Capital market developments in Africa Alia Yousuf Head of EM Debt Funds
May 2009
Table of Contents 2
Recent Development in African capital markets Impact of the global financial crisis Current state of African bond markets What can be done How can bond markets help growth Opportunities for Africa
Recent Development in African capital markets 3
% GDP
% y/y
•
Global growth and the search for yield by investors opened up new markets
80
7
•
USD bearish trades led to more unconventional FX trading, namely frontier markets FX
60
5
40
3
20
1
•
Further support came from the commodity price cycle, debt relief, other concessional cash-flows and remittance flows
•
While internally, several African countries improved policy making.
•
Human capital returning and a growing urban population supported continued high growth
-1 0 1980 1984 1988 1992 1996 2000 2004 2008 Ext. debt (%GDP, LHS) GDP (% y/y, RHS) average grow th 80-00
average grow th 01-09
Sources: IMF WEO & IFS, Standard CIB Global Research
Recent Development in African capital markets 4
In capital markets trading volumes grew
Absolute debt level is still low relative to peers
40,000
Securitized domestic debt/GDP, % 60
30,000 20,000
Sub-Saharan Africa (ex -Nigeria) Sub-Saharan Africa
0
20
-10,000
10
3Q
19 3Q 98 1 3Q 999 20 3Q 00 20 3Q 01 20 3Q 02 20 3Q 03 20 3Q 04 20 3Q 05 20 3Q 06 20 3Q 07 20 08
30
Source: EMTA, JP Morgan
Bubble size reflects nominal stock of securities
40
10,000
-20,000
Mauritius
50
Botsw ana Kenya
Nigeria
Angola
WAMU 0 0
50
100
150
200
250 GDP, US$ bn
Impact of the global financial crisis 5
•
A sharp reversal in all flows into emerging markets.
•
Remittance flows have also fallen – World Bank predicts global remittance to drop by 8% y/y in 2009
•
The timing is crucial for African countries to • Take this opportunity and build the necessary capital market infrastructure to accommodate future inflows especially given the scarcity of capital globally
USDbn EM
USDbn AF
1,000
40
750
29
500
18
250
7
-4
0
1991 1994 1997 2000 2003 2006 2009f Net private sector financing Emerging Markets (LHS) Net private sector financing to Africa/ME (RHS) Sources: IIF, Standard CIB Research
Write downs and deleveraging hit banks capital 6
Current state of African bond markets 7
• South African bond market is developed while Nigeria, Egypt and Kenya have a sufficiently developing capital markets. But the rest of SSA capital market are still in their infancy • Yield curves generally do not exist and when they do, they seldom go out further than five years – issuance is on irregular basis • Lack of government benchmark makes it difficult for corporates to access the debt capital markets • Most markets are illiquid and offer vanilla products and small size of markets generally prevents foreign participation
What can be done 8
• Building a yield curve - need for regular benchmark auctions rather than ad hoc single issuances • Primary dealer system and clear rules on 2-way pricing for market makers to create liquid secondary market and facilitate price discovery, Nigeria has done well in this regard. • Get rid of taxes on income (Zambia, Egypt) • Remove regulatory costs of corporate issuance • Regulatory improvements around disclosure will be key to more sustainable DCM markets. Maybe move to IFRS?
