Efficient Securities Markets Institutional Development Initiative Global Capital Markets Development Department Securities Markets Group
Agenda
•Introduction •Bond Markets in East Africa •ESMID
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Introduction • Africa’s housing & infrastructure financing needs are enormous - US$93 billion or 15% of GDP
• Bulk of infrastructure undertaken by public sector using foreign currency loans – Funding inadequate to meet all requirements – Currency risk passed on to consumers
• Private Sector can contribute in bridging the financing gap • Capital Markets can raise long-term local currency financing for infrastructure and housing – Kenya Government raised US$240 million through bond market for infrastructure – Kenya Electricity Generating Company - KenGen raised US$330 million in 10-yr bond for power generation projects 3
Benefits of Well Functioning Local Currency Bond Markets Better risk management for borrowers: • Lower interest rates • Reduced foreign currency risks • Reduced refinancing risks • Longer tenors Improved yields for institutional investors Improved ability to deal with financial crises Financial sector diversification Accelerated private sector development Expanded housing and infrastructure finance
This generates growth and reduces poverty 4
Ingredients for a Vibrant Bond Market
Capacity
Enabling Environment
Market Place
Macro Economic
Trading, Clearing, Settlement, Depository infrastructure
Bankable Projects & Sponsors
Pre-trade and posttrade transparency
Informed Intermediaries
Bond Market Structure
Informed Investors
Environment
Legal & Regulatory - Issuance Process - Market Rules
Tax Regimes
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Bond Markets in East Africa
Tenor of Fixed Income Instruments East Africa Longest
Longest
Treasury
Corporate
Bond
Bond
Rwanda*
3 Years
10 Years
Uganda
10 Years
10 Years
Tanzania
10 Years
10 Years
Kenya
20 Years
10 Years
• Floating Rate instruments
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Treasury Yield Curves Uganda, Tanzania & Kenya as at 30 June 2010 14.0000
Uganda Tanzania
12.0000
10.0000
Kenya
8.0000
6.0000
4.0000
2.0000
O/N T/N 1W 1M 2M 3M 6M 9M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 15Y 16Y 17Y 18Y 19Y 20Y 21Y 22Y 23Y 24Y 25Y Source: Standard Chartered Bank Kenya
Tenors have extended and yields have recently declined 8
East Africa Cumulative New Corporate Bond Issues (US$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)
700.0 600.0 Global Credit Crisis
500.0 400.0
Kenya
300.0 Uganda 200.0 Tanzania
100.0 2004
2005
2006
2007
2008
2009
“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.
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Corporate Bond Issues - Kenya Ke nya
Industry
East African Development Bank (EADB)
DFI
Faulu Kenya
Year of Issue
Te nor
800
2004
7
7.5% Fixed
Microfinance
500
2005
5
91 day T-bill + 0.5%
PTA Bank
DFI
800
2005
7
7.80% Fixed
Athi River Mining
Cement
800
2005
5
91 day T-bill + 1.75%
Shelter Afrique
Housing DFI
200
2005
7
91 day T-bill + 1.0%
CFC Stanbic Bank (Private Placement)
Banking
600
2005
7
182 day T-bill + 1.5%
PTA Bank
DFI
1,000
2007
7
182 day T-bill + 1.0%
Barclays Bank of Kenya
Banking
1,206
2007
7
91 day T-bill + 0.6%
Barclays Bank of Kenya
Banking
740
2007
7
182 day T-bill + 1.0%
Sasini Tea & Coffee
Agriculture
600
2007
5
11.75% Fixed
Mabati Rolling Mills
Manufacturing
1,200
2008
8
182 day T-bill + 1.75%
Mabati Rolling Mills
Manufacturing
800
2008
8
13.00% Fixed
I & M Bank (Private Placement)
Banking
600
2008
7
91 day T-bill + 2.5%
Zain Kenya (Private Placement)
Telcom
5,700
2008
3
182 day T-bill + 1.75%
CFC Stanbic Bank
Banking
98
2009
7
182 day T-bill + 1.75%
CFC Stanbic Bank
Banking
2,402
2009
7
12.50% Fixed
Shelter Afrique
Housing DFI
KenGen
Infrastructure
Ksh (M)
Coupon
1,000
2009
3
11.00% Fixed, Floating (182 day T-bill +1.50%)
25,000
2009
10
Fixed 12.5%
7,500
2009
5
Fixed 12.25%, Floating 182-day T-bill +1.85%
Tourism
400
2010
5
12% and 10% fixed
Cement
1,600
2010
5
12.5% fixed and equity upside
Safaricom
Infrastructure
TPS Serena (Private Placement) Athi River Mining (Private Placement)
53,546
Corporate Bond Issues – Uganda, Tanzania and Rwanda Uganda Uganda Telecom East African Development Bank (EADB) Standard Chartered Bank Uganda Housing Finance Bank Stanbic Bank PTA Bank
Tanzania East African Development Bank (EADB) PTA Bank Barclays Bank Tanzania Standard Chartered Bank Tanzania ALAF
UGX 24,000 20,000 23,000 35,000 30,000 10,000
USD 10.5 8.8 10.1 15.4 13.2 4.4
Country
USD
% of GDP
Kenya
653.7
2.1
Uganda
58.0
0.5
Tanzania
45.4
0.3
132,000
58.0
Rwanda
1.7
0.1
TSh 9,000 6,000 24,600 8,000 15,070
USD 7 4 18 6 11
East Africa
758.8
3
62,670
Rwanda Banque Commercial Rwanda (BCR)
Rfw 1,000 1,000
45
USD 2 2
Broad range of sector have tapped the bond market Nongovernment bond markets in East Africa are relatively small ….but potential is significantly large 11
Kenya Pension Funds Investments Size of Industry estimated at Ksh 272 billion
Pension Funds Investments % in Assets Classes 2001-2008 70%
Government Securities
60%
Pension funds are natural investors in long-term assets
Other Fixed Income
50% Quoted Equity
40% Property
30% Private Equity
Diversification in last 7 years has been into equities…and recently into corporate bonds
20% Other
10% Offshore
0% 2001
2002
2003
2004
2005
2006
2007
2008
Data Source, RBA – Excludes NSSF
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Challenges to Bond Market Development – East Africa Weak Regulatory Environment • Issuance process • Tax regimes • Investment requirements • Market rules • Licensing framework
Inadequate Market Infrastructure • Trading, clearing, settlement, and depository • Transparency information collection and dissemination
Lack of Capacity • Regulators • Market participants •Project Preparation gap
