Transcript High Level Seminar No.4 Financial Crisis and Access to Finance

High Level Seminar: Panel 4
The Financial Crisis and Access to Financing
African Development Bank
Annual Meetings 2009
Stuart Culverhouse
Chief Economist
12 May 2009
[email protected]
Contents
 Impact of crisis on Sub-Sahara Africa
 Policy responses
 Funding strategies
 International markets
 Domestic markets
 Innovative solutions
02
Conclusions
Key messages:
 Markets closed for the time being for most sub-Investment Grade
issuers, which precludes most Sub Saharan countries (but may be
not all) from international sovereign bond issues
 Appetite will return, investors cash rich, underinvested in EM
 Borrowers will need to be ready when conditions allow
-
perceived credit risk will depend on how policymakers respond to the
crisis and facilitate inward investment
in the meantime, financing options exist for both the public and
private sector
 On the bright side, Africa is showing more resilience than in the
past, thanks to reforms, has better developed domestic markets to
fall back on and funding needs are lower than other regions
03
Synchronised global recession
World and Regional Growth
Real GDP growth (% y/y)
15
10
5
0
-5
World
SSA
CEE
CIS
Developing Asia
Western Hemisphere
-10
-15
Source: IMF WEO April 2009 Database. Shaded areas indicate (approx.) periods of global recession.
04
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
-20
Transmission mechanism of credit crunch to Africa
Main channels:
 Trade





Export demand
Export prices
 Oil and other commodity prices
Remittances
Donor flows
Capital account



Has been crucial in previous EM crisis episodes
Impact on FDI
Impact on portfolio flows
 Key impacts on current account and fiscal balances as well as economic
growth
05
Impact on Africa
Downward revisions to Sub Saharan Africa GDP growth:
Macro impact of global recession on SSA
April 2008
October 2008
January 2009
April 2009
Real GDP growth (%)
2008
2009
2010
6.6
6.7
6.1
6.3
5.4
3.5
5.0
5.5
1.7
3.8
Source: IMF World Economic Outlooks
06
Fiscal impact
Fiscal balances
15
% of GDP
10
SSA
Oil exporters
MIC (ex. SA)
LIC
5
0
-5
-10
2006
2007
2008
Source: IMF Regional Economic Outlook, April 2009. *Including grants
07
2009f
2010f
Current account impact
Current account balances
15
% of GDP
SSA
Oil exporters
10
MIC (ex. SA)
LIC
5
0
-5
-10
2006
2007
2008
Source: IMF Regional Economic Outlook, April 2009. *Including grants
08
2009f
2010f
nJa 08
nJa 08
nFe 08
bFe 08
bM 08
ar
M 08
ar
Ap 08
r-0
Ap 8
r
M - 08
ay
M -08
ay
Ju 0 8
nJu 08
n0
Ju 8
l-0
Ju 8
l-0
Ju 8
lAu 08
gAu 08
gSe 08
pSe 08
pO 08
ct
O 08
ct
N 08
ov
N 08
ov
D 08
ec
D 08
ec
D 08
ec
Ja 08
nJa 09
nFe 09
bFe 09
bM 09
ar
M 09
ar
Ap 09
rAp 09
r-0
9
Ja
Impact on financial markets (1) - currencies
Indexed (2 Jan 2008 = 100)
Selected African Currency Movements
160
150
140
130
120
110
KES
UGX
MUR
ZMK
GHS
NGN
AOA
MWK
100
90
80
Source: Bloomberg
09
Source: Bloomberg
010
Apr-09
Apr-09
Mar-09
Mar-09
Feb-09
Feb-09
Jan-09
Jan-09
Dec-08
Dec-08
Dec-08
Nov-08
Nov-08
Oct-08
Oct-08
Sep-08
Sep-08
Aug-08
Aug-08
Jul-08
Jul-08
Jul-08
Jun-08
JPM EMBIG (basis points)
1000
Jun-08
May-08
May-08
Apr-08
Apr-08
Mar-08
Mar-08
Feb-08
Feb-08
Jan-08
Jan-08
Jan-08
Impact on financial markets (2) – EM sovereign spreads
Emerging Market Bond Spreads
900
800
700
600
500
400
300
200
100
0
Impact on financial markets (3) – African eurobonds
Sovereign eurobonds in SSA (ex SA)
120
Mid-price
110
100
Gabon yield = 11.1%
90
80
70
60
50
Ghana yield = 13.6%
40
Ghana 8.5% 2017
30
Gabon 8.2% 2017
20
REPCON 2.5% 2029
REPCON yield = 20%
10
8
b0
M 8
ar
M 08
ar
-0
Ap 8
r-0
Ap 8
rM 08
ay
M 08
ay
-0
Ju 8
n0
Ju 8
n0
Ju 8
l-0
Ju 8
l-0
Ju 8
lAu 08
gAu 08
gSe 08
pSe 08
p0
O 8
ct
-0
O 8
ct
N 08
ov
N 08
ov
D 08
ec
D 08
ec
D 08
ec
-0
Ja 8
n0
Ja 9
nFe 09
bF e 09
bM 09
ar
M 09
ar
-0
Ap 9
r-0
Ap 9
r-0
9
8
Fe
Fe
b0
8
n0
Ja
n0
Ja
Ja
n0
8
0
Source: Exotix/Bloomberg
011
Impact on capital flows
Capital inflows to Sub Saharan Africa
012
Policy responses
1) Monetary policy
•
•
Lower policy interest rates in Nigeria, Botswana, Kenya, Mauritius
•
Despite still generally high inflation
But in some countries, market rates have risen (Uganda, Zambia)
2) Currency adjustments
•
•
Pegged/fixed rates have been devalued: Nigeria, Angola
Elsewhere, floating rates have been the shock absorber
3) Fiscal policy
•
•
•
Room for fiscal expansion/counter cyclical fiscal policy?
e.g. Gabon, Tanzania, Mozambique (IMF Regional Economic Outlook, April 2009)
Scope for financing larger deficits?
4) IMF to the rescue
•
•
•
•
ESF: Malawi, Senegal, Tanzania (SLA)
SBA: Gabon (was already in place), Seychelles
PRGF: Zambia (already in place, but recently augmented)
Possible support for Kenya, Ghana
013
Local interest rates
Local rates
Treasury Bill rates
Kenya
Nigeria
Mauritius
Uganda
Zambia
Ghana
Latest 91 day Change since dec 08
(%)
(basis points)
7.4
-110
3.6
-157
4.6
-406
11.6
na
13.8
-10
25.7
100
Bond Yields
Latest Auction date
Tenor Change since dec 08
(%)
(basis points)
12.0
Sep-08 10 year
na
11.9
Apr-09 5 year
140
7.7
Apr-09 4 year
-250
13.5
Feb 09* 5 year
na
19.5
Feb-09 5 year
160
21.0
May-09 2 year
0
Source: national central banks
014
Funding strategies

