Feature Interview with Olivier Eweck
29 January 2014
Manager, Financial and Technical Services Division,
African Development Bank
Mr. Olivier Eweck has diversified experience in capital markets, combining portfolio management activities; private sector investment skills; and quantitative and derivative expertise.
Mr. Eweck’s responsibilities at the AfDB, among others, include the issuance of bonds in the African capital markets and the design of new financial products and services for the Bank. He has been working for the African Development Bank Group for more than 5 years.
Q: Why is it important to develop a domestic bond market denominated in local currency?
A: There are many reasons for developing such a market and the importance of a domestic bond market is widely recognized. Domestic bond markets are part of the financial system and deepening that system insulates countries from external shocks, by reducing reliance on foreign financing and lessening the severity of external imbalances.
In Africa, foreign currency-denominated liabilities have frequently financed local currency activities, while the stock of foreign currency denominated assets has been comparatively limited. In such cases, a large and unexpected depreciation of the domestic currency can destroy much of the net worth of companies and initiate a wave of insolvencies, a financial crisis and a deep fall in economic output. Local currency financing raised on domestic bond markets helps to eliminate this foreign exchange risk. Having a strong domestic bond market provides investors with a vehicle in which we and other borrowers can raise capital for on-lending for other developmental activities.
Formerly loans from institutions like the AfDB, were offered exclusively in foreign currency. But key economic developments over the last decade in Africa have led to a review of the AfDB’s approach to finance. The spectrum of AfDB-financed projects has become more varied, including infrastructure projects in middle income countries where needs can often be met by local industry, rather than on imports, and projects with revenues principally received in local currency. This is why in 2006, the AfDB launched its Local Currency framework. Our role as an MDB is to adapt to our clients’ needs and reduce their overall risk profile by extending local currency loans and domestic bond markets help us to do that.
Q: What would you say from your experiences are the key impediments and bottlenecks to developing African local debt markets?
A: Developing any bond market takes time, not just in Africa. Furthermore, each country has its own unique financial system with its own set of challenges so it is hard to generalize. Nonetheless, the issues faced by the various stakeholders to local debt market development in African can be grouped into certain categories. For example, on the demand-side regulatory environments could be reformed, when they exist, to further facilitate bond issuance. In the AfDB’s local currency funding activities, we often engage in policy dialogue with regulators to consider for instance increasing the percentage of non-government bonds that the different market players are eligible to hold or advocate for a change in regulation to enable a program issuance (Medium-Term Note program). The MTNs are an effective tool for the Bank to continuously tap these markets.
The costs of issuance could be deemed too high versus commercial bank financing and the buy and hold strategies adopted by certain investors also lead to a lack of liquidity in secondary markets. On the supply side, the over-dominance of the government issuances, can also crowd out corporate issuances, although increasingly parastatals and multinationals are active in the market. But ultimately, we need more diversified issuers.
There is also a lack of ability to raise long-term capital and therefore there is a need for the government to set new benchmarks which would extend the yield curve and provide the basis for the pricing of future corporate issuances.
Q: Several African countries have issued bonds in foreign currencies, which have been oversubscribed (Rwanda with $400 million, Namibia with $500 million, Zambia with $750 million and Nigeria with $1 billion), yet emerging bond funds are in free fall. Why the continued preference to issue foreign currency bonds? What could be the risks in the near future?
A: Well, despite the headline news, African countries’ international bond issues are still a marginal phenomenon compared to other emerging markets such as Latin America or Asia. To date, only 15 countries out of 54 have tapped international capital markets. The Low Income Countries tapping international capital markets are taking advantage of the flexibility provided by the new rules of the Bretton Wood institutions which enable them to raise prudent non-concessional borrowing when their debt burden and debt management capacity permit. The massive debt clearance mechanisms (HIPC and MDRI) of the last decade coupled with increased debt management capacity and the growth prospect on the continent have created the required environment to take on new debts. In light of their significant infrastructure needs, the low level of development of their capital markets and the historically low yields levels in developed markets, African countries do not hesitate to tap international capital markets to raise the volume of financing required for their investments. The issuances by Mozambique, Ghana, Nigeria, Rwanda and Tanzania in 2013 are ample evidence of this new trend.
That being said the volume of resources raised in international capital market remains limited compared to Multilateral and bilateral financing which still account for over two third of African countries external financing. Therefore, I am not sure I would agree with the idea that there is preference to issue foreign currency bonds. I believe it is more of a diversification play for the time being, until such time when a number of African countries would have established a sustained track record of international bond issuances.
The major risk in the near future would be the tapering and the refinancing of these huge borrowings contracted when rates were relatively accommodative. The relative successes of the Ghanaian and Nigerian issuances in the summer are testimony of the potential impact that a tapering would have on international investors’ appetite for emerging markets debts and the resulting impact in their pricing. The gradual normalization of yield curves in developed markets will lead to a re-pricing and a more refined assessment of the risk among African issuers. Countries falling short on macroeconomic performances may end up financing/refinancing their debts at more expensive levels than a couple of months ago.
Q: Do you think that diaspora bonds are simply another new trend? For the moment only the Ethiopia has issued a diaspora bond. What can the AfDB do to develop this type of issuance?
A: Relegating the diaspora bond to a “trend” really misses the mark. Our department recently participated in a diaspora conference promoted by online crowdsourcing platform Homestrings in London where the passion to engage in serious talk about how to leverage migrant capital was palpable. People are underestimating the power and quantum of cash controlled by the diaspora and what it could mean for a continent like Africa, where up to 140 million Africans leave abroad. We are talking about nearly $10 billion in savings in their countries of residence on top of remittances which accounts for over $40 billion in inflows to the continent per year. That’s a potential $50 billion which cannot be ignored. Although Ethiopia’s attempt to issue a diaspora bond did not go as well as they would have hoped, it was only the first attempt and should not dampen the enthusiasm for the potential it could hold. Nigeria is fine-tuning plans to raise $100 million. The Bank of Uganda has announced to the media that it is looking into the tool. Furthermore, they have actually been attempts in Kenya and Ghana where certain features of sovereign infrastructure bonds appealed specifically to the diaspora. We at the AfDB are trying to help potential issuers by publishing research on the subject, the latest being a sort of guidebook to issuance “Diaspora Bonds: Some Lessons for African Countries”. We also offer a product – the Partial Credit Guarantee (PCG) that we are looking into opening to some of our low income countries, to assist issuers in achieving lower pricing for their diaspora or other sovereign issuances in the international capital market by guaranteeing a portion of schedule bond payments against default. The AfDB is excited, governments are keen and investors are willing and that to me is a recipe for future success.