• Rating agencies Small and Fragmented Markets • Lack of critical mass of issuers and investors • Inability to take advantage of economies of scale
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Lessons/Issues - – East Africa
•
Approval process is still long (average 6 months)
•
Merit based process applied
•
Not much differentiation with equity issues
•
No recognition of sophisticated institutional investor base
•
There is a growing institutional investor base – seeking avenues to diversify and enhance returns
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ESMID
ESMID Africa ESMID: • Efficient • Securities • Markets • Institutional • Development
A partnership between: • Swedish International Development Cooperation Agency (Sida) • International Finance Corporation (IFC) • World Bank
Foster development of well functioning securities markets to: • Broaden availability of local-currency investment instruments • Enable private sector development
INITIAL FUNDING USD 5.5 million from Sida
• Improve financing for housing & infrastructure • Create jobs and improve livelihoods 16
ESMID Africa – Current Operations
• Kenya • Uganda
East Africa
• Tanzania
(Regional Approach)
• Rwanda • Nigeria
Country Approach
ESMID Africa largely works with clusters of countries where changes have the potential to reverberate across several nations, i.e. East Africa
ESMID - Comprehensive Approach Supports all layers of a securities market Regulators MOF, Securities Commissions, Central Banks, Pension Regulators Market Infrastructure Exchanges, OTC Trading System, Clearing & Settlement System, Rating Agencies
Market Participants Issuers
Intermediaries
Investors
•Regulatory advice (issuance, investment, new products) •Institutional capacity building (training, process improvement)
•Advice on market structure and institutional arrangements •Institutional capacity building (code of conduct, process) •Capacity Building (trainings, licensing program) •Transaction support (structuring, approvals, etc.)
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ESMID East Africa Components Legal & Regulatory Assistance
Strengthening the Market Place
Capacity
Primary issuance framework for nongovernment bonds
Market Infrastructure
Certification & Licensing framework
Regulatory Framework
Asset Backed Securities
Pre-trade and posttrade transparency
Securities Training Modules
Market Infrastructure
Bond Market Structure
Bond Market Structure
Regional Training Provider
Issuers & Investors
Building
Regionalization
Transactions Support 19
ESMID East Africa Components Legal & Regulatory Framework • Improve approval process • Reduce costs • Framework for new products
Capacity Building Certification/Licensing • Training
Transactions Support • Active support to issuers and intermediaries for replicable transactions • Introduce new & innovative products
Market Infrastructure • Market Structure • Clearing & Settlement • Transparency & Information Dissemination
Regionalization • Broadening & deepening efficient capital markets • Cross border issues
• Develop regional provider
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East Africa – Achievements ACHIEVEMENTS
ACHIEVEMENTS • •
•
•
Comprehensive diagnostics and roadmaps completed Strong relationships with and buy-in from stakeholders
•
Regional Institute and training curriculum
Buy-in for OTC market model for bonds •
Market structure
•
Legal & regulatory framework
Buy-in for regionalization strategy •
Legal & Regulatory framework
•
Market Infrastructure
•
Issuers & Investors
–
Establishment of Institute
–
Development of course material
•
Supported closing of a US$22 million equity linked note in Kenya
–
Pilot of courses & training of trainers
•
Strong Transactions pipeline US$ 600 million.
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ESMID Africa Pilot – Achievements Buy In Strong relationships with and buy-in from stakeholders - reached over 1,000 stakeholders Comprehensive diagnostics and roadmaps completed Buy–in for full disclosure primary marker framework and OTC Bond Market Structure Buy-in for Regionalization Strategy & Roadmap
Training Developed and piloted regional training program – over 550 participants and 67 trainers trained Securities Industry Training Institute (SITI) established by the exchanges with ESMID’s support SITI is now rolling out courses across East Africa
Transactions Support for closing of US$22 million equity linked note in Kenya Monitoring and/or supporting pipeline of over US$600 million
Implementation A recognized authority on capital market development, playing a key role in policy dialogue on financial sector reforms
Support to promising issuers in infrastructure, housing and microfinance
Collaboration with EAC Secretariat on regional market infrastructure project
Leveraged US$1.1 million to support upstream transactions work
Members Bond Market Steering Committee – Kenya
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THANK YOU “ESMID has been very instrumental in coming up with a framework that we can follow in the coming future…” -Pierre Celestin Rwabukumba, Capital Markets Advisory Council of Rwanda, Nov 2008
“We at the NSE support this initiative. We know it will broaden the reach of our members in common competence and standards of dealings in the markets.” – James Wangunyu, Chairman, Nairobi Stock Exchange, Sep 2008
“ESMID has come in and provided a diagnostic on the situation on the ground…it is an independent and objective diagnostic. It is a collaborative process… they have come and brought all stakeholders on…” – Simon Rutega, CEO, Uganda Securities Exchange, Nov 2008
“The [ESMID] project comes at a time when Kenya and other African countries are grappling with the needs of their growing economies and the need to improve infrastructure.” – East African Standard, Sep 2007
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THANK YOU
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