Are markets so dislocated that nothing will help give access to finance at the moment?
Bad news:

International bond market closed to all but highly rated EM names for new issues

May take some time for appetite to return for SSA (ex SA) issues

But risk appetite will return, first for new sovereigns issues

already seen market rally but still too expensive to issue in primary market under current
conditions

secondary market yield on single B-rated sovereigns is about 12-13%

When appetite returns, conditions will not be so favourable to the borrower as before
Good news:

African governments should benefit from improvements in domestic debt markets made in recent
years to raise finance locally in domestic currency. They now have something to fall back on.

However, still some questions about domestic debt markets:

Issuance capacity

Crowding out

Foreign investors no longer present

Which is why fiscal discipline will be needed to bring financing needs down to available sources.
015
Loss of market access




How significant is loss of access anyway? Who wanted to borrow?
A few sovereigns had aspirations but not clear that many, if any, corporates in SSA where
coming to the debt market and refinancing needs are low.

Among the pool of SSA names, both middle and low income countries, only
“frontier emerging markets” would have had access anyway, so loss of access is
not going to affect many countries. But those without access will be even more
aid-dependent.

Among frontiers with aspirations of coming to the market, crisis has delayed plans,
probably for several months but this appetite should return
Also, many SSA corporates raised equity cheaply rather than debt, providing some
insulation from the deterioration in debt markets.
International banks have also reduced loans to Africa and Middle East according to BIS
reporting data for 2008Q4

Down US$20 billion (exchange rate adjusted basis) although for SSA (ex SA),
decline in lending was only US$7 billion. For Nigeria, decline was US$4 billion.
016
Pre-crisis issuance plans
Were not expected to return soon to market after 2007 issues


Ghana
Gabon
Had plans for bond issues, at various stages (problem for 2010?)




Uganda
Zambia – needs a rating first
Tanzania – needs a rating first
Angola?
Had no plans for issuance


Nigeria – no need, but plan for naira issue announced in Sept. 08
Mauritius?
Who was hit hardest then?


