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ISSUES SURROUNDING THE DEVELOPMENT OF MUNICIPAL AND CORPORATE BOND MARKETS IN ZAMBIA

ISSUES SURROUNDING THE DEVELOPMENT OF MUNICIPAL AND CORPORATE BOND MARKETS IN ZAMBIA. “DEVELOPING GOVERNMENT BOND MARKETS IN SUB-SAHARAN AFRICA” WORKSHOP 17 – 19 JUNE 2003 , JOHANNESBURG, SOUTH AFRICA Presented by Lloyd Chingambo, General Manager / Chief Executive Officer,

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ISSUES SURROUNDING THE DEVELOPMENT OF MUNICIPAL AND CORPORATE BOND MARKETS IN ZAMBIA

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  1. ISSUES SURROUNDING THE DEVELOPMENT OF MUNICIPAL AND CORPORATE BOND MARKETS IN ZAMBIA “DEVELOPING GOVERNMENT BOND MARKETS IN SUB-SAHARAN AFRICA” WORKSHOP 17 – 19 JUNE 2003, JOHANNESBURG, SOUTH AFRICA Presented by Lloyd Chingambo, General Manager / Chief Executive Officer, Lusaka Stock Exchange Ltd.

  2. THE PLAYERS • Corporate entities (private / parastatals) / municipalities • Arranger (Stock Brokers) • Investors (individuals and institutional) • Regulators (Government, Securities & Exchange Commission, Lusaka Stock Exchange)

  3. 1.1 Why would a Corporate / Municipal issue a Bond? • Diversification of funding base (into institutional markets) and increased stability in the capital structure. • To secure intermediate maturity funding for long term projects and capital expenditure • Mitigation against exposure to interest rate risk through rate protected instruments (cap, floor, swaps) • Mitigation of Foreign Exchange risk • Funding costs relative to maturity tends to be cheaper than rolling over short-term bank facilities • Positive impact on branding through market publicity

  4. 1.2 Arrangers of Capital Market Transactions • What does the Arranger contribute? • Managing the debt issue to ensure overall success of the transaction (structuring, underwriting and obtaining credit enhancements where required) • Assists the issuer in producing the documentation and obtaining regulatory approvals • Marketing and placement of the bonds (distribution) • Makes market in the securities to support the Issue • Overtime, looks to also develop interest rate and cross currency derivative applications (swaps, repos, etc.)

  5. 1.3 Investors in Debt Securities Why an investor would buy a bond – Investor base includes insurance companies, pension funds, asset managers, broker dealers and banks • Higher yield pick-up over government securities • Diversification of investment portfolio to reduce overall risk profile • Matching duration of assets and liabilities • To fulfill criteria set by asset allocation policies • Contribute towards development of the domestic capital markets

  6. 1.4 The Regulators • Government has overall responsibility to institute, political stability, macroeconomic measures and a strong legal framework that creates an enabling environment • The SEC ensures investor protection through supervision of the securities industry • The Stock Exchange provides a market place for secondary trading activity and approves the listing of new issues

  7. BENEFITS • An efficient domestic Corporate and Municipal Bond Market provides: • Alternative financing to bank loans and equity • More transparent pricing of corporate credit risk • Diversification of credit risk • Potentially lower Foreign Exchange risk in debt repayments • A wider variety of investible products • Improved secondary market liquidity • An impetus for the fuller development of Africa’s financial services sector

  8. THE CHALLENGES • Most markets in Africa will experience one or more of the following: • Chronically high interest rates and inflation • Lack of comprehensive market regulation • No intermediate maturity benchmarks (yield curve) • Absence of credit rating agencies (credit culture) • Lack of deep investor base (non-bank Financial Institutions) • Limited market liquidity • Fear of the “unknown” by potential borrowers (young & unsophisticated market) • Development of the 10 year bond (benchmark) • Buy and hold attitude

  9. 4. PROMOTING MARKETS DEVELOPMENT • 4.1 The Government • Government can create an enabling environment through the following measures: • Ensuring political stability • Prudent economic and fiscal management to achieve greater market stability • Create a culture of transparency that enforces discipline, promotes business growth and attracts foreign investment • Have in place the necessary Infrastructure, Regulatory and Legal Systems • Create a foundation for the domestic bond market by issuing fixed rate benchmarks (development of yield curve)

  10. 4.2 The Securities and Exchange Commission • The SEC as the prime industry regulator should consider the following: • Comprehensive securities law that clarifies treatment of various asset classes and issuer types (e.g. SPVs) • Work towards regional integration through uniformity of regulatory standards • Market liberalisation (structural) within a prudent supervisory framework • Incentive schemes to encourage debut issues (e.g. lower approval / registration fees, tiered withholding tax structures) • Competitive approval fee structures

  11. 4.3 The Stock Exchange • Infrastructure and uniform standards: • Physical infrastructure – an electronic trading platform capable of processing a wide range of transaction types • Flexible, interlinked and automated Clearing and Settlement Systems based on Delivery Versus Payment (DVP) and Real Time Gross Settlement (RTGS) • Links to other regional and international exchanges (e.g. BESA, Clearstream and Euroclear) • Similar listing requirements to facilitate cross listing • Lobby for relaxation of foreign exchange controls to broaden the investor base (regional flow)

  12. 5. STRATEGIES FOR ZAMBIA • 5.1 Economic Management • Manage fiscal position • Lower inflation • Manage currency and capital account policies • Statutory Boards and Government linked corporations encouraged to issue bond and extend maturity profile. • Specifically encourage municipalities to issue municipal bonds through SPVs

  13. 5.2 Infrastructure, Regulations, Legal System • Clarify regulatory and legal treatment of securities • Best practice Clearing and Settlement systems • Physical infrastructure • Consider more incentives • Consultative and proactive approach

  14. 5.3 Government Bond Markets • Issue fixed rate benchmarks • Lengthen maturity profile • Publish issuance calendar • Increase market liquidity (Institutional Investments Guidelines)

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