Regulatory requirements to enable strong LCBMs 9th Forum on African Public Debt Management and Bond Markets Tamsin Freemantle 15 June 2015

Contents Why develop strong LCBM’s Regulation Factors that influence growth “macro” “micro” What should we be doing?

Why Develop Strong LCBM’s? Protect the economy from exogenous shocks Provide robust and stable domestic market for regular government and SOE borrowing Reasonable costs Longer tenures Assist with fiscal stability and discipline Create yield curves to enable domestic source of capital for corporates Original sin – so exciting!

Rule or directive made or maintained by an authority Regulation Regulation Rule or directive made or maintained by an authority National regulation Market participants can influence policy but regulation or laws made by Parliament Pension Fund Regulation Industry level regulation Market participants have much more direct involvement in industry level regulation Market regulation ie listings requirements Most important thing is that it needs to be appropriate – problem now is that each country is at a different stage of development but we are all to a greater or lesser degree globally connected – if we want to play on that stage then we need to acknowledge this.

Some Factors That Influence Growth - Macro Size of the economy Interest rates Size of the banking sector Government issuance Tenure and coupon type Fiscal balances Government and corporate needs

Some Factors That Influence Growth - Micro Pricing Ease of access Diversity of instruments available Market infrastructure Price discovery (liquidity) Clearing and settlement Skilled participants Information and data reliability

Markets at a glance

GDP Growth Constant Prices Source: AFMI

Increases in inflation are not great for investors – in most of these countries there has been an increase and in many of them, also very volatile so difficult for issuers to know what the actual costs will be in the long term Source: AFMI

Local Currency Debt Outstanding % of GDP April 2015 paper (Kathrin Berensman) over 90% of local outstanding debt is government issued which indicates shallowness of LCBM’s in SSA Source: AFMI

Total External Debt Outstanding % of GDP Increase in local Ivory Coast 300% Ghana 500% Kenya 600% SA 0% Increase in external Botswana 100% Mauritius 130% Uganda 125% Zambia 300% Source: AFMI

Tenures of Outstanding Bonds 2012 10 years + Bostwana Kenya Mauritius Nigeria South Africa Uganda Zambia 5 – 10 Years Ivory Coast 1 – 5 years Ghana Source: AFMI

Current Account Balances Only Nigeria and Zambia moved from a negative to a positive current account balance so in terms of this we all need to borrow – the eurobond issues have been unkind to Zambia and Ghana though (esp exchange rate risk) and they are negotiating with the IMF for loans to enable them to cover coupon payments Source: AFMI

State of Play Improved issuance in LCBM by value Improved length of issuance Institutions strengthened but can improve more Fiscal discipline – use of Eurobond proceeds in Zambia Corporate bond markets still nascent Secondary markets illiquid Need more skills Many of the markets are growing and now need secondary measures to enable growth

What Should We Be Doing? Regulation Working with government and regulators on policy changes Pension Fund regulation Local government issuance Opening market to foreign investors Looking at processes for listing debt instruments Requirements and approvals and ongoing regulation Looking at pricing of debt instruments High pricing makes local markets unattractive Liquidity drivers Are market makers the answer? Pension fund participation in the market has increased but more to be done – the regulations around pension fund participation can be restrictive – look at amendments to Pencom law in Nigeria on qualifying investments Foreign investment Ghana – 30% in 2013 SA – 40% Nigeria 20%

Non-Regulatory Solutions Work together Systems Clearing and settlement Expensive and adds to cost of local issues - can we not work together on technology? Market Information and data reliability Can we not work together to ensure accuracy? Talent development Skills and capacity Can we not work together on upskilling and cross skilling?

Conclusion The function of the market at core is to provide a platform for investors to invest and issuers to raise capital Government or corporate DCM plays a key role in macro economy of countries and regions Key is not to have enabling regulation but to not have disabling regulation