Overview of the African Bond Market
28 January 2014
Since 2007 there has been a steady increase in activity across African bond markets. In 2012, domestic bond markets on the continent totaled approximately USD390 billion. Some of the continent’s more advanced bond markets including Nigeria, Egypt and South Africa have been included in JP Morgan and Chase benchmark GBI-EM index and Barclay’s local currency bond indices. Despite these encouraging developments, African bond markets are not homogeneously developed across the various regions.
In North Africa, the financial market is largely defined by developments in Egypt, Morocco and Tunisia, which constitute the bulk of the bond market. Egypt’s bond market is highly developed with a good mix of long and short term maturities. Egypt had approximately USD 49 billion of outstanding T-Bonds and USD 55 billion of Outstanding T-Bills at end of 2012 which constitutes 28.6% of the African debt market. The financial markets in Morocco and Tunisia are fairly well-developed, although similar to other economic regions, the debt market is dominated by government bonds with relatively long maturity periods. The outstanding stock of T-Bonds is approximately USD 39 billion compared to USD 1 billion for T-Bills in Morocco. In Algeria, the financial market is dominated by a bond market with few government and private sector issuances. The financial markets in Libya and Mauritania are in their infancy with debt securities in the latter comprised of short-term treasury bills.
In the Economic Community of West African States (ECOWAS) region, the bond market is at varying levels of development. On the one hand, the Nigerian bond market is fairly developed with a maturity range of up to 30 years. On the other hand, Ghana has a less developed but growing debt market and its corporate bond issuance is gaining momentum although the numbers of issuers remains limited. In the West Africa Economic and Monetary Union (WAEMU), although the market is integrated, there is limited debt market depth. The domestic government debt outstanding of the WAEMU was only USD 5,5 billion at end of 2012 compared USD 7,3 billion and USD 52 billion in Ghana and Nigeria respectively.
The East Africa Community, comprising Uganda, Kenya, Tanzania, Rwanda and Burundi, are taking steps to implement a regional bond market. At the moment, Kenya is the largest market, with issues valued at USD 2.25 billion at the end of 2012; Seychelles follows with USD 202.7 million. The maturity profile of the securities is homogenous throughout the region: Tanzania and Uganda both recently launched a 15-year bond, the longest maturity available in the region (except for Kenya that sells 20 to 25-year instruments). Lending rates in the region are high: above 15% in Kenya and Tanzania and in Uganda, interest rates were 26% at the end of 2012. In addition, the region experienced high rates of inflation: 16.1% in Tanzania and 14% in Burundi and Uganda. The region is characterized by limited secondary trading as most investors (mainly large financial institutions) prefer to hold their investment until maturity. In almost all cases, government securities represent more than 3/4 quarters of all issues.
The Southern Africa region has the most developed bond market of all regions. The BESA, the South Africa bond Exchange, is the most sophisticated on the continent, with securities ranging from traditional vanilla bonds to inflation-linked and Switched bonds. The total value of the government securities in 2012 was ZAR 1.3 trillion which constitutes 35.6% of the African debt market. Mauritius bond market is ranked 2nd, with Rs.146 billion worth of government securities in August 2013. It is to be noted that the island boasts a very developed financial industry, including offshore business services. Corporate bonds issues are a little timid in the region, although standing ahead of the rest of the regions. Maturity-wise, countries issue the longest maturities of Africa, with South Africa once having issued a 35-year security. Lending rates are quite high; South Africa displays one of the lowest rates in the region (8% in 2012) while Malawi has the highest rate with more than 32%.
The CEMAC financial market is at an embryonic stage and there are considerable, albeit surmountable, obstacles to the development of the regional bond market. CEMAC hosts two stock exchanges whose coexistence does not augur well for financial market development.
As the continent’s economic growth continues, both foreign and local investors are increasingly seeking exposure to African domestic bond markets. For African markets this means investing more in solutions that will allow the provision of timely and reliable information to investors.
Given the region’s resilience during the global financial crisis, Moody’s expects sustained investor interest in Africa. Adding to the optimistic sentiment is the commitment of some notable multilateral institutions to strengthen the regions debt markets. Local-currency bond issuances in these markets by multilateral institutions such as the IFC and the AfDB will hopefully be a precursor to increased and sustained long-term investment in African Bond Markets. With these positive developments, it is clear that African nations are heeding the call to leverage new ways of raising resources within the domestic financial system.