Chad’s First Steps in the Regional Public Securities Market1
Except for two issuances through bank syndication in 2011 and 2013, Chad never resorted to the regional public securities market before the last quarter of 2014, when the country issued its first ever Treasury bills. Since then, Chad expanded its issuances and was the largest issuer among CEMAC members in 2015. The first steps taken by Chad in the regional securities market have been encouraging, obtaining financing regularly at relatively low interest rates and without exchange rate risk. On the basis of a more comprehensive analysis of the CEMAC securities market, this chapter stresses some challenges and makes some recommendations to strengthen Chad’s participation in the regional public securities market.
1. The development of domestic public securities’ markets in Sub-Saharan Africa (SSA) has been the subject of several studies and analyses. Sy (2007) focused on the primary market in the WAEMU region and the determinants of prices of local-currency denominated public securities. Again for the WAEMU market, Diouf and Boutin-Dufresne (2012) studied the determinants of interest rates, identified challenges and prospective reforms that could help make the market more dynamic, and assessed the potential systemic risks that it may pose for the region’s banking system. Very few (if any) similar analyses have been made for CEMAC, which can be explained by the relatively recent establishment of this market (first issuances of securities by Cameroon at the end of 2011) and limited data.
2. A specific analysis for the CEMAC market is particularly relevant today in the context of the sharp fall in oil prices since mid-2014. Such a shock has a massive impact on CEMAC public finances, forcing its countries to seek for additional financing sources. Indeed, after a gradual development since late 2011, CEMAC countries yearly issuances of public securities doubled in 2015 compared to 2014. A deeper and more liquid securities’ market would help for monetary policy through potential open market operations, for fiscal policy by accessing more resources, and for the financial sector stability by offering more of low-risk assets with different maturities.
3. For Chad, a detailed analysis is motivated by its recent access to the auction market, with Treasury bills first issuances in late 2014 followed by a significant expansion in 2015 within the context of the ECF-supported program.
4. This study is supported by the creation of a dedicated database based on the statements of each issuance published on the website of the BEAC. This database contains the following details: the issuer country, the date of the issuance, maturity, number of primary dealers as bidders, amount announced by the Treasury, amount of bids, amount auctioned, and the interest rates or prices (minimum and maximum proposed by the primary dealers, ceiling rate or maximum price accepted by the Treasury, and weighted-average interest rate).
B. Gradual Development of the Market, Which Remains Limited Despite a Record High Level of Issuances in 2015
5. In the late 90s, the decision of a gradual phase-out of direct central bank financing to governments in the region paved the way for the development of the regional public debt market. The Executive Board of the BEAC decided in 1999 to freeze its statutory advances to national Treasuries and approved the establishment of a domestic market for the issuance of Treasury bills and Treasury bonds. Due to lack of political support, this project was long delayed, until the approval by the Monetary Policy Committee in March 2008 of a transitional scheme providing for the coexistence of statutory advances (scheduled to decrease) and the issuance of government securities.
6. CEMAC countries’ public securities issuances through auctions have grown since 2011 and reached their highest level in 2015 (Figure 1). After the success of their first issuances in late 2011 (CFAF 50 billion), the Cameroonian authorities doubled their issuances of Treasury bills in 2012. The only other actor in the regional auction market at that time was the Central African Republic, with CFAF 1.56 billion issued in 2011 and CFAF 9.4 billion in 2012. Gabon joined the auction market in 2013, issuing CFAF 99 billion in Treasury bills. The first auctions of Treasury bonds occurred in 2013, both from Cameroon (CFAF 23.5 billion with a two year-maturity) and Gabon (CFAF 25 billion with a three-year maturity). Auctions of public securities stagnated in 2014 at around CFAF 265 billion, despite Chad’s entry into the market. Finally, gross issuances more than doubled in 2015 compared to 2014, reaching CFAF 608 billion, in a difficult economic context characterized by a sharp fall in oil revenue.
Figure 1.Chad: CEMAC Public Securities Auction Market
Sources: BEAC; IMF Staff calculation.
7. The stock of auctioned public securities more than doubled in 2015 to reach CFAF 532 billion. This was the result of longer maturities for Treasury bills issued in 2015 and increased placements of Treasury Bonds. There was a high level of one-year Treasury bills’ issuances in 2015 (CFAF 196.5 billion). In addition, Chad was very active in the Treasury bonds’ market. At the end of 2015, Treasury bonds represented 43 percent of the stock of auctioned public securities.
