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Supranational Domestic Debt Issuance. Presentation to the African Stock Exchanges Association Conference. 12 September 2005 – Cairo. Rationale. Requirements. Issues and challenges. Impact of MDB bond issuance. ADB and development of African capital markets. I. II. III. IV. V. 2. - PowerPoint PPT Presentation
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12 September 2005 – Cairo12 September 2005 – Cairo
Supranational Domestic Debt Issuance
Presentation to the African Stock Exchanges Association
Conference
Presentation to the African Stock Exchanges Association
Conference
ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-OlugbadeASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page Page 22
Rationale I 2
Requirements II 8
Issues and challenges III 12
Impact of MDB bond issuance IV 15
ADB and development of African capital markets
V 18
OutlineOutline
ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-OlugbadeASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page Page 33
Shareholding 53 African and 24 non-African countries Subscribed capital – US$ 33.54 billion
Highest rating : AAA from Moodys, S&P, Fitch and JCR Strong membership support Strong financial fundamentals Good asset quality Sound financial controls and prudent risk
management policies
Solid presence in international capital markets Borrow in close to 20 different currencies
in Euro, domestic and global markets Borrowing portfolio of US$ 8.8 billion as of
Dec-2004 Assets under management of US$ 10.7
billion as of Dec-2004
Shareholding 53 African and 24 non-African countries Subscribed capital – US$ 33.54 billion
Highest rating : AAA from Moodys, S&P, Fitch and JCR Strong membership support Strong financial fundamentals Good asset quality Sound financial controls and prudent risk
management policies
Solid presence in international capital markets Borrow in close to 20 different currencies
in Euro, domestic and global markets Borrowing portfolio of US$ 8.8 billion as of
Dec-2004 Assets under management of US$ 10.7
billion as of Dec-2004
The African Development Bank: The African Development Bank: a a supranational organization issuing debt in several international supranational organization issuing debt in several international
capital markets to fulfill its development missioncapital markets to fulfill its development mission Provides long term loans, guarantees, equity
and risk management products Sovereign clients (including policy-based
and project loans) Non-sovereign clients Cumulative approvals 1964-2004: USD 30
billion All sectors: agriculture, finance,
multisector, infrastructure
Offers technical assistance for projects and programs that provide
institutional support and coordination of RMC development policies and plans
for specific projects that support for instance capital markets development
Provides grants for emergency humanitarian assistance from its Special Relief Fund
Plays a catalytic role through a dynamic co-financing and partnership strategy US$ 74 billion co-financing mobilized since
1964
Provides long term loans, guarantees, equity and risk management products Sovereign clients (including policy-based
and project loans) Non-sovereign clients Cumulative approvals 1964-2004: USD 30
billion All sectors: agriculture, finance,
multisector, infrastructure
Offers technical assistance for projects and programs that provide
institutional support and coordination of RMC development policies and plans
for specific projects that support for instance capital markets development
Provides grants for emergency humanitarian assistance from its Special Relief Fund
Plays a catalytic role through a dynamic co-financing and partnership strategy US$ 74 billion co-financing mobilized since
1964
ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-OlugbadeASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page Page 44
The continent requires significant volumes of financing to address all its needs especially in infrastructure
Sub-Saharan Africa’s 7.6 million telephone lines are just under Sub-Saharan Africa’s 7.6 million telephone lines are just under 50%50% of the number of telephone lines of the number of telephone lines in Manhattan.in Manhattan.
Sub-Saharan Sub-Saharan Africa, excluding South AfricaAfrica, excluding South Africa,, has fewer has fewer roads than Poland.roads than Poland.
Less than 40% of AfricanLess than 40% of African rural population rural population have have access to access to clean water and sanitationclean water and sanitation..
Infrastructure financing needs for North Africa alone are estimated at $ 20 billion between 2005 and 2015!
ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-OlugbadeASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page Page 55
GOVERNMENT YIELD CURVE
1.00
2.00
3.00
4.00
5.00
6.00
7.00
1 2 3 4 5 6 7 8 9 10 15 20
years
yie
ld (
%)
Bonds
Yet, financing remains limited to medium term bank loans …
Loans
7 years
… leaving large unfunded portions with currency and maturity mismatches
ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-OlugbadeASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page Page 66
Capital markets in the 53 African countries are at varied stages of development ...
… many share several shortcomings but have potential for growth
ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-OlugbadeASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page Page 77
Local currency issuing and lending is an
important strategy for most MDBs
Respond to clients needs
(volume, asset-liability management:currency and maturity and attractive funding costs)
Develop capital markets
(high quality investment alternatives to local investors as well as new funding sources for MDBs)
Fund raising and lending in local domestic currencies is consistent with most MDBs mandate
This supports the deepening of the financial system’s intermediation capacity and complements local financial institutions
ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-OlugbadeASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page Page 88
Rationale I 2
Requirements II 8
Issues and challenges III 12
Impact of MDB bond issuance IV 15
ADB and development of African capital markets
V 18
OutlineOutline
ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-OlugbadeASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page Page 99
Size and depth of the market
Economic, fiscal and monetary discipline
Yield curve
Existence and liquidity of swap market
Successful MDBs domestic debt issuance requires a number of conditions
Liberalised financial sector with deregulated interest rates
Will facilitate conversion of borrowed funds into currency of choice if need be
Help address matching of bonds and projects / negative cost of carry issues
Availability of several maturities
Secondary market trading
Stable macroeconomic
conditions
Strategic and policy decision to permit and facilitate MDBs issuance in the market
Government Support
ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-OlugbadeASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page Page 1010
Additional considerations
Existence of efficient trading, clearing and settlement systems and other supporting infrastructure
Existence of clearing system – Bridge with international systems
Delivery versus payment (or else settlement risk)
Research, information on the markets
Credit rating
Market infrastructure
Assess supply and demand for bonds Existence and size of investor’s base : banks, institutional or retail
investor (individuals); domestic and foreign; active or inactive. All this has consequences on price efficiencies and liquidity.
