Importance of Strong LCBM & Trade-off: Borrowing Domestically vs. International Markets

1. Importance of Strong LCBM & Trade off Between Borrowing Domestically vs. International Markets 9TH FORUM ON AFRICN PUBLIC DEBT MANAGEMENT AND BOND MARKETS Presenter: Thembi Mda | Senior Analyst: Debt Issuance and Management, National Treasury | 15 May 2015

2. Increased Foreign Bond Issuance in Sub-Saharan Africa

3. Growing foreign bond issuance in SSA • Sovereign bond issues for sub-Saharan Africa (SSA) have surged since the global financial crisis of 2007-08 • with particularly strong levels of issuances in 2013 and 2014 Bar chart: SSA sovereign bond issuance (US$ billions) Line graph: median public sector debt level (% of GDP) General government foreign currency & FC-indexed debt as a % of total government debt Source: IMF WEO Source: Moody’s Statistical Handbook

4. Driving factors Average real GDP growth (%, 2015 – 16) • Strong investor demand because of loose monetary conditions in advanced economies creating a “search for yield” • Many Improved macroeconomic fundamentals in issuing countries • Fast growing economies • SSA growth second only to SE Asia • Underdeveloped local debt markets • Lack of depth and capacity to meet domestic demand SSA GDP (% World GDP) Source: IMF WEO

5. Ratings a major factor in ability to issue foreign bond • Many countries now have ratings issued by international agencies Ratings factor assessments across SSA Source: Moody’s

6. Benefits of foreign bond issuance • Diversification of funding sources • International markets have more capacity than local markets • Ability to raise large amounts for longer maturities than in local markets • Debt restructuring and rescheduling • Can have a positive effect on a country's debt profile • Lower interest and straightforward repayment • Provides benchmark for domestic private sector to also borrow from international markets • Infrastructure finance to support economic growth • International markets impose no restrictions on how money is spent • Unlike multi-lateral and bilateral lenders • Speed with which issue can be packaged vis. a vis months spend negotiating a multilateral/bilateral loan

7. Risks of foreign bond issuance • Exchange rate risk • Although foreign issuance may look cheaper (lower interest rate) than local debt, the borrowing cost increases significantly when national currency depreciates • Between 2000 -13, average annual currency depreciation in SSA was 3-4%, amounting to 44% cumulatively. • Vulnerability to shocks • Many countries are dependent on commodities for revenue and foreign exchange • Swings in commodity prices affect the government revenue and ability to service debt Currency depreciation (Jan 2013 – May 2015) Commodity Price (Jan 2013 – May 2015) Source: Bloomberg

8. Risks of increased foreign bond issuance • Although African countries have fast growing economies with improved macroeconomic environment, their economies remain vulnerable to external socks. • Low foreign reserves • High current account deficits • Volatile currencies Foreign exchange reserves Average current account balance Source: IMF, REO Source: Moody’s statistical handbook

9. Outlook for coming years • Global interest rates on increasing path as Fed increases rates • Increase in future cost of financing in international markets • Dollar strength: increase in repayment and roll-over risk • Emerging and frontier market spreads have increased back to the levels last seen at the time of the May 2013 “taper tantrum” and have become more volatile. • In particular, spreads began to increase in October 2014 as oil prices started to decline • Since December 4014 have spiked several times by up to 200 basis points Emerging market spreads: Jan 2013 – Mar 2015

10. Risk mitigation is important • Risk mitigation strategies are needed to manage risks associated with foreign bond issuance. These strategies are highly technical and require high level of expertise • Hedging strategies such as swaps • The recent Argentina case has highlighted the need to strengthen the legal framework to protect sovereign issuers in the event of foreign debt default and restructuring • paripassu clauses • Collective action clauses

11. Other options in foreign capital markets • The are alternatives to international sovereign issuance especially for infrastructure or project finance. Although these are more lengthy to negotiate, a country is more likely to exercise more discipline in execution of project and how money is spent. • Export credit agency: provide AAA rating to the deal thereby reducing cost • Public private partnerships • Combination of concessional and syndicated loans

12. Importance of Local Currency Debt Capital Markets

13. Benefits of LCBM Development • A well-functioning and liquid bond market provides: • government with a stable source of funding at reasonable costs and desirable maturity. • Sustainable market-oriented debt management strategy. • Creates an additional tool for countercyclical policies and policy space at times of crisis. • Provides insulation against various shocks. • LCBM help the corporate sector finance its investment needs and generate economic growth. • Provide outlet for domestic savings • Facilitating risk management and reducing risk exposure of the private sector • Facilitate the implementation of key policies such as monetary policy • Improves the transmission of monetary policy.

14. Role of government is important • A number of countries issue government securities despite having budget surpluses. This is done in order to development the local market: • provide a benchmark yield curve for the corporate debt market; • support liquidity management operations of the central bank; • provide an investment alternative with little or no risk of default for investors; • maintain and develop smooth functioning and efficient financial markets; and • provide market infrastructure through a robust payment and settlement system and a strong legal framework (i.e., collateral and bankruptcy laws). • Strategy implies fiscal cost in form of negative carry – but cost is low against benefits listed above.

15. Building blocks for LCBM development • A strong high-level government commitment to upgrade and reform LCBM is necessary to ensure sustainability of the reform efforts. • Fiscal, monetary and macroeconomic policy discipline • Building capacity and technical skills in the public debt management office • Development of market infrustructure • Inter-institutional effort and policy coordination is required across fiscal, monetary, and regulatory authorities. • Coordination across agencies and interaction with private sector participants • Gaining credibility through continual implementation of policies • clear communication to build and foster credibility among market participants

16. The South African Experience

17. Brief History of South African Market • 1994 South Africa was in a debt trap. Government focused on getting policies implementation • Monetary and fiscal discipline • Strengthened tax collection and cash management • Development of local currency market • Consolidation of yield curve • Creation of benchmark bonds • Introduced risk benchmarks • Strengthened investor relations • RSA able to fund predominantly in local market (only 9% in foreign market). • Able to implement counter cyclical fiscal policy during economic downturn Budget Balance & Debt as a percentage of GDP Source: National Treasury,

18. Closing Remarks

19. Development of LCBM a national priority • Global interest rates on increasing path as advanced country monetary policy normalises • Increased cost of funding in international markets • Dollar strength – increased repayment risk • National commitment to develop local market is imperative • Capacity building within government • Intergovernmental cooperation • Development of market infrastructure • Building credibility with investors and local market players

20. Thank You