12 September 2005 – Cairo

1. Supranational Domestic Debt Issuance Presentation to the African Stock Exchanges Association Conference 12 September 2005 – Cairo

2. Rationale Requirements Issues and challenges Impact of MDB bond issuance ADB and development of African capital markets I II III IV V 2 8 12 15 18 Outline

3. The African Development Bank: a supranational organization issuing debt in several international capital markets to fulfill its development mission • Shareholding • 53 African and 24 non-African countries • Subscribed capital – US$ 33.54 billion • Highest rating : AAA from Moodys, S&P, Fitch and JCR • Strong membership support • Strong financial fundamentals • Good asset quality • Sound financial controls and prudent risk management policies • Solid presence in international capital markets • Borrow in close to 20 different currencies in Euro, domestic and global markets • Borrowing portfolio of US$ 8.8 billion as of Dec-2004 • Assets under management of US$ 10.7 billion as of Dec-2004 • Provides long term loans, guarantees, equity and risk management products • Sovereign clients (including policy-based and project loans) • Non-sovereign clients • Cumulative approvals 1964-2004: USD 30 billion • All sectors: agriculture, finance, multisector, infrastructure • Offers technical assistance • for projects and programs that provide institutional support and coordination of RMC development policies and plans • for specific projects that support for instance capital markets development • Provides grants for emergency humanitarian assistance from its Special Relief Fund • Plays a catalytic role through a dynamic co-financing and partnership strategy • US$ 74 billion co-financing mobilized since 1964

4. Sub-Saharan Africa, excluding South Africa, has fewer roads than Poland. Less than 40% of African rural population haveaccess to clean water and sanitation. The continent requires significant volumes of financing to address all its needs especially in infrastructure Sub-Saharan Africa’s 7.6 million telephone lines are just under 50% of the number of telephone lines in Manhattan. Infrastructure financing needs forNorth Africa alone are estimated at $ 20 billion between 2005 and 2015!

5. 7 years Bonds Loans Yet, financing remains limited to medium term bank loans … GOVERNMENT YIELD CURVE 7.00 6.00 5.00 yield (%) 4.00 3.00 2.00 1.00 1 2 3 4 5 6 7 8 9 10 15 20 years … leaving large unfunded portions with currency and maturity mismatches

6. Capital markets in the 53 African countries are at varied stages of development ... … many share several shortcomings but have potential for growth

7. Fund raising andlending in local domestic currencies is consistent with most MDBs mandate Respond to clients needs (volume, asset-liability management:currency and maturity and attractive funding costs) Local currency issuing and lending is an important strategy for most MDBs Develop capital markets (high quality investment alternatives to local investors as well as new funding sources for MDBs) This supports the deepening of the financial system’s intermediation capacity and complements local financial institutions

8. Rationale Requirements Issues and challenges Impact of MDB bond issuance ADB and development of African capital markets I II III IV V 2 8 12 15 18 Outline

9. Successful MDBs domestic debt issuance requires a number of conditions Economic, fiscal and monetary discipline Stable macroeconomic conditions • Liberalised financial sector with deregulated interest rates Strategic and policy decision to permit and facilitate MDBs issuance in the market Government Support Size and depth of the market Yield curve • Availability of several maturities • Secondary market trading Existence and liquidity of swap market • Will facilitate conversion of borrowed funds into currency of choice if need be • Help address matching of bonds and projects / negative cost of carry issues

10. Additional considerations Assess supply and demand for bonds Market participation • Existence and size of investor’s base : banks, institutional or retail investor (individuals); domestic and foreign; active or inactive. All this has consequences on price efficiencies and liquidity. • Issuers: government, corporates, financial institutions • Financial institutions/broker dealers/ with arranger capabilities Existence of efficient trading, clearing and settlement systems and other supporting infrastructure Market infrastructure • Existence of clearing system – Bridge with international systems • Delivery versus payment (or else settlement risk) • Research, information on the markets • Credit rating