8. However, the objective of replacing BEAC direct financing by public securities issuances’ remains only a long-term objective. Until recently, the BEAC was taking steps to reduce financing to CEMAC member states and promoting market-based mechanisms for financing government budgets. However, in early August 2015, and in response to the external shocks faced by the region, the mechanism of “statutory advances” (i.e., BEAC’s overdraft facility for budget financing) was reactivated with the approval of a 52.4 percent increase in their ceilings. On top of this, the BEAC approved in late September 2015 an additional mechanism of “exceptional advances”, allowing for a disbursement of CFAF 140 billion to Chad in October 2015 and CFAF 9.2 billion to the Central African Republic in May 2016.
9. The stock of statutory (and exceptional) advances is still almost 6 times larger than the stock of public securities. At the end of 2015, the stock of BEAC statutory advances to CEMAC countries amounted to CFAF 1,984 billion relative to a stock of public securities of CFAF 330 billion. In fact, Cameroon is the only CEMAC country whose balance of statutory advances is lower than its stock of securities. Conversely, Congo and Equatorial Guinea, virtually absent from the securities market (two issuances by Equatorial Guinea), are the biggest users of BEAC’s statutory advances.
C. Chad’s Participation in the Regional Public Market
10. Although the CEMAC’s auction market for public securities started in late 2011 with the first issuances by Cameroon, Chad never resorted to it before 2014. Until then, the authorities used to negotiate direct financing from the banking sector. In two occasions, they proceeded to large regional bond issuances (CFAF 107 billion2 in 2011, and CFAF 85 billion in 2013) through syndications3 arranged by two banks designated as primary dealers. Chad issued its first ever Treasury bills in the last quarter of 2014 and expanded its issuances (both Treasury bills and bonds) in 2015.
11. In the first auctions, the Chadian authorities implemented an auction strategy aimed at forcing primary dealers to lower their offered interest rates (Figure 2). After announcing to seek up to CFAF 10 billion with a maturity of 3 months, and despite total bids approaching CFAF 18 billion, the Treasury accepted only CFAF 1 billion to send a strong message on the maximum interest rate it was ready to accept.4 This strategy was successful, as the maximum interest rate proposed by the SVTs (Spécialistes en valeurs du Trésor, primary dealers) fell sharply by the third issuance in December 2014. Through four 3-month-Treasury bills’ issuances, the Chadian Treasury was able to mobilize a total of CFAF 27.5 billion in 2014, at a weighted average annual interest rate of 2.8 percent.
Figure 2.First Auctions by Chad
Sources: BEAC; IMF Staff.
12. Based on the success of their first issuances, and facing large financing needs with the fall in oil revenue, the authorities reinforced their issuance program for 2015. Treasury bills were regularly issued throughout 2015, but with a gradual lengthening of maturities. In fact, Chad conducted six 6-month Treasury bills issuances between March and July 2015 totaling CFAF 71 billion. All of them were oversubscribed and resulted in relatively low annualized interest rates (3.05 percent on average). Between September and end-2015, Chad issued one year-Treasury bills, with five issuances totaling CFAF 64 billion at an average annual interest rate of 3.4 percent. Treasury bonds’ issuances were delayed compared to the initial calendar, but they still ended up exceeding initial plans: CFAF 139.3 billion was issued with maturities of two, three and five years, and an effective average interest rate of 4.3 percent.
13. Chad was the most active CEMAC country in terms of amounts issued in 2015. The Chadian Treasury placed CFAF 156 billion (gross) in Treasury bills and CFAF 139.3 billion (gross) in Treasury bonds, for a total of around CFAF 190 billion in net placements of public securities. However, net domestic financing (excluding from BEAC) was actually negative as several of those issuances were used to swap or roll-over existing banks loans. The main benefit of those operations was then to lengthen the maturity of outstanding Chadian government liabilities and potentially lower the future debt service, while providing banks with more liquid securities that could be refinanced by the central bank.
Chad’s Domestic Risk Premium and Potential Market Mispricing
14. Chad has paid slightly more than 100 basis points (bps) than Cameroon in interest rates on 3- and 6-month Treasury bills. Comparing issuances by Chad to those of Cameroon (the most active country in the regional market and the one enjoying the lowest interest rates) undertaken at identical or close dates,5 the interest rate spread stood at 104 bps for 3-month Treasury bills and 110 bps for 6-month Treasury bills.
