Regional Snapshot of Government Bond Markets in Africa and Challenges of developing active bond markets

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Regional Snapshot ofGovernment Bond Markets in
Africa and Challenges of developing active bond
markets

• Mauritius, December11, 2003
• Sunil Benimadhu
• The Stock Exchange of Mauritius

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Presentation Outline

• Statistical overview of the evolution of capital
  markets in Africa, with a particular focus on
  Government Bond Markets
• Prerequisites to the development of an active
  market for Government securities
• Potential benefits of an active market to
  Sub-Saharan African economies

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Capital markets environment in Africa has
undergone a major change in recent years due to

• Implementation of structural adjustment
  programmes
• Pursuit of market oriented policies by African
  Leaders

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Statistical Data on African Stock Markets(Ex
South Africa)
1988 1997 2002
No of stock exchanges 6 14 19
Market capitalisation of African Stock Market (USBillion) 5.5 49 66
Value traded(USBillion) 0.16 8.6 6.5
No of listed companies 788 1180 1760
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Indicators of stock market development(1997-2002
mean values, End of period)
Countries No of Listed Cos MCAP/GDP () TVT/MCAP ()
Botswana 15 20.81 5.25
Ghana 22 13.30 3.23
Mauritius 40 38 7
Zimbabwe 69 71.95 16.48
Kenya 23 13.80 4.23
Egypt 980 29.46 23.85
Thailand 422 30.78 84.82
Brazil 471 28.70 55.14
Turkey 288 32.35 148.95
Poland 205 15.63 37.73
Malaysia 778 135.54 48.48
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Size of Bond markets Wide disparity in size of
markets in the region
NoteData for 2002 except Tanzania, South Africa,
Swaziland, Botswana 2003, Kenya Nigeria 2001
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Size of the market Most countries in the region
rely on external debt
NoteData for 2002 except Tanzania, South Africa,
Swaziland, Botswana 2003, Kenya Nigeria 2001
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Size of the market Reliance on external debt
still widespread
Note Data is based on simple averages of
countries included in the World Bank/IMF Survey,
during 2001- 2003
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Domestic GS compositionLimited non-marketable GS
Non-marketable securities consist of Tanzania
Government stocks Ghana Tema Oil Refinery bonds
(stocks not included) South Africa Former
Homeland Bonds Nigeria T-bonds
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Domestic marketable GS T-bills are dominant
Note Data for 2002 except Tanzania, Uganda,
South Africa, Swaziland, Botswana 2003, Nigeria
2001
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Domestic GS compositionFixed rate securities
dominant in EAP and MENA
Note Data is based on simple averages of
countries included in the World Bank/IMF Survey,
during 2001 2001-2003. LAC T-bill breakdown
unavailable.
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Domestic GS by tenorShort term securities
dominant
Note Data for 2002 except Tanzania, Uganda,
South Africa, Swaziland, Botswana 2003, Nigeria
2001
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Domestic GS by tenorLonger term securities most
common in EAP
Note Data is based on simple averages of
countries included in the World Bank/IMF Survey,
during 2001-2003
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Summary-Secondary market

• Banks are dominant holders of GS, as well as
  public sector.
• Securities to retail investors issued in
  Botswana, planned in South Africa Nigeria
• Secondary market liquidity still shallow
• Repo markets are active in most countries

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Investor BaseBanks are the primary holders of GS
in the region
Note Kenya includes government stocks (mainly
held by Other), Swaziland Other holders are
primarily institutional investors
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Investor BaseDirect and indirect requirements to
hold GS are commonplace
Note Data is based on simple averages of
countries included in the World Bank/IMF Survey,
during 2001 -2003
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Prerequisites for the development of an active
Government debt market

• Broadening the investor base
• Developing active money markets
• Developing benchmarks
• Mark to market practice
• Broadening the range of instruments
• Market transparency
• Clearing and Settlement System
• Existence of a trading culture and of traders
  well-versed in fixed-income trading techniques

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Potential benefits

• Benefits to the investor
• Micro-economic Sectoral Benefits
• Macro-economic benefits

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Benefits to the investor

• Broadening of the range of instruments available
• Liquidity of instruments
• Ability to trade instruments in an efficient and
  transparent manner
• Switching opportunities available depending on
  investors rating of different instruments
• Efficient Price discovery mechanism

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Micro Economic Sectoral Benefits

• Improve financial intermediation and promote
  competition and development of related products
  Services
• Change financial system from a primarily bank
  oriented to a multi-layered system where capital
  markets can complement bank financing
• Facilitate emergence of corporate bond market
• Reduce cost of funds for companies

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Macro-economic Benefits

• Strengthen the transmission and implementation of
  monetary policy
• Enable the use of market based indirect monetary
  policy
• Develop a benchmark yield curve which become the
  guiding reference for other instruments and
  institutions
• Set the stage for an effective integration of
  different subsectors of the economy
• Reduction of debt-service costs for government

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Thank you