African Development Bank
2 March 2015
Vice President Finance, African Development Bank, Mr. Charles Boamah
Q: What are the new developments on the African Domestic Bond Index?
Indices can attract significant capital if they are designed to be transparent, investable, representative and offer attractive returns. In developing regions it is particularly important for market participants to act to reduce financial market impediments and instill local and international investor confidence. The success of the ABF (Asian Bond Fund) and GEMX (Global Emerging Markets Local Currency Bond Index) initiatives are tribute to the efforts of multinational and local organizations looking to develop their local bond markets and move them to new and sustainable levels. The ADBI Family addresses some of the key issues typical bond investors look at when investing in local currency markets and those that a critical to their development such as:
(i) Are there bond markets in African countries?
(ii) Is the necessary market infrastructure in place?
(iii) Is bond data available?
(iv) Do the legal and regulatory systems protect investor rights?
(v) Who are the potential investors for domestic debt?
(vi) What is the state of the economy? Can debt be repaid?
(vii) Will inflation and FX rates eliminate investment returns?
(viii) Are there local institutions supporting bond market investors?
The ADBI family will comprise a benchmark index series and a Fundamental index. The benchmark index is the “AFMI Bloomberg African Bond Index” (ABABI) which is a rules-based market value weighted composite index calculated by Bloomberg BVAL Methodology. The African Fundamental Bond Index (AFBI) is a ranking of African local bond markets established by the African Financial Markets Initiative (“AFMI”) at the AfDB.
Q: Could you define the ‘’AFMI BBG African Bond index’’ (ABABI)?
The AFMI Bloomberg African Bond Index (ABABI) family includes the Bloomberg South Africa (BSAFR), Bloomberg Egypt (BEGYP), Bloomberg Nigeria (BNGRI), and Bloomberg Kenya (BKEN) Local Sovereign Indices. Two other countries will soon be added to the index. To be included in the index a security must have at least 1 year remaining to maturity and have a minimum par amount outstanding of ZAR 2 billion, EGP 1 billion, NGN 50 billion, or KES 1 billion in their respective markets.
Q: How does the Bank foresee the inclusion of more countries in the index- currently it tracks only 4 countries?
In partnership with Bloomberg, the AFMI will be reviewing the addition of new countries on a bi-annual basis i.e. June and December. Following the decision to include, ABABI will be updated every 3 months. Some of the key criteria that will determine inclusion will largely be the availability of reliable pricing sources and requisite liquidity in those markets. There is a need to continue actively working to expand coverage on the continent.
Q: What outcomes do you expect from the launch of the AFBI in the African local currencies markets?
The African Fundamental Bond Index (AFBI) series are reflective of the recent developments of the local bond markets in Africa some of which have grown in profile in terms of liquidity and maturity profile using a common set of indicators including macroeconomics variables; market structure; and market liquidity. The African Fundamental Bond Index (AFBI) will reveal the factors contributing to African Local Currency Bond Markets structure, noting that most the African debt markets are still at the early stage of their development. This index will provide the basis for designing a strategy for African bond markets development and deepening with appropriate sequencing of policy action and associated delivery of technical assistance (TA) where needed. The annual AFBI report will be the barometer to identify the priority reform measures in each market segment.
Q: Where do you position your index vis a vis the other bond indices in Africa and why did you partner with Bloomberg?
These prices are drawn from market data contributed by market participants. This broad global dataset of market observations is combined with market-leading analytics and Bloomberg’s terms and conditions databases to produce objective third-party pricing with transparency into how the prices are derived.
Q: What is the next step for the African Financial Markets Initiative?
The AFMI is currently structuring the African Domestic Bond Fund (ADBF) which will invest in long term African sovereign debt. The specific objectives of the ADBF project are:
(i) To reduce African countries dependence on foreign currency denominated debt;
(ii) To encourage the deepening of domestic bond markets through investments in longer-dated debt;
(iii) To contribute to the development of the investor base in African domestic bond markets; and
(iv) To create a permanent forum for discussion and provision of technical assistance on domestic bond market issues.