Sovereign Issuers Entering International Markets: A Cross Country Experience

1. Sovereign IssuersEntering International Markets: A Cross Country Experience

2. Overview Trends Preconditions Strategic Considerations Common Mistakes Preconditions for accessing international capital markets Strategic considerations in managing an international capital market issue Common mistakes Preconditions for accessing international capital markets Strategic considerations in managing an international capital market issue Common mistakes

3. A CaveatI explicitly abstract from dealing with the question of external issuance and note that I assume the overall envelope of external borrowing has been determined elsewhere in the context of a rigorous DSA and a comprehensive overall medium/long term debt strategy (MTDS), taking into account the relevant macroeconomic risks

4. Africa: Limited Impact of Turmoil Not noticeably affected African debt or equity markets, except South Africa Explanation: Limited integration with global markets Small size and low liquidity Macro story still positive with commodity prices strong Investor rationale

5. What if the Outlook Worsens? Unlikely to lead to major pull backs by foreign banks and portfolio investors But, retrenchment is possible Most significant risk would be from events on the real side Open question: How sharp a decline in growth prospects and commodity prices would lead foreign banks and investors to begin pulling back from Africa?

6. LICs as an Asset Class Potential first-time international issuers growing; Potential re-access Search for yield ends in Africa Relatively unique investor base (Anglo and Francophone connection) Funding from local markets available between 1-2 yrs Will debt issuance integrate them with global markets?

7. LICs as an Asset Class Could external debt result in currency mismatch for many issuers? Experience of Eastern Europe relevant for Africa? Should non-concessional borrowing from international markets be limited? Swap Paris Club debt by issuing debut bonds in international markets?

8. Offshore Financing? Subsidiaries of large banks Conduits for capital inflows Inherent risk from counterparty positions Risks to BoP Currency options market Who regulates?

9. Growing Investor Interest in the �last frontier� Sharp increase in portfolio investor interest Drivers: Debt relief restored debt sustainability in many countries Sustained record of good macroeconomic performance Diversification and �high yield� � the last region to capitalize on market convergence Official sector is helping catalyze

10. Recent Experience Timing of issue? Domestic and external conditions are favorable. Medium-term outlook? Growth, inflation, current account, fiscal stance Servicing of existing public debt Policy transparency and adequate data dissemination and Political support in carrying out structural reforms

11. External Environment Most issues occurred when: Global liquidity was ample Risk appetite high

12. Characteristics of Selected Bond Issues (1)

13. Characteristics of Selected Bond Issues (2)

14. Relative Cost of Issue 

15. Spreads and Sovereign Ratings

16. Market Access and Risk Appetite

17. Benefits of International Issuance Supplements domestic savings Diversifies external financing sources Obtains longer maturities Establishes a pricing benchmark Closer international market monitoring

18. Risks of International Issuance Exchange rate exposure and debt servicing costs Refinancing risk Swings in terms of trade And/or when repayment of a bullet bond represents a significant fraction of export earnings

19. Use of Proceeds is a key factor for early decision Balance sheet operations Retire existing high cost and/or short maturity debt; Paris club debt Resolve debt in arrears Reduce domestic debt Financing specific projects (infrastructure) General government purposes (ex ante riskiest)

20. All within the context of a medium-term debt management plan (MTDS)  Size, Maturity and Repayment structure Liquidity and cost considerations Larger-size issue tends to increase the rollover or repayment risk Market conditions also have an effect on the size of a bond issue

21. Strategic Considerations Amortizing structure or a bullet bond? Bullet bonds tend to increase the rollover risk for the issuer Perspective of reserve adequacy/coverage (R/STD) Currency denomination of debt? Considerations related to borrowing costs, currency composition of foreign trade and asset structure, and the investor base

22. Tactical Issues Choice of investor base Building up a diversified base of international investors Legal jurisdiction and the form of CACs to be included. Selection of advisors and managers

23. Debt Management Issues Need to balance debt management objectives and investor-base interests Duration considerations relating to investors� portfolio preferences Trade-off between size and frequency of issues

24. Other Pricing Issues Price discovery should be obtained through auctions or book building (syndication process) Execution risk of a new issue could be lowered by market sounding

25. Common Errors Issue size; Rush to market; �Under pricing� Poor selection of lead managers Insufficient choice of proposals Weak investor base Issuing without formulating debt strategy Delayed use of proceeds Insufficient capacity to manage financial risks

26. Role of Fund�Debt Issues As countries integrate more with global markets, the importance of debt and risk management increases For the IMF Market Access and level of market borrowing should be part of fiscal/debt strategy, consistent with the BoP outlook Debt strategy (MTDS) should be embedded in a medium-term macro framework and based on DSA and risk analysis. Work is underway with World Bank Need for parallel advice, surveillance and program, on important transactions (e.g., 1�st time issuance, restructuring)