Importance of Bond Markets
Bond markets have long been a stable and reliable source of long term financing for both governments and corporates in the world, serving as a mechanism for the transformation of savings into financing for the real sector, thus constituting an alternative source of funding to bank financing.
Not only do domestic bond markets provide a platform for funding of budget deficits, economic literature and experience shows that deep and liquid domestic bond markets ensure access to long-term local-currency debt that contributes to financing long-term investments and address the large and growing infrastructure development needs. This is crucial for Africa, as the continent lags behind other developing regions on most standard indicators on infrastructure development.
The Africa Infrastructure Country Diagnostic (AICD) estimates that over the next 5 years, USD 93 billion per annum is needed for capital and operating expenditure on infrastructure.
The McKinsey Global Institute estimates that USD 72bn per annum is spent in Africa on infrastructure investment. Of this figure, 65% is from African governments, the private sector contributes 25%, followed by non-OECD countries at 6% and Official Development Assistance is 4%. Despite these efforts, a USD 49 billion funding gap still exists.
The issuance of local currency denominated bonds by African governments offers an alternative source of funding to bridge the funding gap. Moreover, local currency bond markets will reduce debt-service costs over the medium to long term and prevent currency mismatches that may ensue from external funding.