15. More generally, a clear hierarchy in terms of risk premiums would have existed among CEMAC countries for 3- and 6-month Treasury bills. There were a total of 142 individual issuances of Treasury bills in the regional market between November 2011 and end-2015, and more than half of those issuances (76) were undertaken by Cameroon. Using the interest rates obtained by Cameroon as benchmarks, the following observations can be made (Figure 3):
Gabon is the second “best” risk among CEMAC countries, with interest rates 30-40 bps higher than Cameroon, but with a large standard deviation.
Interest rates are higher for Chad than for Gabon, but with a low variance among issuances, which could be explained by the lumping up of similar maturity issuances.
The Central African Republic faces the highest interest rates, at around 5 percent per year for 3 month-Treasury bills and slightly more than 5 percent for 6 month-Treasury bills.
Figure 3.Chad: Weighted Average Interest Rate of 3 month and 6 month T-Bills Issuances
Sources: BEAC; IMF Staff calculation.
16. Interest rates in the region appear to be positively linked with governance and public management ratings, as well as public debt indicators (Figure 4). While CEMAC countries’ securities issuances are not rated by the main international rating agencies, some trade credit insurers provide a country risk classification that includes these countries, with better ratings for Cameroon and Gabon than for Chad and the Central African Republic.6 In the same vein, rankings like the World Bank’s Doing Business show a better rating for Cameroon and Gabon. Public debt indicators follow along the same lines as the ratio of public debt over GDP is significantly lower for Cameroon and Gabon than for Chad and the Central African Republic.
17. The risk premium hierarchy has been less obvious on 1-year Treasury bills. Cameroon had long been the only CEMAC country with regular issuances of one year-Treasury bills (Annex 2). The first 1-year issuance by Gabon was conducted in April 2015 and Chad undertook five issuances of that type between September and December 2015. While Cameroon has benefitted from lower interest rates on average, there is less clarity on risk premium hierarchy among CEMAC countries for this type of maturity. For instance, the one year-Treasury bills issued by Gabon in the last quarter of 2015 had an interest rate of 4 percent on average, significantly higher than similar issuances by Chad (five issuances with an average interest rate of 3.4 percent). Even more surprising, the last auction of the year for Cameroon and Chad were done the same day (on December 23, 2015), with the same amount auctioned (CFAF 8.5 billion), and for the first time the interest rate was higher for Cameroon (3.9 percent) than for Chad (3.5 percent). In the same vein, the first ever issuance by Equatorial Guinea in September 2015 was done at an interest rate of only 1.36 percent (lower than any issuances by Cameroon for any maturities).
Figure 4.Chad: Average Interest Rate on 6-month Treasury Bills’ Issuances
Sources: BEAC; Countries authorities; World Bank; United Nations; IMF Staff calculation.
18. While limited activity on Treasury bonds makes comparisons difficult, peculiar interest rates’ dynamics may suggest the presence of some market mispricing. Only Chad and Gabon resorted to Treasury bonds issuances in 2015, and the interest rate on Gabon 2-year Treasury bonds (4.6 percent) was higher than the interest rate on Chad’s 5-year Treasury bonds (4.1 percent). An inversion of the yield curve was present for Chad, with lower interest rates obtained for 5-year Treasury bonds than for 2-year Treasury bonds. One potential explanation would be that, despite the auction mechanism, the limited number of SVT involved (only one or two SVT making a bid) favors a prior agreement between the Treasury and the bank(s) involved, as in the case of syndication, which could lead to some market mispricing.
19. More generally, the low interest rates obtained by Chad and other CEMAC countries in their auctions confirm the mispricing of the securities, which is a serious obstacle to further market development. With a relatively inexpensive monetary financing (currently at the TIAO—Taux d’Intérêt des Appels d’Offres—of 2.45 percent per year), the governments does not seem ready to pay significantly more on the domestic market, therefore opting for low cut-off rates in their auctions. A comparison with the few international bond issuances by Cameroon or Gabon reinforces the sense that interest rates on CEMAC public securities are abnormally low.7 The mispricing of the CEMAC countries’ securities is a serious obstacle to further market development, in particular by discouraging the emergence of a secondary market (see section D).