Issuers: government, corporates, financial institutions
Financial institutions/broker dealers/ with arranger capabilities
Market participation
ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-OlugbadeASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page Page 1111
Ministry of Finance (MOF)
Consent to issue, tax exemption and use of proceeds
Investment eligibility: no restrictions on investors & asset-risk weighting of bonds
Documentation, listing, disclosure, domestic rating requirements
Clear and sound legal and regulatory framework is critical
Central Bank and non bank regulatory
agency
Securities Regulator
Tax treatment of AfDB bonds and withholding tax
Authorization to invest in government securities for warehousing
Currency convertibility option on deal proceeds (may not be exercised in case of back-to-back lending)
Rated by several agencies & comprehensive documentation framework covering several markets
Authorization to allow all investor classes to hold issue: insurance companies, pension funds and mutual funds
Asset classification for investors (government ?)
Enable AfDB to achieve cost-efficiencies that will translate into lower cost of its loans and create a new asset class for institutional investors, thus
broadening the potential investor base
Enable AfDB to achieve cost-efficiencies that will translate into lower cost of its loans and create a new asset class for institutional investors, thus
broadening the potential investor base
ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-OlugbadeASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page Page 1212
Rationale I 2
Requirements II 8
Issues and challenges III 12
Impact of MDB bond issuance IV 15
ADB and development of African capital markets
V 18
OutlineOutline
ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-OlugbadeASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page Page 1313
Is MDBs domestic debt issuance always desirable?
Possible Crowding Out Local Issuers ?
Governments can regulate issuance flows with delivery of consent
No oversupply of securities and over time investor base widens
MDBs play a catalytic role and encourage new issuing activity
Exchange rate
volatility?
Impact on currency can be monitored
(Pressure on currency if daily volume of FX transactions low and swap amount important)
MDBs often require swapping so countries must assess economic policy implications within a context
of financial and economic liberalization
ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-OlugbadeASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page Page 1414
MDBs may face some challenges
Domestic debt issuance, part of the annual borrowing requirement to fund all activities – Cannot
be done at all costs (Speed and cost effectiveness of alternative financing strategies)
Pricing and Competitiveness
Lack of pricing transparency and credit awareness lead to difficulties in pricing (regulatory treatment and
liquidity)
All in cost likely to be above government so lending could be limited to private sector clients
Asset and Liability
ManagementNegative cost of carry ?
Lack of hedging (swaps) and warehousing instruments
Time lag and matching of assets and liabilities
(short or long term, fixed or floating, bullet or amortising)
ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-OlugbadeASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page Page 1515
Rationale I 2
Requirements II 8
Issues and challenges III 12
Impact of MDB bond issuance IV 15
ADB and development of African capital markets
V 18
OutlineOutline
ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-OlugbadeASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page Page 1616
Positive spill over effects from MDBs issuancePositive spill over effects from MDBs issuance
MDBs and government principal development objectives are aligned
Deepen financial markets and foster bond market development and competition in bond market
Contribute to reducing financial sector and overall economic risk exposure (FX and maturity risk for borrowers and financial institutions )
MDBs are AAA rated institutions
Credit diversification for investor, a new asset class as an alternative to sovereign bonds
Issuer diversification
Funding advantage in long-term end of curve to be passed on to borrowers of long-term resources Directly provide long-term funding to the economy and indirectly encourage mobilization of other long-term resources
Enable benchmark yield curve establishment and extension of yield curve
Contribute to emergence of a credit market and culture
ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-OlugbadeASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page Page 1717
Benefits of issuance by MDBsBenefits of issuance by MDBs
Transfer of know how and support authorities efforts in wide dissemination of international best practice
Documentation, listing, settlement, rating, clearing and transparency
Risk management products
MDBs continuous presence in international markets translates into high visibility transaction and signals confidence in local market and commitment to its development
ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-OlugbadeASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page Page 1818
Rationale I 2
Requirements II 8
Issues and challenges III 12
Impact of MDB bond issuance IV 15
ADB and development of African capital markets
V 18
OutlineOutline
ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-OlugbadeASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page Page 1919
The Bank has conducted preparatory work on several markets …
BWP
Botswana
MAD
Morocco
EGP
Egypt
TND
Tunisia
KES
Kenya
UGX
Uganda
TZS
Tanzania
XOF
West Africa CFA
NGN
Nigeria
ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-OlugbadeASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page Page 2020
Different issues fuel development of capital markets
CAPITAL MARKETS
SUPPLY OF BONDS
Sound fundamentals and financial liberalization
DEMAND OF BONDS
• Pension funds• Mutual funds• Insurance sector
• Privatization• Tax incentives
Increase institutional investors base
TECHNOLOGICAL INFRASTRUCTURE
• Depository and clearing systems• Trading platforms• Payment systems
Efficiency gains and lower transaction
costs
Improve exchange infrastructure
Foreign investment
Increase liquidity
REGULATOR • Independent supervisory agency• Investor protection• Corporate governance
Mitigate information and agency concerns
Increase retail investors base
Promote stocks dissemination
Discipline, efficiency,
innovation and best practices
Foreign issuance
Thank youThank you
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