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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.
However no representation, warranty or undertaking (express or implied) is given and no responsibility or liability is accepted by Principal Investment
Management (“PIM") as to the accuracy or completeness of the information contained herein. All rights to the content contained herein remain the
exclusive property of PIM. Opinions, forecasts, and estimates constitute our judgment as of the date of this presentation and are subject to change
without notice. Copying, duplication or re-publishing of the information contained herein is prohibited without the express written consent of PIM.
PIM is a division of Standard Bank Plc (“SBplc”). SBplc is authorised and regulated by the Financial Services Authority ("FSA") and entered in the
FSA’s register (register number 124823). No liability is accepted whatsoever for any direct or consequential loss arising from the use of this document.
Furthermore, the information contained in this document is for information purposes only and should not be construed as and offer to sell, a solicitation
of an offer to buy or a recommendation for any security or as providing advice of any kind. Address: Cannon Bridge House, 25 Dowgate hill, London
EC4R 2SB. Tel: 020 7815 3000. Calls may be recorded.
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