Presentation to: East African Stock Exchanges Association

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Presentation to East African Stock Exchanges
Association Presentation by Evans Osano,
Program Manager, ESMID Africa IFC
Arusha, Tanzania 15 December 2007
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ESMID Africa
Introduction What a Bond Market can do for East
Africas Real Sector Current Status of East
Africas Bond Markets Challenges to Bond Market
Development ESMID Africas Role in Bond Market
Development in Africa
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IFC and Infrastructure

• IFC works with governments and the private sector
  to
• Improve bankability of infrastructure projects
• Increase private sector participation in
  infrastructure projects
• IFC services
• Sector reform regulatory policy advice (in
  conjunction with World Bank)
• Advice to governments on packaging and presenting
  deals
• Early stage risk capital and advice to project
  sponsors
• Project finance for PPPs and private
  infrastructure
• IFC operational goals
• Increase number of fully financed robust
  private infrastructure projects
• Improve access to basic infrastructure services
  for Africans

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Introduction
East Africas housing finance needs estimated at
US6 billion p.a. in the next 20 years Unmet
infrastructure and housing needs hamper economic
growth and poverty reduction Bulk of
infrastructure undertaken by the public sector
using foreign currency loans Private Sector can
contribute in bridging the financing gap Local
financial institutions have limited capacity to
finance infrastructure Capital Markets can be
used to raise long-term local currency financing
for infrastructure
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Introduction - Financing Instruments
Equity Finance Long-term capital provided in
the form of shares, signifying part ownership in
the company. Private Equity Common with
Greenfield projects. Project Finance -
Subordinated Debt (Quasi Equity/Mezzanine
Finance) Unsecured finance that is senior to
equity but junior to senior debt May allow
participation in the upside potential of an
equity position. Bond Markets - Local Currency
Project Bonds.
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Bond Markets Ingredients for a vibrant bond
markets

• Macro environment
• Legal environment
• Tax environment
• Bankable projects
• Informed investors
• Market structure in terms regulation and
  participants
• Borrowers, lenders and intermediaries

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Bond Markets Benefits of a Bond Market to the
Real Sector

• Expanded housing finance
• Improved infrastructure finance
• Improved risk management for borrowers i.e.
• Lower interest rates
• Reduced foreign currency risks
• Reduced refinancing risks
• Improved yields for institutional investors
• Increased financial sector diversification
• Accelerated private sector development

This creates employment
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East Africa Listed Instruments 2006
East African Securities Market, Listings and Value


NSE

USE

DSE

Listed Companies



Domestic

52

5

6

Cross listed

0

3

2

Total

52

8

8

Bonds




Government

78

19

10

Corporate

7

1

6

Total

85

20

16

Market Capitalization, US millions

Equities

10 800

2 200

2 340

Domestic Firms

10 800

112

659

Bonds




Government

3 130

340

195

Corporate

142

13

52

Total

3 272

353

247


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NSE Listed Instruments As at 30 June 2007
Based on estimated 25 free float market cap,
Turnover for 6 months of 2007, Ratio
annualized 6 listed corporate bonds in Kenya
one is fixed rate Only Telcoms have made
significant use of the markets in the past
(Safaricom Celtel) In 4 years corporate bonds
have recorded turnover of only US82,000 buy
and hold strategy of institutional investors,
small size of issues, structure of issues
(floating rate)?
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Status of Bond Markets Yield Curve
Source Reuters Limited Yield Curve extended to
15 years but relatively steep? Study needed to
estimate the long-term inflation expectations in
East Africa Central Banks could consider issuing
inflation-linked bonds
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Role of Pension Funds in Kenya
Size of Industry estimated at US4 billion and
growing at US250 million p.a Pension Funds are
natural investors in long-term assets (Account
for 25 of T-bonds) ..However are risk averse,
but increasing investments in equities questions
this
Data Source, RBA
Lesson Pension reforms required in Tanzania and
Uganda
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Challenges to a Vibrant Bond Market in East Africa

• Legal and regulatory environment
• Equity-type requirements applied to bond issues
• Approval process It takes long to approve
  issues (up to 9 months)
• Merit versus disclosure based approval regime
  debate
• Issue costs need to rationalize high costs
• Asset Backed Securities regulations to
  facilitate securitization
• Secondary Market
• Market Structure
• Settlement risk in a non-DVP environment
• Electronic trading platform for bonds
• Information Asymmetry Price reporting, yield
  curves and bond indexes

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Challenges to a Vibrant Bond Market in East Africa

