African Financial Markets Initiative 2015
18 December 2015
African Financial Markets Initiative
Mr. Cedric Mbeng Mezui, Coordinator, African Financial Markets Initiative
AFMI Year in Review
The overall landscape for African debt markets has shown little improvement since the beginning of the year with the fall in commodity prices, coupled with the slowdown of the Chinese economy –this has had a negative impact on African currencies. These factors have also affected the appetite for the continent’s credit.
Despite the above, African economies are still gearing up to issue Eurobonds albeit at higher rates- this was evidenced with recent Eurobond issuances. This context creates an opportunity for greater domestic resource mobilization. The importance of AFMI’s various activities –outlined below- and continued collaboration with stakeholders across the continent is further highlighted.
African Development Bank (AfDB/AFMISM) Bloomberg® African Bond Index (ABABI)
The ABABI, initially composed of four countries (South Africa, Egypt, Nigeria and Kenya) had two additional countries added to the index in line with targets set with Bloomberg for the year.
In September 2015, Botswana and Namibia joined the index after successfully passing Bloomberg’s battery of tests for reliable bond pricing information (BVAL methodology). Ghana is expected to be added early next year. Other potential markets being considered include Morocco, Mauritius and Zambia.
*The ABABI is available on the Bloomberg Terminal (BADB index).
African Fundamentals Bond Index
The African Fundamentals Bond Index (AFBI) 2015 Annual Rankings Report assesses markets across 6 factors (Macroeconomic conditions; Governance; Bond Market Infrastructure; Issuers, Issuing Strategy and Market Access; Domestic Investor Base; Active participation of Economic Agents) and 23 sub-factors. The 2015 AFBI country rankings shows the low level of development of African bond markets. South Africa, Egypt and Nigeria are the top three markets in Africa.
The AFBI remains the barometer to identify the priority reform areas and technical assistance projects in each African Local Currency Bond Market segment. A pipeline of 23 Technical Assistance projects has been identified for the period 2016-2018. Development activities based on the AFBI will help countries integrate the ABABI.
African Domestic Bond Fund (ADBF)
The raison d’etre of the ADBF is to establish a new financial product on the African continent which will create more liquidity in the local currency markets invested by the Fund. The ADBF will contribute to lifting the technical barriers to investment in local currency by investors by improving operational components of African bond markets (e.g. settlement systems, data collection and dissemination etc.) and encouraging the creation and adoption of African bond indices as no adequate benchmark for investors exists at the moment- to this end the AfDB launched the ABABI in 2015. The Fund should also help increase the pool of sophisticated African fund managers and contribute to skills transfer into Africa.
The designing and the structuring of the Fund is taking into account the key challenges modeling the current African macroeconomic environment. This includes the impact of the slowdown in the Chinese economy on African economies, the expected rise in US interest rates linked to changes in the Federal Reserve interest rate policy, the commodities shock affecting most African markets and all the other factors leading to the depreciation of African currencies. These different risk factors explain why the African Development Bank is taking on a lead role in creating this Fund to reduce African markets dependence on foreign borrowing.
The Fund will be a semi-actively managed Government bond fund in which investors will be required to meet KYC requirements. Target investors are Banks, Institutional Investors; Sovereign Wealth Funds; Development Banks; etc. The Fund is being set up outside the AfDB and the Bank will provide seed capital.
African Yield Curve Guidebook
A yield curve is the relation between the cost of borrowing, i.e. interest rate, and the debt time to maturity for a given borrower in a given currency. The role and the importance of a benchmark yield curve in any debt market has been widely studied in economic and financial literature and put in empirical evidence in developed countries. It takes regular issuances by governments with varying maturities to develop secondary markets and boost liquidity.
The proof of the predictive role of the yield curve slope has been demonstrated for industrial economies ((Harvey, 1989). The yield spread being a monetary policy tool, should help to anticipate inflation and activity in the real economy. Over the past decade, African countries implemented financial sector reforms, some with the objective of developing domestic bond markets. In most African countries the public sector leads debt issuance, mainly with debt instruments of very short tenor and activities on the domestic primary markets with non-liquid secondary market trading. They are confronted with many problems among them the absence of benchmark yield curves, especially long-term tenors crucial to benchmark private sector bond pricing.
The main objective of the upcoming African Yield Curve Guidebook is to provide an overview of African economies’ local debt issuance strategies and status of the construction of their yield curves.
AFMI Technical Assistance Program
The objective of the call for proposal launched in June 2015 was to identify priority areas for intervention in local currency bond market development. Target beneficiaries of the Technical Assistance interventions are African-based national and regional organizations and associations involved in local currency bond market development, such as government agencies, Regional Economic Communities as well as private sector entities.
The 2014 AFBI report identified several priority areas where the majority of countries scored poorly. They include Bond Market Infrastructure; Issuers, Issuing Strategy and Market Access; Domestic Investor Base and Active participation of economic agents. To answer these challenges, AFMI is targeting 4 primary areas of intervention: i) Money Markets; ii) Regulation; iii) Broadening Investor Base and iv) Developing Secondary Debt Markets.
The AFMI received a total of 23 proposals with financing requirements ranging from USD 50,000 to USD 2,000,000. Markets covered include Pan-African, SADC, UEMOA, CEMAC, WAMZ, Kenya, Zambia, Uganda, South Africa and Ghana. In January 2016, the AfDB review committee will go through all projects and shortlist for implementation in 2016. Short-listed proposals will be refined to align them with available financing and priority activities within the Bank’s Financial Markets Division and Financial Sector Development Department. AFMI and the beneficiary will then agree on project implementation and establish the project management team. Missions to the field will be organized as needed.
What to expect in 2016:
- Implementation of AFMI technical assistance projects
- Announcement of ABDF Fund Manager
- Fundraising for the ADBF
- Inclusion of one more countries to the ABABI
- Training of Liaison officers from 40 African countries
- Webinar quarterly conference meetings on African debt markets
- The revamping of the AFMI data Portal www.africanbondmarkets.org