1. 12 September 2005 – Cairo Supranational Domestic Debt Issuance Presentation to the African Stock Exchanges Association Conference Presentation to the African Stock Exchanges Association Conference

2. ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page 2 RationaleI2 RequirementsII8 Issues and challengesIII12 Impact of MDB bond issuanceIV15 ADB and development of African capital markets V18 Outline

3. ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page 3 Shareholding 53 African and 24 non-African countries Subscribed capital – US$ 33.54 billion Highest rating : AAA from Moodys, S&P, Fitch and JCR Strong membership support Strong financial fundamentals Good asset quality Sound financial controls and prudent risk management policies Solid presence in international capital markets Borrow in close to 20 different currencies in Euro, domestic and global markets Borrowing portfolio of US$ 8.8 billion as of Dec-2004 Assets under management of US$ 10.7 billion as of Dec-2004 The African Development Bank: a supranational organization issuing debt in several international capital markets to fulfill its development mission Provides long term loans, guarantees, equity and risk management products Sovereign clients (including policy-based and project loans) Non-sovereign clients Cumulative approvals 1964-2004: USD 30 billion All sectors: agriculture, finance, multisector, infrastructure Offers technical assistance for projects and programs that provide institutional support and coordination of RMC development policies and plans for specific projects that support for instance capital markets development Provides grants for emergency humanitarian assistance from its Special Relief Fund Plays a catalytic role through a dynamic co- financing and partnership strategy US$ 74 billion co-financing mobilized since 1964

4. ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page 4 The continent requires significant volumes of financing to address all its needs especially in infrastructure Sub-Saharan Africa’s 7.6 million telephone lines are just under 50% of the number of telephone lines in Manhattan. Sub-Saharan Africa, excluding South Africa, has fewer roads than Poland. Less than 40% of African rural population have access to clean water and sanitation. Infrastructure financing needs for North Africa alone are estimated at $ 20 billion between 2005 and 2015!

5. ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page 5 GOVERNMENT YIELD CURVE 1.00 2.00 3.00 4.00 5.00 6.00 7.00 123456789101520 years yield (%) Bonds Yet, financing remains limited to medium term bank loans … Loans 7 years … leaving large unfunded portions with currency and maturity mismatches

6. ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page 6 Capital markets in the 53 African countries are at varied stages of development... … many share several shortcomings but have potential for growth

7. ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page 7 Local currency issuing and lending is an important strategy for most MDBs Respond to clients needs (volume, asset-liability management:currency and maturity and attractive funding costs) Develop capital markets (high quality investment alternatives to local investors as well as new funding sources for MDBs) Fund raising and lending in local domestic currencies is consistent with most MDBs mandate This supports the deepening of the financial system’s intermediation capacity and complements local financial institutions

8. ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page 8 RationaleI2 RequirementsII8 Issues and challengesIII12 Impact of MDB bond issuanceIV15 ADB and development of African capital markets V18 Outline

9. ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page 9 Size and depth of the market Economic, fiscal and monetary discipline Yield curve Existence and liquidity of swap market Successful MDBs domestic debt issuance requires a number of conditions  Liberalised financial sector with deregulated interest rates  Will facilitate conversion of borrowed funds into currency of choice if need be  Help address matching of bonds and projects / negative cost of carry issues  Availability of several maturities  Secondary market trading Stable macroeconomic conditions Strategic and policy decision to permit and facilitate MDBs issuance in the market Government Support

10. ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page 10 Additional considerations Existence of efficient trading, clearing and settlement systems and other supporting infrastructure  Existence of clearing system – Bridge with international systems  Delivery versus payment (or else settlement risk)  Research, information on the markets  Credit rating Market infrastructure Assess supply and demand for bonds  Existence and size of investor’s base : banks, institutional or retail investor (individuals); domestic and foreign; active or inactive. All this has consequences on price efficiencies and liquidity.  Issuers: government, corporates, financial institutions  Financial institutions/broker dealers/ with arranger capabilities Market participation

11. ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page 11 Ministry of Finance (MOF) Consent to issue, tax exemption and use of proceeds Investment eligibility: no restrictions on investors & asset-risk weighting of bonds Documentation, listing, disclosure, domestic rating requirements Clear and sound legal and regulatory framework is critical Central Bank and non bank regulatory agency Securities Regulator  Tax treatment of AfDB bonds and withholding tax  Authorization to invest in government securities for warehousing  Currency convertibility option on deal proceeds (may not be exercised in case of back-to-back lending)  Rated by several agencies & comprehensive documentation framework covering several markets  Authorization to allow all investor classes to hold issue: insurance companies, pension funds and mutual funds  Asset classification for investors (government ?) Enable AfDB to achieve cost-efficiencies that will translate into lower cost of its loans and create a new asset class for institutional investors, thus broadening the potential investor base

12. ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page 12 RationaleI2 RequirementsII8 Issues and challengesIII12 Impact of MDB bond issuanceIV15 ADB and development of African capital markets V18 Outline

13. ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page 13 Is MDBs domestic debt issuance always desirable? Possible Crowding Out Local Issuers ? Governments can regulate issuance flows with delivery of consent No oversupply of securities and over time investor base widens MDBs play a catalytic role and encourage new issuing activity Exchange rate volatility? Impact on currency can be monitored (Pressure on currency if daily volume of FX transactions low and swap amount important) MDBs often require swapping so countries must assess economic policy implications within a context of financial and economic liberalization

14. ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page 14 MDBs may face some challenges Domestic debt issuance, part of the annual borrowing requirement to fund all activities – Cannot be done at all costs ( Speed and cost effectiveness of alternative financing strategies) Pricing and Competitiveness Lack of pricing transparency and credit awareness lead to difficulties in pricing (regulatory treatment and liquidity) All in cost likely to be above government so lending could be limited to private sector clients Asset and Liability Management Negative cost of carry ? Lack of hedging (swaps) and warehousing instruments Time lag and matching of assets and liabilities (short or long term, fixed or floating, bullet or amortising)

15. ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page 15 RationaleI2 RequirementsII8 Issues and challengesIII12 Impact of MDB bond issuanceIV15 ADB and development of African capital markets V18 Outline

16. ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page 16 Positive spill over effects from MDBs issuance n nMDBs and government principal development objectives are aligned n Deepen financial markets and foster bond market development and competition in bond market n Contribute to reducing financial sector and overall economic risk exposure (FX and maturity risk for borrowers and financial institutions ) n nMDBs are AAA rated institutions n Credit diversification for investor, a new asset class as an alternative to sovereign bonds n Issuer diversification n Funding advantage in long-term end of curve to be passed on to borrowers of long-term resources Directly provide long-term funding to the economy and indirectly encourage mobilization of other long-term resources n Enable benchmark yield curve establishment and extension of yield curve n Contribute to emergence of a credit market and culture

17. ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page 17 Benefits of issuance by MDBs n nTransfer of know how and support authorities efforts in wide dissemination of international best practice n Documentation, listing, settlement, rating, clearing and transparency n Risk management products n nMDBs continuous presence in international markets translates into high visibility transaction and signals confidence in local market and commitment to its development

18. ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page 18 RationaleI2 RequirementsII8 Issues and challengesIII12 Impact of MDB bond issuanceIV15 ADB and development of African capital markets V18 Outline

19. ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page 19 The Bank has conducted preparatory work on several markets … BWP Botswana MAD Morocco EGP Egypt TND Tunisia KES Kenya UGX Uganda TZS Tanzania XOF West Africa CFA NGN Nigeria

20. ASEA Conference – 12 September 2005 – African Development Bank / M-L. Akin-Olugbade Page 20 Different issues fuel development of capital markets CAPITAL MARKETS SUPPLY OF BONDS Sound fundamentals and financial liberalization DEMAND OF BONDS Pension funds Mutual funds Insurance sector Privatization Tax incentives Increase institutional investors base TECHNOLOGICAL INFRASTRUCTURE Depository and clearing systems Trading platforms Payment systems Efficiency gains and lower transaction costs Improve exchange infrastructure Foreign investment Increase liquidity REGULATOR Independent supervisory agency Investor protection Corporate governance Mitigate information and agency concerns Increase retail investors base Promote stocks dissemination Discipline, efficiency, innovation and best practices Foreign issuance

21. Thank you