D. Further Development of the CEMAC Public Securities Market: Challenges for the Region and for Chad8
Promoting a market that better reflects the reality of risks is necessary for its further development. One of the main dysfunctions of the CEMAC public securities’ market is the mispricing of the auctioned securities. It discourages other investors than SVTs to enter to the market (¶20) and hampers the development of a secondary market (¶21). Improvements in terms of communication, planning and executions of the auctions, and debt management would also participate to strengthening the market.
20. Retail investors, including non-residents, need to be attracted to the securities’ market. There are no restrictions for retail investors, including non-resident investors, to purchase CEMAC government securities. The SVTs have an exclusive right to direct participation in Treasury bills or bonds auctions, but they have the obligation, at the request of any investor, to buy and sell public securities. In the same way, non-resident banks have the ability to transmit their orders to SVTs. In fact, the SVTs participate in the regional securities market almost only on their own behalf. At the end of 2015, 95 percent of the Treasury bills issued in the CEMAC (92 percent for Chad) were owned by the SVTs, and 5 percent owned by the same SVTs but on behalf of other banks not registered as SVTs. The situation is similar for Treasury bonds, with 88 percent ownership from SVTs, 9 percent on behalf of non-SVT regional banks, and only 3 percent on behalf of private customers (essentially insurance companies).
21. The secondary market for government securities needs to be developed. Treasury bills and bonds are dematerialized and based on the convention between the BEAC and the SVTs, the latter have the obligation to foster the secondary market by displaying at their counters the purchase and sale prices of government securities. However, the SVT consider the government securities as an option of investment for themselves or as a refinancing instrument (government securities are accepted by the BEAC for rediscounting operations). In any case, the mispricing hampers the development of the secondary market, as SVTs would be forced to realize losses if they would sell the bills/bonds at market price, implying higher yields. At this stage, the secondary market is extremely limited, with only about twenty transactions on BTA and OTA recorded between 2011 and 2014. The secondary market for Treasury bonds issued by syndication is slightly more active. For instance, according to Afritac Centre, 77 transactions on Cameroonian bonds were recorded between 2011 and 2014, which represents an average annual volume of 11 percent of the securities in circulation. The secondary market should also benefit from the planned implementation in 2016 of the legal framework for the repo market (Sale and Repurchase Agreements).
22. The network of SVTs should be strengthened and the dialogue with them improved. Each country has its own network of SVTs. However, most SVTs participate in several networks or are a branch of a regional bank registered as SVT in other CEMAC countries. In Chad, the network of SVTs is limited to nine banks, of which three are domestic. A strengthened and continued dialogue with the SVTs is needed to avoid unnecessary and damaging competition among issuers. In addition, such a dialogue could help to reduce the mispricing, and an in-depth market analysis with the SVTs would help the governments to target potential end-buyers (large corporates, insurances companies…).
23. The unification of the Treasury bonds issued through auctions and by syndication could help stimulate the market. Currently, Treasury bonds issued by auction are exchanged over-the-counter (OTC), while bonds issued by syndication are traded on the Douala and Libreville stock exchanges. Afritac Centre advocates limiting that fragmentation, including encouraging domestic syndication: an SVT is designated by the authorities as the leader and it seeks to involve other banks in the operation through the auction market. This would require a modification of the article 9 of the BEAC regulation of public securities, as the determination of the price of the issuance with the SVT will be needed for a domestic syndication.
24. The calendars for planned issuances should be better respected. As specified in the legal and regulatory framework of the CEMAC public securities market, national Treasuries have to publish annual and quarterly indicative calendars of issuances. While this requirement is generally met, it is crucial to better respect those calendars to enhance the credibility of the Treasury securities among market participants. In the case of Chad, several auctions in 2015 were postponed, while other auctions were undertaken without a previous announcement.
