An Asian lesson on bond markets

The East Asian miracle offers useful pointers for Africa on the development of domestic bond markets, if not on all aspects of economic transformation. This was one conclusion from a panel discussion on “Deepening Africa’s bond markets” we attended at the annual meetings of the African Development Bank (AfDB) in Abidjan.

The panel was composed of a senior economist from the Asian Development Bank (ADB), an authority on bond indices at Bloomberg, the former head of the Securities and Exchange Commission in Nigeria, the head of capital markets and asset management at a pan-African bank, the head of a private equity firm based in Tanzania and a leading figure in the private sector department at the AfDB.

The Asian financial crisis in 1997 and 1998 brought the collapse of several banks which had borrowed short term in fx and lent long term in local currency.

In response eleven central banks provide $2bn in seed capital for new bond funds. This acted as a trigger, and local currency issuance in Asia soared from $1trn equivalent in 2000 to $8trn in 2014. An AfDB initiative is to launch an Africa bond fund for passive and active investors.

Bloomberg and the AfDB have launched a USD denominated African bond index covering South Africa, Nigeria, Egypt and Kenya. Namibia and Botswana are shortly to be added, with four unnamed countries to follow.

The growth of privately-held savings across Africa and the emergence of the middle class should together amount to healthy non-institutional demand for bonds. Marketing can sometimes make the difference, as we learnt from an example in Egypt.

In September 2014 the sale of bonds for the expansion of the Suez Canal raised the equivalent of $8.5bn. It took off when the postal service was appointed a selling agent and instantly tapped retail demand.

The pan-African bank has ten million customers across Africa. It has launched six mutual funds to tap retail savings and plan four more by end-2015. Small countries need not be excluded. The Lao government has raised funds on the Bangkok market, which has a capitalization of $300bn. Finally the AfDB is encouraging the development of local ratings agencies such as Bloomfield Investment in Côte d’Ivoire.