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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.

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slide1

Supranational Domestic Debt Issuance

Presentation to the

African Stock Exchanges Association Conference

12 September 2005 – Cairo

outline

Rationale

Requirements

Issues and challenges

Impact of MDB bond issuance

ADB and development of African

capital markets

I

II

III

IV

V

2

8

12

15

18

Outline
slide3

The African Development Bank: a supranational organization issuing debt in several international capital markets to fulfill its development mission

  • 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
  • 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
slide4

Sub-Saharan Africa, excluding South Africa, has fewer roads than Poland.

Less than 40% of African rural population haveaccess to clean water and sanitation.

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 50% of the number of telephone lines in Manhattan.

Infrastructure financing needs forNorth Africa alone are

estimated at $ 20 billion between 2005 and 2015!

slide5

7 years

Bonds

Loans

Yet, financing remains limited to

medium term bank loans …

GOVERNMENT YIELD CURVE

7.00

6.00

5.00

yield (%)

4.00

3.00

2.00

1.00

1

2

3

4

5

6

7

8

9

10

15

20

years

… leaving large unfunded portions with currency and maturity mismatches

capital markets in the 53 african countries are at varied stages of development
Capital markets in the 53 African countries are at varied stages of development ...

… many share several shortcomings but have potential for growth

fund raising and lending in local domestic currencies is consistent with most mdbs mandate
Fund raising andlending in local domestic currencies is consistent with most MDBs mandate

Respond to clients needs

(volume, asset-liability management:currency and maturity and attractive funding costs)

Local currency issuing and lending is an important strategy for most MDBs

Develop capital markets

(high quality investment alternatives to local investors as well as new funding sources for MDBs)

This supports the deepening of the financial system’s intermediation capacity and complements local financial institutions

outline1

Rationale

Requirements

Issues and challenges

Impact of MDB bond issuance

ADB and development of African

capital markets

I

II

III

IV

V

2

8

12

15

18

Outline
slide9

Successful MDBs domestic debt issuance requires a number of conditions

Economic, fiscal and monetary discipline

Stable macroeconomic conditions

  • Liberalised financial sector with deregulated interest rates

Strategic and policy decision to permit and facilitate MDBs issuance in the market

Government Support

Size and depth of the market

Yield curve

  • Availability of several maturities
  • Secondary market trading

Existence and liquidity of swap market

  • 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
slide10

Additional considerations

Assess supply and demand for bonds

Market participation

  • 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

Existence of efficient trading, clearing and settlement systems and other supporting infrastructure

Market infrastructure

  • Existence of clearing system – Bridge with international systems
  • Delivery versus payment (or else settlement risk)
  • Research, information on the markets
  • Credit rating
slide11

Clear and sound legal and regulatory framework is critical

Consent to issue, tax exemption and use of proceeds

Ministry of Finance (MOF)

  • 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)

Investment eligibility: no restrictions on investors & asset-risk weighting of bonds

Central Bank and non bank regulatory agency

  • Authorization to allow all investor classes to hold issue: insurance companies, pension funds and mutual funds
  • Asset classification for investors (government ?)

Documentation, listing, disclosure, domestic rating requirements

Securities Regulator

  • Rated by several agencies & comprehensive documentation framework covering several markets

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

outline2

Rationale

Requirements

Issues and challenges

Impact of MDB bond issuance

ADB and development of African

capital markets

I

II

III

IV

V

2

8

12

15

18

Outline
is mdbs domestic debt issuance always desirable
Is MDBs domestic debt issuance always desirable?

MDBs often require swapping so countries must assess economic policy implications within a context of financial and economic liberalization

Exchange rate volatility?

Impact on currency can be monitored

(Pressure on currency if daily volume of FX transactions low and swap amount important)

MDBs play a catalytic role and encourage new issuing activity

Possible Crowding Out Local Issuers ?

No oversupply of securities and over time investor base widens

Governments can regulate issuance flows with delivery of consent

mdbs may face some challenges
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

Time lag and matching of assets and liabilities

(short or long term, fixed or floating, bullet or amortising)

Asset and Liability Management

Lack of hedging (swaps) and warehousing instruments

Negative cost of carry ?

outline3

Rationale

Requirements

Issues and challenges

Impact of MDB bond issuance

ADB and development of African

capital markets

I

II

III

IV

V

2

8

12

15

18

Outline
positive spill over effects from mdbs issuance
Positive 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
benefits of issuance by mdbs
Benefits 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
outline4

Rationale

Requirements

Issues and challenges

Impact of MDB bond issuance

ADB and development of African

capital markets

I

II

III

IV

V

2

8

12

15

18

Outline
slide19

BWP

TND

Tunisia

Botswana

UGX

TZS

KES

Uganda

Tanzania

Kenya

MAD

Morocco

XOF

NGN

EGP

West Africa CFA

Nigeria

Egypt

The Bank has conducted preparatory work

on several markets …

slide20

Different issues fuel

development of capital markets

  • REGULATOR
  • Independent supervisory agency
  • Investor protection
  • Corporate governance
  • TECHNOLOGICAL INFRASTRUCTURE
  • Depository and clearing systems
  • Trading platforms
  • Payment systems

Increase retail investors base

Mitigate information and agency concerns

Improve exchange infrastructure

Efficiency gains and lower transaction costs

CAPITAL MARKETS

SUPPLY OF BONDS

DEMAND OF BONDS

Foreign issuance

Foreign investment

Discipline, efficiency, innovation and best practices

Increase institutional investors base

Promote stocks dissemination

Increase liquidity

  • Pension funds
  • Mutual funds
  • Insurance sector

Sound fundamentals and financial liberalization

  • Privatization
  • Tax incentives
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