Pacing Domestic Debt Market Development in Low Income Countries

Transcription

1 Pacing Domestic Debt Market Development in Low Income Countries Presentation by Collins Magalasi Executive Director, African Forum and Network on Debt and Development In Accra, Ghana, June 25, 2012

2 Outline Introduction and context Domestic Debt Markets in Sub-Saharan Africa Pacing domestic debt market development in Low Income Countries Conclusion

3 Introduction and Context Why borrow from domestic market; and Mechanisms Why most LICs leave the attractive borrowing Holding of domestic debts in SSA

4 Domestic Debt in Sub-Saharan Africa A history of highly controlled financial systems Reforms aimed at liberalizing the financial sector for effective financial intermediation. More liberal debt markets, with flexible and market determined interest rates (subject to the level of inflation, amount of outstanding debt, and the risk of default). Governments to no longer force state controlled enterprises to hold government debt despite minimal returns.

5 Challenges with SSA Domestic Debt Markets Shallow financial markets: Stock markets that are either absent or highly illiquid. Narrow Investor base Weak (or disrespect of) legal and institutional frameworks.

6 Weak (or disrespect of) legal and institutional frameworks. Where interest rates are flexible government domestic borrowing is followed by increase in domestic interest rates. Where interest rates are controlled government domestic borrowing leads to credit rationing and crowding out of private investment. Country has capital account restrictions banks are captured they cannot avoid higher domestic interest rates through foreign financing. Where there are no (significant) nonbank investors e.g. pension funds and retirement funds Most private companies rely on bank financing. Maturity structure: Many LICs deal on short-term debt (with all its risks).

7 Longer term debt is challenging in LICs because markets: Are not willing to hold long-term paper for fear of significant inflation and default risks. Are not able to demand long-term debt especially in the absence of institutional investors. And governments become sensitive to increases in financing costs as a result of a rising yield curve of longer-term debts. However, LICs need longer-term debt instruments.

8 Pacing domestic debt market development in Low Income Countries No one-size-fits-all Do not swallow before you chew But at a minimum, have: Stable and credible government Macroeconomic and financial stability A robust debt strategy, linked country s macroeconomic goals (as opposed to the issuance of instruments in response to macro-failures or economic shock) role of planning ministries / departments.

9 Then move to longer-rate instruments (up the yield curve up) and ensure there is healthy interaction between investors, repo market, swaps and futures market etc. Expand the investor base beyond the commercial bank funds Effective legislation which governs processes and defines relationships. Sound and diverse institutional framework which exists as part of the pacing of the development of domestic capital markets

10 Proper market structures must exist in order to develop domestic capital markets. autonomous central banks play a crucial role in facilitating monetary policy operations (as incubator for such markets) by Strengthened market short-end; workability and confidence in Treasury Bills, secondary bill market, build up money market liquidity and getting the active participation of banks Systematising predictability and transparency of the market with clear auction procedures and flexible exchange rates developing intermediaries market infrastructure and secondary market.

11 Conclusion Debt crisis of developing world, into the debt crisis of the developed world, fostered by global financial and economic crisis Need for a large and liquid debt market A well functioning domestic debt market as an alternative investment opportunity for domestic savers, thus helps to reduce capital flight. LICs must prioritise development of domestic debt market, however not with a complacent attitude. Choice of domestic debt market involves trade-offs that LICs must take. (Beware risk of trading the currency mismatch for a maturity mismatch) LIC governments to make efficient the existing short-term debt and aim to be issuing long-term domestic debt with an insurance component imbedded. Politicians should not be short-sighted and shy away from this with their continued it is expensive chants since longer-term domestic debt is safer from both maturity and currency mismatches. This will attract entry of both domestic and foreign investors in the domestic debt market.

12 Thank you