ISSUES SURROUNDING THE DEVELOPMENT OF MUNICIPAL AND CORPORATE BOND MARKETS IN ZAMBIA

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ISSUES SURROUNDING THE DEVELOPMENT OF MUNICIPAL
AND CORPORATE BOND MARKETS IN ZAMBIA
DEVELOPING GOVERNMENT BOND MARKETS IN
SUB-SAHARAN AFRICA WORKSHOP 17 19 JUNE 2003,
JOHANNESBURG, SOUTH AFRICA Presented by Lloyd
Chingambo, General Manager / Chief Executive
Officer, Lusaka Stock Exchange Ltd.
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• THE PLAYERS
• Corporate entities (private / parastatals) /
  municipalities
• Arranger (Stock Brokers)
• Investors (individuals and institutional)
• Regulators (Government, Securities Exchange
  Commission, Lusaka Stock Exchange)

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• 1.1 Why would a Corporate / Municipal issue a
  Bond?
• Diversification of funding base (into
  institutional markets) and increased stability in
  the capital structure.
• To secure intermediate maturity funding for long
  term projects and capital expenditure
• Mitigation against exposure to interest rate risk
  through rate protected instruments (cap, floor,
  swaps)
• Mitigation of Foreign Exchange risk
• Funding costs relative to maturity tends to be
  cheaper than rolling over short-term bank
  facilities
• Positive impact on branding through market
  publicity

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• 1.2 Arrangers of Capital Market Transactions
• What does the Arranger contribute?
• Managing the debt issue to ensure overall success
  of the transaction (structuring, underwriting and
  obtaining credit enhancements where required)
• Assists the issuer in producing the documentation
  and obtaining regulatory approvals
• Marketing and placement of the bonds
  (distribution)
• Makes market in the securities to support the
  Issue
• Overtime, looks to also develop interest rate and
  cross currency derivative applications (swaps,
  repos, etc.)

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• 1.3 Investors in Debt Securities
• Why an investor would buy a bond Investor base
  includes insurance companies, pension funds,
  asset managers, broker dealers and banks
• Higher yield pick-up over government securities
• Diversification of investment portfolio to reduce
  overall risk profile
• Matching duration of assets and liabilities
• To fulfill criteria set by asset allocation
  policies
• Contribute towards development of the domestic
  capital markets

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• 1.4 The Regulators
• Government has overall responsibility to
  institute, political stability, macroeconomic
  measures and a strong legal framework that
  creates an enabling environment
• The SEC ensures investor protection through
  supervision of the securities industry
• The Stock Exchange provides a market place for
  secondary trading activity and approves the
  listing of new issues

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• BENEFITS
• An efficient domestic Corporate and Municipal
  Bond Market provides
• Alternative financing to bank loans and equity
• More transparent pricing of corporate credit risk
• Diversification of credit risk
• Potentially lower Foreign Exchange risk in debt
  repayments
• A wider variety of investible products
• Improved secondary market liquidity
• An impetus for the fuller development of Africas
  financial services sector

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• THE CHALLENGES
• Most markets in Africa will experience one or
  more of the following
• Chronically high interest rates and inflation
• Lack of comprehensive market regulation
• No intermediate maturity benchmarks (yield curve)
• Absence of credit rating agencies (credit
  culture)
• Lack of deep investor base (non-bank Financial
  Institutions)
• Limited market liquidity
• Fear of the unknown by potential borrowers
  (young unsophisticated market)
• Development of the 10 year bond (benchmark)
• Buy and hold attitude

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• 4. PROMOTING MARKETS DEVELOPMENT
• 4.1 The Government
• Government can create an enabling environment
  through the following measures
• Ensuring political stability
• Prudent economic and fiscal management to achieve
  greater market stability
• Create a culture of transparency that enforces
  discipline, promotes business growth and attracts
  foreign investment
• Have in place the necessary Infrastructure,
  Regulatory and Legal Systems
• Create a foundation for the domestic bond market
  by issuing fixed rate benchmarks (development of
  yield curve)

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• 4.2 The Securities and Exchange Commission
• The SEC as the prime industry regulator should
  consider the following
• Comprehensive securities law that clarifies
  treatment of various asset classes and issuer
  types (e.g. SPVs)
• Work towards regional integration through
  uniformity of regulatory standards
• Market liberalisation (structural) within a
  prudent supervisory framework
• Incentive schemes to encourage debut issues (e.g.
  lower approval / registration fees, tiered
  withholding tax structures)
• Competitive approval fee structures

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• 4.3 The Stock Exchange
• Infrastructure and uniform standards
• Physical infrastructure an electronic trading
  platform capable of processing a wide range of
  transaction types
• Flexible, interlinked and automated Clearing and
  Settlement Systems based on Delivery Versus
  Payment (DVP) and Real Time Gross Settlement
  (RTGS)
• Links to other regional and international
  exchanges (e.g. BESA, Clearstream and Euroclear)
• Similar listing requirements to facilitate cross
  listing
• Lobby for relaxation of foreign exchange controls
  to broaden the investor base (regional flow)

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• 5. STRATEGIES FOR ZAMBIA
• 5.1 Economic Management
• Manage fiscal position
• Lower inflation
• Manage currency and capital account policies
• Statutory Boards and Government linked
  corporations encouraged to issue bond and extend
  maturity profile.
• Specifically encourage municipalities to issue
  municipal bonds through SPVs

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• 5.2 Infrastructure, Regulations, Legal System
• Clarify regulatory and legal treatment of
  securities
• Best practice Clearing and Settlement systems
• Physical infrastructure
• Consider more incentives
• Consultative and proactive approach

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• 5.3 Government Bond Markets
• Issue fixed rate benchmarks
• Lengthen maturity profile
• Publish issuance calendar
• Increase market liquidity (Institutional
  Investments Guidelines)