11. Clear and sound legal and regulatory framework is critical Consent to issue, tax exemption and use of proceeds Ministry of Finance (MOF) • Tax treatment of AfDB bonds and withholding tax • Authorization to invest in government securities for warehousing • Currency convertibility option on deal proceeds (may not be exercised in case of back-to-back lending) Investment eligibility: no restrictions on investors & asset-risk weighting of bonds Central Bank and non bank regulatory agency • Authorization to allow all investor classes to hold issue: insurance companies, pension funds and mutual funds • Asset classification for investors (government ?) Documentation, listing, disclosure, domestic rating requirements Securities Regulator • Rated by several agencies & comprehensive documentation framework covering several markets Enable AfDB to achieve cost-efficiencies that will translate into lower cost of its loans and create a new asset class for institutional investors, thus broadening the potential investor base

12. Rationale Requirements Issues and challenges Impact of MDB bond issuance ADB and development of African capital markets I II III IV V 2 8 12 15 18 Outline

13. Is MDBs domestic debt issuance always desirable? MDBs often require swapping so countries must assess economic policy implications within a context of financial and economic liberalization Exchange rate volatility? Impact on currency can be monitored (Pressure on currency if daily volume of FX transactions low and swap amount important) MDBs play a catalytic role and encourage new issuing activity Possible Crowding Out Local Issuers ? No oversupply of securities and over time investor base widens Governments can regulate issuance flows with delivery of consent

14. MDBs may face some challenges Domestic debt issuance, part of the annual borrowing requirement to fund all activities – Cannot be done at all costs (Speed and cost effectiveness of alternative financing strategies) Pricing and Competitiveness Lack of pricing transparency and credit awareness lead to difficulties in pricing (regulatory treatment and liquidity) All in cost likely to be above government so lending could be limited to private sector clients Time lag and matching of assets and liabilities (short or long term, fixed or floating, bullet or amortising) Asset and Liability Management Lack of hedging (swaps) and warehousing instruments Negative cost of carry ?

15. Rationale Requirements Issues and challenges Impact of MDB bond issuance ADB and development of African capital markets I II III IV V 2 8 12 15 18 Outline

16. Positive spill over effects from MDBs issuance • MDBs and government principal development objectives are aligned • Deepen financial markets and foster bond market development and competition in bond market • Contribute to reducing financial sector and overall economic risk exposure (FX and maturity risk for borrowers and financial institutions ) • MDBs are AAA rated institutions • Credit diversification for investor, a new asset class as an alternative to sovereign bonds • Issuer diversification • Funding advantage in long-term end of curve to be passed on to borrowers of long-term resources Directly provide long-term funding to the economy and indirectly encourage mobilization of other long-term resources • Enable benchmark yield curve establishment and extension of yield curve • Contribute to emergence of a credit market and culture

17. Benefits of issuance by MDBs • Transfer of know how and support authorities efforts in wide dissemination of international best practice • Documentation, listing, settlement, rating, clearing and transparency • Risk management products • MDBs continuous presence in international markets translates into high visibility transaction and signals confidence in local market and commitment to its development

18. Rationale Requirements Issues and challenges Impact of MDB bond issuance ADB and development of African capital markets I II III IV V 2 8 12 15 18 Outline

19. BWP TND Tunisia Botswana UGX TZS KES Uganda Tanzania Kenya MAD Morocco XOF NGN EGP West Africa CFA Nigeria Egypt The Bank has conducted preparatory work on several markets …

20. Different issues fuel development of capital markets • REGULATOR • Independent supervisory agency • Investor protection • Corporate governance • TECHNOLOGICAL INFRASTRUCTURE • Depository and clearing systems • Trading platforms • Payment systems Increase retail investors base Mitigate information and agency concerns Improve exchange infrastructure Efficiency gains and lower transaction costs CAPITAL MARKETS SUPPLY OF BONDS DEMAND OF BONDS Foreign issuance Foreign investment Discipline, efficiency, innovation and best practices Increase institutional investors base Promote stocks dissemination Increase liquidity • Pension funds • Mutual funds • Insurance sector Sound fundamentals and financial liberalization • Privatization • Tax incentives

21. Thank you