new financing trends for investment and growth in Africa Prof. Njuguna Ndungu Governor, Central Bank of Kenya World Economic Forum Annual Meeting 2014 •Davos-Klosters • Switzerland • 22-25, January 2014

I. How are Financing Trends in SSA Re-Shaping Investment, Growth and Development? Public investments are important in raising capacity for future growth. Their financing is thus an important public policy debate. What have been the financing trends? Borrowing from the external markets: Debt accumulation after HIPC – Growing with debt. Countries are now more conscious of debt sustainability issues. Innovative resource mobilization for public investment: Borrowing from the domestic markets which requires development of a bond market. => We have seen long-dated papers as well as specific infrastructure targeted bonds. PPP is shaping up as they create endogeneity in investment decisions and completion of projects and drive investments. => Public investments do not necessarily have to be financed by debt accumulation. Results: Reshaping domestic capital markets and private sector response. Financial markets have deepened. Debt instruments have increased and maturity profiles have been lengthened. Private sector – and more specifically Pension Schemes have invested in these government securities.

II. But What Projects Impact on Growth? Infrastructure projects that solve the binding constraints - They reduce transaction costs and enhance private sector investments’ profitability. This allows entrepreneurs to earn and allocate returns from their investments. Public investments to close infrastructure gaps are complementary to private investments. This raises the capacity for future growth. Infrastructure projects cover road and railway networks, clean power generation, efficient ports and airports - they are also covering regional infrastructure projects like LAPSSET in Kenya, Ethiopia and South Sudan.

III. Effects on Growth of the Market: Shaping and Developing Markets Capital markets and financial markets are deepening. Encouraged capital inflows for investment. The availability of instruments in the financial markets has supported vibrancy and encouraged regional markets’ growth. Encouraged private sector to raise long-term finance. Leveraged international capital participation in domestic financial markets – more integration.

IV. Evidence 1.Vibrant Bond Market Types of Bonds Issued; Lengthened Yield Curve Types of Bonds Issued; -Fixed Rate Bonds -Infrastructure Bonds Amortized Fixed Rate Bonds Benchmark Tenors; 2yr, 5yr, 10yr, 15yr, 20yr Longer Tenors; 25yrs and 30yrs Diverse Investors in Government Securities Source: Central Bank of Kenya

IV. Evidence… Vibrant Bond Market Total Value of Bonds Traded 2007 - 2013 Average life of bonds has lengthened from 8 months in June 2001 to 7.2 years at present. Debt profile for Bonds extends 27 years - from 2014 to 2041. Maturity Profile –Domestic debt Source: Central Bank of Kenya Vibrant trading observed since 2010 following: Automated Trading System (ATS) in November 2009. Issuance of Infrastructure bonds from 2009 – traded at NSE. Benefits of the benchmark program and lengthening of the maturity profile of securities since 2007. Source: Central Bank of Kenya

IV. Evidence… Capital Flows and Remittances Source: Central Bank of Kenya Source: Central Bank of Kenya Declining current account deficit (estimated at 8.5 percent of GDP in November 2013 compared to 10.45 percent in November 2012), projections for Kenya’s remittances endorses a stable outlook for the exchange rate and increased foreign exchange inflows from international trade.

IV. Evidence… Kenya Financial Market Growth Gross Domestic Product 2004-2012 GDP Growth % Source: Central Bank of Kenya Source: Central Bank of Kenya Financial sector contributed 10.9 percent of GDP in the 2nd Quarter of 2013. During the second and third quarters of 2013, Kenya's economy is estimated to have expanded by 4.3 percent and 4.4 percent, respectively. Economic outlook for Kenya remains strong with capacity for future growth.

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