Presentation at the 11th ASEA Conference, Accra Ada Osakwe African Development Bank 31 st October 2007 African Debt Markets Development : The African Development Bank Experience “AFRICAN CAPITAL MARKETS: THE NEXT INVESTMENT FRONTIER”

1 Recent Trends in African Debt Capital Markets

2 Continued positive economic trends have been conducive to the development of local capital markets Source: IMF, WEO April 2007 *2007 data are estimates Drivers Macroeconomic stability – Debt relief - Implementation of reforms - Continued global expansion

3 The development of African debt markets is gathering momentum Over USD 10 bn is estimated to have been invested in Sub Saharan African (SSA) capital markets in 2006 Nearly 50% of African countries now issue Government bonds Extension of government yield curves Secondary market trading developments 18 African countries now have a sovereign issuer rating from at least 1 International Credit Ratings Agency 7 additional countries achieved denomination status with Euroclear, and 2 have settlement status

4 BW P UGX KE S GHS TZS ZAR NGN Size of the economy GOVERNMENT YIELD CURVE 1 – 5 - year > 5 - year Shallow / ST Shallow / LT Deep / ST Deep / LT MARKET DEPTH Debt Volume Breadth of Investor Base Secondary market trading Range of Instruments Low MUR High MZM African debt markets are at varied stages of development

5 Snap-shot of selected government debt markets GhanaNigeriaUgandaKenyaSouth Africa Africa GDP (US$ bn) Debt Market Cap / GDP24%17%14%20%44% Sovereign Debt Cap / GDP 22%12%13%19.5%29% Longest Bond Tenor Secondary TradingYes Source: AfDB, AEO 2007, IMF

6 Non-government domestic debt has also increased * Graph reflects US$ equivalent debt issuances in the domestic markets of Botswana, Ghana, Kenya, Nigeria, Tanzania, Uganda and Zambia Evidence from 7 SSA economies shows a marked increase in volumes of non government debt Source: AfDB, Standard Chartered Bank

7 The AfDB and African Capital Markets

8 Supranationals have an important role to play in developing debt capital markets Enhance international image and attraction of market Transfer of international financial know-how Assist with establishing sustainable regulatory framework and infrastructure Provide credit enhancement Help benchmark yield curve establishment and extension Contribute to emergence of a credit market and culture

9 AfDBs Local Currency project has three main objectives Develop and bring visibility to African currencies and bond markets Address need for long term local currency loans that eliminate currency risk for borrowers Promote international best practices and knowledge transfer

10 The AfDB has for the past two years expanded its African debt capital market activities BOTSWANA: BWP 300 million Eurobond TANZANIA: US$ 10 million linked to TZS US$ 15 million linked to TZS due May 09 GHANA: US$ 45 million linked to GHC due Oct 08 US$ 40 million linked to GHS due May 09 NIGERIA: US$ 100 million linked to NGN due Jan 08 US$ 100 million linked to NGN due May 10 KES: US$ 10 million linked to KES due May 08

11 These offshore transactions are a big step towards achieving our objective of promoting African currencies and markets… IncreasedVisibility Bring significant visibility to the countries and their markets Enhance the international image of these markets Provide an attractive investment opportunity to investors in African securities Attract institutional investors from Continental Europe, the United Kingdom and the United States

12 Provide the ‘ice-breaker effect’ for foreign investor exposure to the local markets, and ultimately, direct participation in these markets Give added momentum to ongoing bond market developments in the countries …and of promoting international best practices and knowledge transfer Ice- Breaker Effect Novelty has ensured innovation in structuring and execution Transfer of technical know-how and skills to local institutions First Bank of Nigeria (FBN) was the first Nigerian Bank to lead manage a bond issue launched by a supranational institution, and to provide the first currency and interest rate swap in Naira TechnicalSkills Transfer Transfer

13 This participation has brought increased investor attention to the region “ This deal cements the view that investors are increasingly willing to participate in African currencies “DEAL OF THE YEAR” AfDB GHC Transaction - The Banker Magazine 2006 Awards “DEAL OF THE YEAR” AfDB GHC Transaction - The Banker Magazine 2006 Awards Euroweek, on AfDB’s first Ghanaian Cedi Deal IFR, on AfDB’s first Nigerian Naira Deal African Fixed Income Guidebook MAY 2007 Supranationals have shown increasing interest in issuing in African currencies, and the AfDB’s triple-A rating encouraged a number of investors not previously involved in the Nigerian market to take part “ ” ”

14 Challenges still remain

15 Macro-economic instability Lack of a diversified issuer base Limited investor base Inadequate market infrastructure Unfriendly legal and regulatory framework Complex disclosure requirements Illiquid secondary markets Limited number of intermediaries Imperfect market knowledge and information dissemination Lack of credit ratings culture Significant drawbacks exist in African debt markets that prevent faster growth

16 AfDB seeks to enhance partnerships with African governments to ensure further progress is made   Sensitise governments on the benefits of developing efficient financial sectors, of which local bond markets are a key component   Encourage the regional capital market approach where applicable   Support debt market development through technical assistance and capacity building initiatives StrategyandPolicyConsiderations

17 AfDB seeks to enhance partnerships with African governments to ensure further progress is made OperationalConsiderations   Develop primary and secondary markets   Upgrade legal, regulatory & institutional framework and modernise market infrastructure   Develop benchmark yield curve & lengthen maturities   Deepen the issuer and investor base

18 African debt markets have begun to display signs of developments The AfDB has issued 8 bonds denominated in African local currencies in the past 2 years Significant challenges exist that can impede faster progress in bond markets The AfDB has and will continue to play a role in encouraging the developments in African Debt Capital Markets To summarise…

19 THANK YOU