12 September 2005 – Cairo

12 September 2005 – Cairo12 September 2005 – Cairo

Supranational Domestic Debt Issuance

Presentation to the African Stock Exchanges Association

Conference

Presentation to the African Stock Exchanges Association

Conference

ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-OlugbadeASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page Page 22

Rationale I 2

Requirements II 8

Issues and challenges III 12

Impact of MDB bond issuance IV 15

ADB and development of African capital markets

V 18

OutlineOutline


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

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

The African Development Bank: The African Development Bank: a a supranational organization issuing debt in several international supranational organization issuing debt in several international

capital markets to fulfill its development missioncapital markets to fulfill its development mission 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

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


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 Sub-Saharan Africa’s 7.6 million telephone lines are just under 50%50% of the number of telephone lines of the number of telephone lines in Manhattan.in Manhattan.

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

Less than 40% of AfricanLess than 40% of African rural population rural population have have access to access to clean water and sanitationclean water and sanitation..

Infrastructure financing needs for North Africa alone are estimated at $ 20 billion between 2005 and 2015!


GOVERNMENT YIELD CURVE

1.00

2.00

3.00

4.00

5.00

6.00

7.00

1 2 3 4 5 6 7 8 9 10 15 20

years

yie

ld (

%)

Bonds

Yet, financing remains limited to medium term bank loans …

Loans

7 years

… leaving large unfunded portions with currency and maturity mismatches


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

… many share several shortcomings but have potential for growth


Local currency issuing and lending is an

important strategy for most MDBs

Respond to clients needs

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

Develop capital markets

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

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

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


Rationale I 2

Requirements II 8




V 18

OutlineOutline


Size and depth of the market

Economic, fiscal and monetary discipline

Yield curve

Existence and liquidity of swap market

Successful MDBs domestic debt issuance requires a number of conditions

Liberalised financial sector with deregulated interest rates

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

Availability of several maturities

Secondary market trading

Stable macroeconomic

conditions

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

Government Support


Additional considerations

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

Existence of clearing system – Bridge with international systems

Delivery versus payment (or else settlement risk)

Research, information on the markets

Credit rating

Market infrastructure

Assess supply and demand for bonds 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

Market participation


Ministry of Finance (MOF)

Consent to issue, tax exemption and use of proceeds

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

Documentation, listing, disclosure, domestic rating requirements

Clear and sound legal and regulatory framework is critical

Central Bank and non bank regulatory

agency

Securities Regulator

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)

Rated by several agencies & comprehensive documentation framework covering several markets

Authorization to allow all investor classes to hold issue: insurance companies, pension funds and mutual funds

Asset classification for investors (government ?)

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

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


Rationale I 2

Requirements II 8




V 18

OutlineOutline


Is MDBs domestic debt issuance always desirable?

Possible Crowding Out Local Issuers ?

Governments can regulate issuance flows with delivery of consent

No oversupply of securities and over time investor base widens

MDBs play a catalytic role and encourage new issuing activity

Exchange rate

volatility?

Impact on currency can be monitored

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

MDBs often require swapping so countries must assess economic policy implications within a context

of financial and economic liberalization


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

Asset and Liability

ManagementNegative cost of carry ?

Lack of hedging (swaps) and warehousing instruments

Time lag and matching of assets and liabilities

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


Rationale I 2

Requirements II 8




V 18

OutlineOutline


Positive spill over effects from MDBs issuancePositive 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 MDBsBenefits 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


Rationale I 2

Requirements II 8




V 18

OutlineOutline


The Bank has conducted preparatory work on several markets …

BWP

Botswana

MAD

Morocco

EGP

Egypt

TND

Tunisia

KES

Kenya

UGX

Uganda

TZS

Tanzania

XOF

West Africa CFA

NGN

Nigeria


Different issues fuel development of capital markets

CAPITAL MARKETS

SUPPLY OF BONDS

Sound fundamentals and financial liberalization

DEMAND OF BONDS

• Pension funds• Mutual funds• Insurance sector

• Privatization• Tax incentives

Increase institutional investors base

TECHNOLOGICAL INFRASTRUCTURE

• Depository and clearing systems• Trading platforms• Payment systems

Efficiency gains and lower transaction

costs

Improve exchange infrastructure

Foreign investment

Increase liquidity

REGULATOR • Independent supervisory agency• Investor protection• Corporate governance

Mitigate information and agency concerns

Increase retail investors base

Promote stocks dissemination

Discipline, efficiency,

innovation and best practices

Foreign issuance

Thank youThank you

Documents

12 September 2005 – Cairo