• Lack of instruments
• Currency mismatch most infrastructure projects
  financed by foreign currency loans which carry
  significant currency risk (e.g East African
  Portland Cement)
• Utilities Foreign Currency risk passed on to
  consumers (KPLC and KenGen)
• Asset/Liability mismatch When local banks lend
  long using short-term deposits
• Project Preparation Gap
• Lack of packaged and bankable projects
  (financial viability from standpoint of
  financiers)
• Weak sub nationals (State Owned Enterprises and
  Municipals) limited ability to issue bonds
  without government guarantees
• Limited private sector participation in
  infrastructure development
• Capacity of local intermediaries, investors as
  well as issuers

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ESMID Africa

• Foster the development of well functioning
  securities markets in Africa
• Improve ability to finance infrastructure and
  housing development through local bond markets

• ESMID
• Efficient
• Securities
• Markets
• Institutional
• Development

• A partnership between
• Swedish International
• Development Cooperation (Sida)
• International Finance Corporation (IFC)
• World Bank

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ESMID Africa - Countries

• ESMID Africa largely works with clusters of
  countries where changes have the potential to
  reverberate across several nations, i.e. East
  Africa

• Kenya
• Uganda
• Tanzania
• Rwanda

East Africa (Regional Approach)

• Nigeria

Country Approach
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ESMID Africa Fostering Securities Markets
By applying

• World class expertise and alliances
• Local knowledge and alliances

Improved ability to finance Infrastructure and
housing through securities markets and
products

• Integrated, comprehensive programs
• Long-term commitment
• Practical
• Transaction geared

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ESMID Africa - Building Markets, Facilitating
Transactions
Government/Regulators Market Infrastructure/Securi
ties Exchanges Market Participants
Investors
Issuers

• Direct
• Facilitate Transactions
• Funds to support replicable transactions
• Structuring
• Documentation
• Legal fees

• Indirect
• Build Securities Markets
• Provide TA to
• Create enabling environments
• Build market Infrastructure
• Strengthen market participants

The goal have a small number of high impact
projects that demonstrate possibilities and are
replicable
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IFCs Role in Bond Market Development in East
Africa

• ESMID Africa
• Technical Partners
• (Securities Markets Practitioners/Consultants)
• Local Partners
• (Regulators, Exchanges, Intermediaries, etc.)

• Assistance to Regulators
• Improve approval process
• Reduce costs
• Framework for new products

• Strengthening the Marketplace
• Mkt structure
• Improve secondary mkt liquidity

• Capacity Building Training
• Certification
• Training on bonds

• Regionalization
• Broadening
• Deepening markets

• Processing Transactions
• Funds to support replicable transactions new
  innovative products

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ESMID Africa Legal Regulatory Assistance
Improve approval process (Cut time) Rationalize
costs Recommend framework for new products e.g.
Asset Backed Securities Market Structure and
bond trading environment Harmonize bond issuance
trading regime in East Africa

• Status
• Technical Partner International Securities
  Consultancy Hong Kong
• Start November 2007
• Inception Report Jan 08
• Key Issue Market Structure Working Groups
• Kenya
• Uganda TORs
• Tanzania

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ESMID Africa Secondary Markets

• Status
• Technical Partner OMX Nordic
• Start Jan/Feb 2008
• Key Issue Working Group
• Similar to Legal Regulatory Assistance

Regulatory and institutional framework
for Efficient trading environment Harmonizing
central depositories Improve Liquidity
Market Structure Reduce risk Electronic
Trading of Bonds Market information Bond
Indexes Improve liquidity Yield
Curves Transparency
Improving secondary bond market liquidity
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ESMID Africa Capacity Building Certification
Regional Certification program Certification for
market players Code of conduct for market
participants Training on bonds Targeted at
issuers, investors and intermediaries Training
the Trainers Develop a local/regional
institutional provider
Status Technical Partner DevPar Financial
Canada Start October 2007 Inception Report
Issued Key Issue Institutional framework for
regional training certification
Enhancing capacity and market integrity
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ESMID Africa Regionalization

• Key lessons from relevant international
  experience on regionalization
• Identify suitable models for regionalization
• Identify gaps and obstacles to regionalization
  and make suitable recommendations.
• Develop a road-map for regionalization of East
  African Capital Markets

• Status
• Technical Partner Cadogan UK
• Start October 2007
• Inception Report Issued
• Time table
• Draft models report Jan 08
• Champions w/shop Apr 08
• Conference July 08

Regionalization is a key operating theme for
ESMID Africa
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ESMID Africa Processing a Transaction
Bond Issues Identify bond issues with potential
demonstration effect Cover selected
first-costs associated with Structuring fees,
Documentation fees, Legal fees Target
Issuers in housing and infrastructure sectors

• Status
• Budget provided for up to 5 replicable
  transactions in East Africa
• Transactions should be
• Innovative
• Replicable
• Devt impact

The ability to do a transaction is the beacon
guiding ESMIDs operations
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THANK YOU