Over the past several years, a number of African low- and lower-middle income countries have put development of local currency bond markets on their national policy agendas. Several common motives have been driving this, including a desire to avoid the currency mismatch that can be associated with domestic debt that is denominated in foreign currencies—which has been known to trigger and worsen the severity of financial crises. Another aim is to develop local capital markets so as to improve the flexibility and effectiveness with which financing is raised for local infrastructure and other projects of a medium- to long-term nature that could improve socioeconomic development.
Several African governments have been issuing debt securities at longer tenors over the past decade so as to lengthen the maturity profile of government securities issues to establish a benchmark yield curve for corporate bond issues. The idea here is to encourage companies and other entities in infrastructure sectors to issue bonds as a way of financing infrastructure development. While corporate bond markets, where they exist in these African countries, still tend to be underdeveloped and very small, new issuers---including in infrastructure sectors---have recently begun coming to market in some of these countries.
Some impetus to corporate bond issues in these markets has come from higher bank lending rates since the onset of the acute phase of the global financial crisis in the fourth quarter of 2008. This has been the case in Kenya, for example, where bond market activity has been picking up over the past year. The government has also been pursuing policy initiatives to boost both local issuance and investment, including an exemption of bond investors from withholding tax on interest. Electricity utility KenGen and mobile phone company Safaricom are among the companies in Kenya that have recently tapped the local fixed income market. So far, there has been strong investor interest in these recent issues, which have tended to be oversubscribed.
On the neighboring Uganda Securities Exchange, too, there have been a few corporate bond issues listed in the past several months---although in each case so far by banks and financial institutions. Most recently, in October, the Eastern and Southern African Trade and Development Bank issued a 7-year, SHS 40 bn (US$21 mn) bond on the USE---its second such issue, following a 5-year bond in 2004. Uganda’s National Water and Sewage utility were among those planning bond issues in future.
In Nigeria, the new central bank governor, Lamido Sanusi, has publicly stated that he intends to give renewed priority to developing a corporate bond market, to encourage companies there to shift their funding sources away from bank loans, particularly in raising medium- to long-term finance. It’s also hoped this could encourage Nigeria’s recently restructured banking sector to lend more so to SMEs---which continue to face difficulties in accessing bank credit. The Nigerian SEC is also looking at how to remove bottlenecks to developing a better functioning corporate bond market and provide tax and other incentives to issuers and investors, to reverse a 3-year hiatus in new issues. So far, though, the few corporate bond issues that have been announced--following in the wake of the government’s 20-year bond issue in 2008 intended as a benchmark---are by banks. There has been a flurry of bond issues by Nigerian state governments on local capital markets in the past year, though, that state authorities have said are intended to raise financing for infrastructure projects including urban water supply and water waste management.
Although there is a lack of comprehensive data on investment in these markets, it’s clear that much of the recent interest has come from overseas. Strong foreign investor interest in recent bond issues in Kenya, for example, helped raise the Kenyan shilling to record high levels for the year in September. An important step toward further developing these markets, however, is to encourage greater participation of local institutional investors (pension funds and insurance companies). Further development and more appropriate regulation of local institutional investors would help them realize their potential as financing sources for infrastructure---for which they’re better suited than banks because their liabilities would better match the longer terms of these projects. And local currency bond markets can also be subject to sudden reversals in foreign investment---pointing to the need for these markets to strike a balance in accessing local and foreign financing sources.