GOVERNMENT OF MOZAMBIQUE IN COLLABORATION WITH WORLD BANK AND IMF WORKSHOP 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
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Government of Mozambique in collaboration with World Bank and IMF Workshop
Government of Mozambique in collaboration with World Bank and IMF Workshop 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 - PowerPoint PPT Presentation
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GOVERNMENT OF MOZAMBIQUEIN COLLABORATION WITH WORLD BANK AND IMF WORKSHOP
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
•Importance of Non-Government Bond Markets
•Status of the Bond Markets in Africa
•ESMID’s role Reforming Local Currency Bond Markets in Africa
-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
The potential for Bond financing is also largeLocally sourced infrastructure financing by financial instrument Amount outstanding at end-2006 or most recent available
Source: Local sources of financing for infrastructure in Africa, The World Bank March 2009
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.
Financing Sources for the Housing Sector
Brazil
ChileChina
Colombia
Czech Rep
ublic
Hungary India
Korea, R
ep. o
f
Malaysi
a
Mexico
Poland
South
Africa
Thail
and
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Emerging Market Mortgage Funding
OtherMBSBondsDeposits
Note: ‘Other’ include Housing Provident FundsSource: Housing Finance Policy in Emerging Markets, Edited by Loic Chiquier and Michael Lea, The World Bank 2009
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
• 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
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
Short Term (91-day) Interest Rates in Selected African Countries
Role of ESMID in Reforming Non-Government Bond Markets
16
ESMID Africa ESMID:
• Efficient • Securities • Markets • Institutional• Development
A partnership between:
• Swedish International Development Cooperation
Agency (Sida)
• World Bank• 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
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
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
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
Case StudiesKenya
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• 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
2000 2001 2002 2003 2004 2005 2006 2007 20080
2
4
6
8
10
12
14
Kenya Public Debt 2000 -2008 (USD Billions)
DomesticExternal
2003 2004 2005 2006 2007 2008 20090
100
200
300
400
500
600
Kenya Composition of Domestic Debt
T-billsT - Bonds
22
Treasury Yield Curves Kenya
91 Day
182 Day
1 Year
2 Years
3 Years
4 Years
5 Years
6 Years
7 Years
8 Years
9 Years
10 Years
11 Years
12 Years
13 Years
14 Years
15 Years
16 Years
17 Years
18 Years
19 Years
20 Years
0
2
4
6
8
10
12
14
16
20062009
Kenya Government Treasuries Yield Curve 2002-2009
Yields have flattened
• Treasury yield curve lengthened to 20 years
• Yields flattened due to improved investor confidence
23
Corporate Bond Issues - KenyaKenya Industry Ksh (M) Gurantee Year of Issue Tenor Coupon
East African Development Bank (EADB) DFI 800 None 2004 7 7.5% Fixed
Faulu Kenya Microfinance 500 AFD 2005 5 91 day T-bill + 0.5%
PTA Bank DFI 800 None 2005 7 7.80% Fixed
Athi River Mining Cement 800 None 2005 5 91 day T-bill + 1.75%
East Africa Cumulative New Corporate Bond Issues (US$M)
2004 2005 2006 2007 2008 2009 -
100.0
200.0
300.0
400.0
500.0
600.0
700.0
Kenya
Uganda
Tanzania
Global Credit Crisis
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
…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
50%
36%
5%5% 4%
Kenya: Corporate Bond Holding by Investor Class Jun 2009