Capital Markets Development
Capital Markets Development document sample
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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 • Global growth and the search for yield by % GDP % y/y 80 7 investors opened up new markets • USD bearish trades led to more unconventional FX trading, namely frontier 60 5 markets FX • Further support came from the commodity 40 3 price cycle, debt relief, other concessional cash-flows and remittance flows 20 1 • While internally, several African countries improved policy making. • Human capital returning and a growing 0 -1 urban population supported continued high 1980 1984 1988 1992 1996 2000 2004 2008 growth 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 Sub-Saharan Africa (ex -Nigeria) Mauritius 50 Bubble size reflects nominal stock of securities 20,000 Sub-Saharan Africa 40 10,000 30 Botsw ana 0 20 Kenya Angola Nigeria 10 -10,000 3Q 98 3Q 999 3Q 01 3Q 02 3Q 03 3Q 04 3Q 05 3Q 06 3Q 07 08 3Q 00 19 20 20 20 20 20 20 20 20 20 WAMU 1 3Q 0 -20,000 0 50 100 150 200 250 GDP, US$ bn Source: EMTA, JP Morgan Impact of the global financial crisis 5 USDbn EM USDbn AF • A sharp reversal in all flows 1,000 40 into emerging markets. • Remittance flows have also 750 29 fallen – World Bank predicts global remittance to drop by 8% y/y in 2009 500 18 • The timing is crucial for 250 7 African countries to • Take this opportunity and 0 -4 build the necessary capital 1991 1994 1997 2000 2003 2006 2009f market infrastructure to Net private sector financing Emerging Markets (LHS) accommodate future inflows Net private sector financing to Africa/ME (RHS) especially given the scarcity of capital globally 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 What needs to happen? • Regular issuance • Government’s need to plan and communicate issuance programme • Regulatory environment • Platform must be in place to re-open • Transparency issues to create liquid benchmarks • Liquid benchmark issues • Debt relief must be combined with • Long dated maturities sustainable fiscal policy in order to make • Primary dealership longer-dated instruments attractive • Contractual • Regulators must make primary dealer/market maker status attractive to • Domestic Savings industry ensure liquidity is provided How can bond markets help growth 11 • Long term investment critical for sustainable Local Pension Fund's Exposure to Govt Debt economic growth USDbn 2002 2008 • Corporates must be able to lock in long-term Brazil 40 156 funding to pursue aggressive growth and Colombia 4 22 development strategies • Affordable leverage is critical for increasing long- Source: JP Morgan run returns on equity • Bank issuance allows matching of longer term assets and liabilities – crucial for system stability in emerging markets 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) Current Account (USD) Deficits after grants External inflows Deficit External inflows -1132 Eurobond 862.5 -4909 Eurobond 750 -1983 Privatisation 1125 Privatization 900 -3115 GHS bonds 708 GHS bonds 616 2696 other FDI 1988 4254 86.5% 86.7% Source: Standard Bank 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 USD bn % 100 150 75 100 50 50 25 0 0 -50 a na a t da a ria a a na a t da a yp ria a yp r ic ny an bi ric ny an bi ha n e Eg ha n e m Eg Af Ke m w ga Af Ke ig w ga ig G Za ts G Za N ts N h U h U Bo ut Bo ut So So 2007 2004-07 Source: World Bank, Bloomberg, Standard Bank Group Source: World Bank, Standard Bank Group 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 Kenya Nigeria Uganda Botswana Ghana Dec-00 Feb-08 Source: Standard Bank Group Nigeria: market development 18 Role of government Role of market participants • Establish/strengthen regulators • Market coordination and self-enforcement • Nigerian stock exchange • Money markets association of Nigeria • Securities and exchange commission • Bond market steering committee • Debt management office • Commitment to provide consistent two- • Central bank of Nigeria way quotes • Create primary dealer/market maker • Leveraging external market expertise system through foreign participation • Regular bond issuance calendar • Strong drive to diversify shareholder base through equity capital markets • Electronic securities trading platform • 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 0.00 Feb-00 Oct-01 Jun-03 Jan-05 Sep-06 2003 2004 2005 2006 2007 2008e NSE all share index Govt. bond issuance Source: Reuters, Standard Bank Group Source: Debt Management Office, Standard Bank Group 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 Disclaimer 21 Every care has been taken in preparing this document and the information it contains has been compiled from sources we believe to be reliable. 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