AFDB Supports Local Currency Bond Issuance

- BSE at forefront of efforts to pioneer local bond issuance

The African Development Bank(AFDB) has released a report detailing efforts to launch local currency bonds, in an effort to spur sustainable economic development and social progress in its Regional Member Countries (RMCs), thus contributing to poverty reduction.

The report written with the participation of the Botswana Stock Exchange(BSE) endeavours to mobilize and allocate resources for investment in its RMC's and to provide policy advice and technical assistance to support their development efforts.

“AFDB has a long and successful history in the field of resource mobilization. When the Bank was established more than 50 years ago in 1964, it commenced operations using the equity resources provided by its shareholders, its capital stock. As demand for its development resources increased, the Bank started leveraging its equity by entering into borrowing transactions, firstly directly from other development partners, and later, through bond issues executed in international capital markets. Indeed, it has been quite a journey since then,” observed Hassatou N’Sele Director, Treasury Department, and Acting Finance Vice-President, African Development Bank.

He said, “AFDB’s annual borrowing programme is now running close to USD 10 billion a year, and the Bank is part of a very select group of highly rated supranational issuers that enjoys permanent access of multiple international and domestic markets, and that is able to successfully execute well performing, liquid, multi-billion dollar benchmark transactions in the U.S. Dollar global market.”

The Bank is replicating the same strategy in local currency and its ambition is to achieve the same level of success in African capital markets. Accessing local currency financing, and then making it available to clients on cost-effective terms remains a crucial endeavor for AfDB and the Bank has been actively promoting local currency activities for more than 20-years.

Its first foray into this area happened in 1997, when the Bank obtained, as per its charter requirements, the consent of South Africa to start funding itself in South African Rand, thus addressing the requests of borrowers in the region that had been seeking financing in that currency.

In order to scale up activities in this field, later in 2006, the AfDB’s Board of Directors approved a policy framework for lending in the currency of its RMCs. This policy framework requires that the Bank approve African currencies as lending currencies whenever there is sufficient demand for local currency loans, and where it can fund itself cost-effectively.

The policy is set within the AfDB’s Local Currency Initiative, an initiative that is designed to to assist the Bank’s clients in mitigating foreign exchange risk from projects financed by AfDB, and to facilitate the development of Local Currency Bond Markets (LCBMs) through the issuance of local currency bonds.

The policy framework advocates a range of tools and mechanisms, including local currency bond issues, derivative transactions, and, eventually, borrowings (in loan format) directly in select African markets, for raising cost-effective local currency resources for its clients.

The Bank is also playing an active and crucial role in the development of LCBMs in Africa, creating a suitable conduit for clients to raise their future local currency needs in a cost-effective and risk-conscious manner.

“Under many circumstances, the efficient mobilisation of capital for development projects is underpinned by the existence of a robust Capital Market. In recent years, significant developments have taken place in African financial markets and there has been clear effort to nurture strategic partnerships to deepen these markets and also broaden the participation and reach of DFIs. In the process, the diversity of debt instruments has significantly increased, especially with an inclination towards green finance as well as entrepreneur-focused financing,” said Thapelo Tsheole Chief Executive Officer, Botswana Stock Exchange Chairman, ASEA Market Development Working Group.

He said, “The African Development Bank (AfDB) has been a key stakeholder in the development of Capital Markets; in particular the debt market and has partnered with a number of African States with regards to the issuance of AfDB bond issuance in local currencies. There is still scope for increased growth and African Exchanges are in a position to promote this agenda with support from Governments and the AfDB.”

The growth of Africa’s real Gross Domestic Product (GDP) averaged 4.4% over the past ten years, significantly higher in comparison to the world average economic growth rate of 3.5%.

However, Africa is still faced with numerous developmental challenges, the major one being the infrastructure deficit which is estimated at USD 93 billion per year.

History has indicated that Governments alone – particularly in Africa - may not have adequate capacity to deliver infrastructure projects and pioneer economic growth. Consequently, the debate around private sector led growth has gained momentum in recent years. In addition, Development Finance Institutions (DFIs) are considered an essential enabler in developing economies given their strategic position between the private and the public sector.

This is significant because the Bank faces some challenges when issuing local currency bonds in African capital markets. The back-to-back nature of local currency loans, although ideal for mitigating asset and liability mismatch risk, poses the following challenges: (a) Both the projects and the issuances have to go through substantial structuring to ensure that the profiles mirror each other.

While this process can be accommodated for straightforward lines to financial institutions, it is challenging to structure cash flows of a project finance operation to allow back-to-back financing from a bond issuance.

Moreover, the most sophisticated markets may allow for a fairly easy introduction of a structured bond, however in less sophisticated markets, it may pose a challenge to achieve favorable pricing i.e. sub-government; (b) Matching the timing between the borrowers’ needs for funds and the best time for the Bank to issue in local capital markets is a complex endeavor, potentially causing the risk of cost of carry. Cost of carry of resources raised in local capital markets can be quite significant.

The Bank would have to warehouse significant amounts of liquidity in local currency for smaller projects  while waiting for each project to be ready for disbursement.

Other challenges faced include need for better communication, amounts that can be raised locally, exorbitant interest rates locally and lack of convertibility.

African markets are therefore being encouraged to put measures in place that help minimize cost-of carry for highly rated issuers, improve information disclosure, undertake strategic initiatives to enhance secondary market activity and liquidity as well as creating a diverse local and international institutional investor base, and encouraging the participation of retail investors.

Currency Converter




BQA Introduces Online Submission

Mascom Live Sessions

GUC Programmes


Opinion Poll

Who do you think is the next Bots President..?!

UDC - Duma Boko
BCP - Dumelang Saleshando
BDP - Seretse Khama Ian Khama
Add a new response!
» Go to poll »
5 Votes left


Receive HTML?

Joomla : The Tswana Times - T