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    African Department

    © 2014 International Monetary Fund

    Cataloging-In-Publication Data

    Joint Bank-Fund Library

    Issuing international sovereign bonds [electronic resource] / prepared by Mauro Mecagni [et al.]. – Washington, D.C.: International Monetary Fund, 2014.

    1 online resource. — (African Department; 14/02)

    “Opportunities and challenges for Sub-Saharan Africa.”

    Includes bibliographical references.

    Description based on online resource; title from digital title page.

    ISBN: 978-1-47552-310-2

    1. Government securities—Africa, Sub-Saharan. I. Mecagni, Mauro. II. International Monetary Fund. III. International Monetary Fund. African Department (Series); 14/2.

    HG4715.I87 2014eb


    Introduction and Summary

    This chapter examines the rise in international sovereign bonds issued by African frontier economies and recommends policies for potential first-time issuers. Maintaining prudent fiscal frameworks consistent with debt sustainability is crucial for deriving lasting benefits from additional financing. Beyond that, first-time international sovereign bond issuers should focus on improving the composition and profile of their public debt under an appropriate debt management framework, adhering to best operational practices for first-time issuance, and locking in low interest rates while smoothing the maturity profile of the entire public debt portfolio. International sovereign bonds may not be the best option for financing infrastructure investment, and other funding options may need careful consideration.

    Sub-Saharan Africa’s access to capital markets is picking up significantly. Easy global financial conditions—low interest rates in advanced economies and low global risk aversion leading to portfolio reallocation in search of risk-adjusted yields and diversification opportunities—are facilitating access of sub-Saharan African countries to international capital markets. First-time or repeated issuance by those countries is also seen by many observers as recognition of sub-Saharan Africa’s high return potential, owing to its natural resource wealth and improved macroeconomic policies and development prospects.

    Access to international bond markets brings opportunities to investors and sub-Saharan African countries, but risks exist. By increasing their exposure to Africa, even from a relatively low base, foreign investors can diversify their portfolios, and sub-Saharan African sovereigns can broaden the investor base for their public debt instruments. For issuers, the first impact is to enhance the available fiscal financing envelope, including longer-term project financing. The process also brings financial innovation to the continent, such as infrastructure bonds to bond enhancements and guarantees for local currency bond market (LCBM) products. In addition, access to external financing and LCBM development (Box 1) helps sub-Saharan African economies better shield consumption and investment spending from the impact of exogenous shocks.1 That said, the availability of debt instruments may also generate new macrofinancial and debt vulnerabilities that need to be monitored carefully, and may in some cases reduce access to concessional financing.

    Sub-Saharan Africa: Local Currency Bond Markets

    Deep and liquid local currency bond markets (LCBMs) are widely recognized as playing an important role in promoting the effectiveness of macroeconomic policies, the implementation of development programs, and mitigating the impact of financial crises and external shocks on the domestic economy. Their presence allows a country to differentiate its channel of financing, allowing for improved shock absorption capacity at times when access to external financing is limited, or complementing these external financing sources in the realization of investment programs.

    Bond Market Comparisons (2010)

    Source: Staff estimates.

    Note: CEMAC = Economic and Monetary Community of Central Africa; WAEMU = West African Economic and Monetary Union.

    In sub-Saharan African countries, LCBMs are still at a nascent stage of development. The outstanding stock of government securities was 14.8 percent of GDP in 2010, much lower than in other developing, emerging, and advanced economies (see figure). The difference is even greater for corporate bonds. On average, the outstanding stock of corporate bonds was 1.8 percent of GDP—much lower than for other developing and emerging economies (with the exception of Poland). Moreover, the low level of development of the bond market is particularly apparent compared with more advanced economies, where for corporate bonds, the outstanding stock ranges from 26.5 percent of GDP for Canada to 98.6 percent of GDP for the United States (Mu and others, 2013).

    LCBMs are dominated by government securities. Government securities represent 89.2 percent of total outstanding local currency denominated bonds, compared with 10.8 percent for corporate bonds. This contrasts with the situation in other regions of the world (Figure 1).

    A number of structural constraints are impairing the development of LCBMs in sub-Saharan Africa. A limited and undifferentiated investor base, mostly concentrated in domestic banks; undeveloped secondary markets; and illiquid debt instruments have impeded the development of domestic bond markets, making it difficult for countries to raise affordable long-term financing in their shallow domestic markets (except for South Africa). Therefore, despite the implied currency and other risks, funding via international debt instruments is being pursued as one alternative way to overcome lack of long-term local currency financing.

    Nonetheless, a number of sub-Saharan African countries are committed to addressing these impediments to the development of LCBMs, recognizing that shallow domestic bond markets expose governments to higher interest and rollover risks, affect monetary policy effectiveness, impede banks from pricing long-term lending, and prevent benchmarking for the development of corporate financing instruments.

    This box was prepared by Yibin Mu.

    Figure 1.
    Sub-Saharan Africa: Recent Sovereign Issuances

    Sources: Bank for International Settlement Quarterly Review; Bloomberg; EPFR.

    Note: Data corresponds to flows of investment in bonds issued by entities of the corresponding sub-Saharan African countries by global exchange traded funds and mutual funds, expressed in U.S. dollars. A negative value corresponds to a reduction in the holdings. EPFR data is available for Botswana, Côte d’Ivoire, Democratic Republic of Congo, Gabon, Ghana, Nigeria, and Zambia.

    1 VIX is the Chicago Board Options Exchange Market Volatility Index.

    Building on previous IMF staff analysis, this chapter covers the following topics: (1) the experience with international sovereign bond issues in sub-Saharan Africa to date and the range of likely first-time issuers, (2) reasons for the renewed global investor interest in sub-Saharan Africa, (3) opportunities and risks in issuing international bonds, (4) operational considerations in issuing international sovereign bonds instruments, and (5) capacity-building processes to support a successful issuance, especially for first-time issuers, and to mitigate vulnerabilities that could arise in international sovereign bonds.

    To make the most of the renewed global investor interest in frontier markets, the following recommendations are provided for first-time sub-Saharan African sovereign issuers:

    • Develop a sound macroeconomic framework and strive to maintain prudent fiscal policies that safeguard fiscal and public debt sustainability.

    • Improve the composition and profile of public debt under an appropriate medium-term debt management strategy.

    • Adhere to best practices in terms of information disclosure and outreach to potential investors.

    • Lock in low interest rates with modest amortization over long maturities, while smoothing the maturity profile of the entire public debt portfolio to minimize rollover risks.

    • Carefully consider the overall borrowing costs in light of the impact of the normalization of monetary policy in advanced economies and the ongoing reassessment of emerging countries’ and of frontier markets’ risks by international investors.

    • Review capacity and secure appropriate technical assistance to prepare for issuing international sovereign bonds.

    Finally, a sovereign bond issue may not in all cases be the best financing option. Countries need to carefully consider alternative options to fund public infrastructure projects; in many cases, more tailored financing options can either be less expensive or less risky. For example, bond financing may not be efficient if it is not possible to mitigate carry-costs by matching the funding requirements of the project over time through consecutive bond issues.

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