Kenya – bond issue was key plank of 2008-09 financing strategy
Seychelles – crisis brought on default, but was already vulnerable
017
New issues (1): what does the market look like?
EM eurobond issuance (sovereign and corporate) has revived in
2009 after being dead in 2008Q4




Perhaps opportunistic to take advantage of more favourable
conditions. Get financing done early.
Needs must - refinancing
But market only open to highly rated credits
 Sovereigns but also some sub-Investment Grade corporates
have come to market
Yields higher than pre-Lehman collapse
But also the case that new issues have more favourable terms to
the lender, including PRI, offshore DSA, poison puts, calls, change
of ownership clauses for corporates. So borrowers cannot secure
the generous terms seen in the 2005-08 bull market.
018
New issues (2): volumes and ratings
Distribution of new EM sovereign eurobond issues in 2009 Q1
6
Number of issues
Total issuance $18.3bn
Value: $4.8bn
5
Value: $5.8bn
4
3
2
Value: $4.8bn
Value: $2.8bn
AA
A
1
0
Source: Bloomberg. Excludes Lebanon (B-) swap
BBB
Rating bucket
019
BB
External Financing Requirements




Modest financing needs in SAA compared to other regions, but problem is
everyone is competing for funds. Other borrowers (governments/quasi
governments and corporates) in EM and developed world crowding out
African borrowers or investors/banks cutting back lending/investments
Current account balances in SSA likely to worsen this year. Deficit for
region projected at US$67bn. Nearly 8% of GDP, up from 2% in 2008.
But overall gross external financing needs in the region should remain
relatively modest because amortisation – given extent of concessional debt
– is low. Amortisation “only” US$12bn. So gross financing needs are some
US$80bn.
Compare this to Eastern Europe and CIS with current account deficits and
large amortisation falling due, producing massive financing needs. Stems
mainly from rapid increase in private external borrowing.
020
EM financing requirements
Em erging Markets
Sub Saharan Africa
$ bn
$ bn
800
100
700
80
600
60
500
40
400
20
300
0
200
100
2009
2010
-40
0
-100
2008
-20
2008
2009
2010
-200
-60
-80
Current account
Amort isat ion
GEFR
Current account
CEE and CIS
Amort isat ion
GEFR
Western Hem isphere
$ bn
$ bn
400
250
350
200
300
150
250
200
100
150
50
100
50
0
2008
0
-50
2008
2009
2010
-100
2009
2010
-50
-100
Current account
Amort isat ion
GEFR
Current account
Source: IMF WEO database
021
Amort isat ion
GEFR
Developing domestic debt markets (1)
Factors important to international investors
 Transparency/communication



Primary dealer network



Gives different incentives and encourages a market
Length of yield curve


Larger issuance sizes, less regularly
Local institutional investor base


Separates good from bad markets
Responsibilities go with privileges
Benchmarks


Auction results and history, auction calendar
Post information on websites
Care not to lengthen too soon, need domestic savers
Other issues: such as tax, currency convertibility, custody



Disincentive if need certification for every transaction
One year restrictions are significant opportunity cost
Encourage local institutions to compete with foreign banks
022
Developing domestic debt markets (2)
Role of international investors
 Played a prominent role in 2006-2007



Accounted for 11% of Ghana market (3% of GDP), 20% in Nigeria, 17% in
Malawi and 14% in Zambia
Allowed borrowers to lengthen maturities and lower rates
But international investors are fickle
Supranational local-currency linked issues, such as AFDB
 Funding operation for MDBs with externality of developing local market
 Some investors cannot take local custody or sub investment grade
 So take currency risk via AAA credit instrument, with easier settlement
 Brings new investors, e.g. if no previous issues or if capital controls
 But can crowd out (substitute) foreign investment in some local markets
 Is it more suitable to those markets that are less developed?
023
Innovative financing solutions






terms – borrowers need to be prepared to give more away
syndicated loans
private placements – perhaps first to return to select Africa-focused foreign investors
collateralised loans
granting guarantees – role for AFDB?
financing backed by offshore payments


targeted/specific bond issues



diverse offshore payment flows, such as remittances, FDI and export-related revenues,
can be monetised. This type of structure can offer significant investor protection and
represents an innovative way for the larger African banks to raise funding even in the
current environment.
Infrastructure bonds. Tend to be long dated. Are they only really viable to those with
more mature domestic markets? (e.g. Kenya)
Diaspora bonds. Tap dedicated investor base who may look more favourably at buying
African debt at affordable rates to the issuer (e.g. Sri Lanka Development Bonds)
state contingent claims for sovereigns and corporates (e.g. GDP or commodity
price-linked warrants)


Data issues and trust
Exotix’s experience in Yemen with Jabal Salab in a US$120 million project financing deal
to develop zinc deposits financed through a high yield bond and “kicker” linked to zinc
prices
024
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