markets Institutional Institutional Development Development A partnership between: Swedish International Development Cooperation Swedish International Development Cooperation Agency (Sida) Agency (Sida) World Bank World Bank International Finance Corporation (IFC) 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

17. 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

18. 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

19. 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

20. Case Studies Kenya

21. 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

22. 22 Treasury Yield Curves Kenya Yields have flattened Treasury yield curve lengthene d to 20 years Yields flattened due to improved investor confidence

23. 23 Corporate Bond Issues - Kenya

24. 24 East Africa Cumulative New Corporate Bond Issues (US$M) Kenya has had record issuance of US$500 million in 2009, over 90% infrastructure related KenGen (US$330 million) and Safaricom (US$100 million) 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. 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 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 Assets estimated at 20% of GDP

26. Case Studies Nigeria

27. 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 Source: Central Bank of Nigeria

28. 28 …Corporate Bond Issues in Nigeria IssuerAmount (N’bn) Access Bank*13.5 Access Bank200.0 Crusader*4.0 Federal Mortgage Bank of Nigeria*27.0 Guaranty Trust Bank*200.0 C & I Leasing2.2 Diamond Bank200.0 FCMB100.0 Fidelity Bank200.0 First Bank500.0 NAHCO5.0 Oando200.0 Thomas Wyatt2.0 UBA500.0 UPDC30.0 Zenith Bank200.0 TOTAL2,383.5 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 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. 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 Source: AFRINVEST West Africa

30. 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

31. Thank You Evans Osano eosano@ifc.org 31