What can be done - continued 9
• Development of repo markets to allow hedging of interest rate swaps (IRS) and quicker downside price corrections in rising rate environments • Need for derivative market to allow companies to manage their risks • Documentation and legislation that would allow netting of derivative positions • Introducing floating rate instruments, sub-national markets and CPI-linkers (which are also an important part of getting a proper inflation targeting regime up and running i.e. Israel) • Greater pools of domestic liquidity via pension funds and insurance - regulatory reform in these areas is key to supporting capital markets •
Raising domestic savings rates
•
Pension reforms – mandatory, contributory schemes
•
Insurance industry consolidation – mandatory cover in certain insurance categories
•
Banks must offer a wide range of dedicated long term savings products
• Finally, there still need to be an incentive to get the macro picture right, too much volatility makes regulatory reform a secondary issue in most African markets
What can be done 10
Characteristics of a liquid bond market •
Regular issuance
•
Regulatory environment
•
Transparency
•
Liquid benchmark issues
•
Long dated maturities
•
Primary dealership • Contractual
•
Domestic Savings industry
What needs to happen? •
Government’s need to plan and communicate issuance programme
•
Platform must be in place to re-open issues to create liquid benchmarks
•
Debt relief must be combined with sustainable fiscal policy in order to make longer-dated instruments attractive
•
Regulators must make primary dealer/market maker status attractive to ensure liquidity is provided
How can bond markets help growth 11
•
Long term investment critical for sustainable economic growth
Local Pension Fund's Exposure to Govt Debt 2002 2008 USDbn
•
Corporates must be able to lock in long-term funding to pursue aggressive growth and development strategies
Brazil Colombia
•
Affordable leverage is critical for increasing longrun returns on equity
•
Bank issuance allows matching of longer term assets and liabilities – crucial for system stability in emerging markets
Source: JP Morgan
40 4
156 22
Ghana 2007-2008 Government Financing 12
•
Ghana has successfully tapped the capital market during 2007 and 08 to finance nearly all of their Fiscal deficit financing requirement
Fiscal (GHS) Deficits after grants
Current Account (USD) External inflows
Deficit
Eurobond
750
1125
Privatization
900
708
GHS bonds
616
-1132 Eurobond
862.5
-1983 Privatisation -3115 GHS bonds
2696
-4909
External inflows
other FDI
1988 4254
86.5%
Source: Standard Bank
86.7%
Opportunities for Africa 13
•
Fastest growing mobile telecoms market globally with >30% CAGR
•
10% of World proven oil reserve*
•
30% of the planet’s mineral resources including: • • • •
Gold – 40% Cobalt – 50% Manganese - 80% Platinum Group Metals – 90%
•
While Sub Saharan Africa only represents • 1.6% of Global GDP
•
Capital market development is crucial for African growth prospects
* Excluding Ghana Source: Bloomberg, Standard CIB Research, IMF World Economic Outlook
14
Questions
15
Annex
Comparative bond market indicators – size and growth in domestic public sector debt 16
Outstanding domestic public debt
Growth in domestic public debt
Source: World Bank, Bloomberg, Standard Bank Group
Source: World Bank, Standard Bank Group
ts w
an a
a Bo
Af r ic
ut h
da
2004-07
So
ga n U
ny a Ke
ria ig e N
G ha
an a ts w
Bo
ga n U
Za
G ha
Ke
ria ig e N
Af ric
ut h
Eg So
2007
yp t
-50 Eg
0
m bi a
0
%
na
25
da
50
m bi a
50
na
100
ny a
75
a
150
yp t
100
Za
USD bn
Comparative bond market indicators – maturity spectrum of selected African debt capital markets 17
Maturity in years 32
24
16
8
0 South Africa
Egypt
Zambia Dec-00
Source: Standard Bank Group
Kenya Feb-08
Nigeria
Uganda
Botswana
Ghana
Nigeria: market development 18
Role of government •
Establish/strengthen regulators
Role of market participants •
Market coordination and self-enforcement
•
Nigerian stock exchange
•
Money markets association of Nigeria
•
Securities and exchange commission
•
Bond market steering committee
•
Debt management office
•
Central bank of Nigeria
•
Commitment to provide consistent twoway quotes
•
Create primary dealer/market maker system
•
Leveraging external market expertise through foreign participation
•
Regular bond issuance calendar
•
•
Electronic securities trading platform
Strong drive to diversify shareholder base through equity capital markets
•
Pension reform creating sustainable growth in investible funds
Nigeria: market development 19
Nigerian stock exchange index
Volume of government bond issuance NGN bn
67,500
600.00
51,625
450.00
35,750
300.00
19,875
150.00
4,000 Feb-00
0.00
Oct-01
Jun-03
Jan-05
NSE all share index Source: Reuters, Standard Bank Group
Sep-06
2003
2004
2005
2006
2007
Govt. bond issuance Source: Debt Management Office, Standard Bank Group
2008e
Nigeria: next steps 20
• Debt capital markets • Focus on development of liquid benchmark sovereign issues • Establishing framework for corporate issuance • Grow repos market – introduce interest rate swaps • Dollar sovereign curve for pricing corporate eurobonds
• Equity capital markets • Continue to encourage listing from top Nigerian corporate names • Further promote timely and transparent reporting
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