25. The communication before and after an auction should be strengthened. The statements published two or three days before an auction are minimalists, mentioning only the nature of the securities (bills or bonds), the maturity, and the desired amount. WAEMU countries are at a more advanced stage, with the pre-auction statement being accompanied by a pre-auction note including more comprehensive information (results of the previous auctions, planned auctions, amounts that will mature in the coming weeks, etc.), and often preceded (one or two weeks before the auction) by an information note on the issuance, the issuer, and the economic and financial context. All this information is published in the dedicated website of the UMOA-Titres agency, while its equivalent in the CEMAC, the CRCT (Cellule de Règlement et de Conservation des Titres, Unit for the settlement and conservation or securities), does not have its own website. Regarding Chad, results in terms of communication have been mixed: three of the 12 Treasury bills issuances in 2015 were not preceded by the publication of statements announcing the issuances, and two of them were not followed by the publication of a statement of results.
26. Good debt management practices should also help in developing the government securities market. It is important that governments respect as much as possible their planned issuance calendars and disclose comprehensive and timely information to investors. Furthermore, enhanced coordination can help avoid unnecessary competition among CEMAC countries, for instance by not issuing securities with identical maturities on the same day. More generally, sound debt management strategies should also help reassure investors about the government's ability to repay its securities and facilitate the rollover of maturing debt.
27. Improved debt management should include a clearer decision-making process. Decisions on cut-off prices, through the “ceiling rate” in the case of a Treasury bills or “price limits” in the case of Treasury bonds, directly impact the amounts raised. In theory, in order to avoid market distortions, and as long as the bids are sufficient, the issuer should accept all the best SVTs offers up to the announced amount of the issuance, regardless of the proposed interest rates or prices. In reality, the National Treasury can decide to auction less than planned to avoid distortions in the yield curve or, alternatively, to auction more than planned when certain conditions are met. In particular, when the bids exceed the planned amount by a large margin, it is justified to get additional financing at favorable conditions. If appropriate, this decision should be explained in the statement of result, to avoid affecting SVTs’ expectations for the following issuances.
28. One key objective for Chad is to make this mode of financing more regular. The first Chadian securities’ issuances were held in an emergency context given the huge loss in budget revenue linked to the occurrence of two exogenous shocks. They show the possibility for Chad to have access, in a more transparent manner, to financing in the regional market at relatively low interest rates and with the significant advantage of no currency risk. In the period ahead, this mode of financing is encouraged and should be part of a more comprehensive borrowing strategy. The challenge is not necessarily to increase the amounts borrowed, but also to address some cash management problems. Chad should therefore improve the planning of issuances, taking into account the entire range of maturities available, and integrate these issuances and the planned repayments into a cash management plan.
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Through the Regional Securities Market: Past Successes and Current Challenges »IMF Working Paper WP/12/249
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Agence UMOA Titreshttp://www.umoatitres.org/en
|Central African Rep.||1.56||9.4||2.5||2.5||14.8|
|Due to mature||2011||2012||2013||2014||2015|
|Central African Rep.||0||5.21||8.25||0||9.3|
|Central African Rep.||1.56||4.19||−5.75||2.5||5.5|
Source: IMF Staff, based on statements of result of all individual issuances published by the BEAC.
Prepared by Gabriel Léost (AFR) with inputs from Chaker Soltani, Public Debt Management Advisor at AFRITAC Centre. This chapter also benefited from inputs and comments from Vincent Fleuriet (MCM), Patrick Imam (AFR), Nicolas Million (ICD), Monique Newiak (AFR), and Samuel Delepierre (OED).
The CFAF is fixed to the Euro with a parity of 655.957 CFAF against 1 Euro.
There are two procedures in the CEMAC market for the issuance of public securities: by auction for Treasury bills and by auction or syndication for Treasury bonds.
Bidders are required to submit offers for both the amount and the interest rate. The Treasury then decides on the allocation of bonds to bidders and the accepted interest rates.
C. Soltani and B. Debergh found a seasonal effect in interest rates, with a significant increase in September-October when banks would be willing to buy securities only at higher interest rates in order to improve their annual profit figures. In this study, issuances of Treasury bills with the same maturity are compared when auction dates do not differ by more than one month.
For instance, Hermes-Euler rating for Cameroon and Gabon is at a “significant risk” level, while Central African Republic and Chad are at “high risk” level. Cameroon and Gabon have also a better risk rating than Central African Republic and Chad in the EKF (Denmark’s export credit agency) classification.
The interest rate on the 10 year-Eurobond issuance by Gabon in June 2015 reached 6.95 percent, while Cameroon obtained 9.75 percent in its 10 year-Eurobond issuance in November 2015.
Most of the recommendations presented in this section are based on technical assistance reports by Afritac Centre.