2010 SOVEREIGN DEBT MANAGEMENT FORUM October 25-27, 2010 - - PowerPoint PPT Presentation

2010 SOVEREIGN DEBT MANAGEMENT FORUM

October 25-27, 2010

Presentation on ‘Market Development in Lower Income Countries (LICs): Market Development in Lower Income Countries (LICs): Relevance for Financial Sector Development and Structural Constraints’ Kenya Case Study

BY

• Mr. John K. Murugu

Director, Debt Management Department, Ministry of Finance, Kenya

PRESENTATION OUTLINE

1. Highlights of Economic and Financial Indicators

PRESENTATION OUTLINE

2. Domestic Debt Market 3. Evolution of the Domestic Debt Market 4. Trends in the Government Securities Market 5. Developments in the Corporate Bonds Market 6. Key Reforms and Strategies 7. Outcomes 8 Way Forward 8. Way Forward

1.Highlights of Economic Indicators

T bl 1 E i I di Table 1: Economic Indicators

2002 2004 2007 2008 2009 2010 GDP at current prices 13 1 16 1 27 0 28 6 29 7 30 8 GDP at current prices (US$bn) 13.1 16.1 27.0 28.6 29.7 30.8 GDP per capita (US$) 406.8 470.4 725.8 746.7 769.4 789.7 Real GDP growth (%) 0.5 5.1 7.0 1.6 2.6 4.4 Population (million) 32.2 34.2 37.2 38.3 38.6 39.0 Inflation (Average Annual) 2.0 11.6 9.8 18.5 12.7 5.5 Budget Deficit (% of GDP) (3.1) (0.1) (1.8) (3.9) (3.7) (6.5) Budget Deficit (% of GDP) (3.1) (0.1) (1.8) (3.9) (3.7) (6.5) Current Account (%

• f

GDP) (0.9) (0.8) (5.8) (6.2) (6.3) (5.6) Public Debt (% of GDP)

• f which: Domestic

59.8 23 0 61.9 25 3 43.6 21 9 42.8 20 7 45.8 22 5 45.7 22 2

• f which: Domestic

External 23.0 36.8 25.3 36.6 21.9 21.7 20.7 21.1 22.5 23.3 22.2 23.5

Highlights of Economic Indicators – Cont’d

h l h

7 8

)

Chart 1: Real GDP Growth

3 4 5 6

growth (%)

1 2 3

GDP g Year Year

Hi hli ht f E i I di t C t’d Highlights of Economic Indicators – Cont’d

• Kenya experienced severe Economic and Political problems in

1980s and 1990s and there was practically no growth 1980s and 1990s and there was practically no growth.

• In 2002, a new government embarked on reforms under an

“Economic Recovery Strategy (ERS) for the period 2003-07”. This made the Economy register sustained upward trend in GDP made the Economy register sustained upward trend in GDP growth from 0.5% in 2002 to 5.1% in 2005 and 7.0% in 2007.

• After expiry of ERS, the Government

put in place a new development Blue print – Vision 2030 aimed at transforming the development Blue print Vision 2030 aimed at transforming the country to a middle income country by 2030. The Vision 2030 has 3 pillars namely:

• Economic -To achieve and sustain growth 10% in medium term

Economic To achieve and sustain growth 10% in medium term

• Social
• To achieve equitable social development
• Political -Aimed for an issue based and accountable democratic

political system. political system.

Highlights of Economic Indicators – Cont’d

• Controversy over Elections at end of 2007 resulted in serious Post
• Controversy over Elections at end of 2007 resulted in serious Post

Election Violence (PEV). When combined with the impact of global financial crisis, it led to a sharp drop of GDP growth to only 1 6% in 2008 This improved to 2 6% in 2009 and growth of 4 5% is 1.6% in 2008. This improved to 2.6% in 2009 and growth of 4.5% is projected for 2010

• The Coalition Government that was formed after the PEV gave

priority to putting in place a new constitution to address the priority to putting in place a new constitution to address the identified causes of the problems. This was achieved in August 2010.

• While implementation of the Vision 2030 suffered some setback

While implementation of the Vision 2030 suffered some setback due to the PEV, the programs in the Medium Term Plan are on course and there is optimism that the Vision will be realized.

Highlights of Financial Indicators

Table 2: Financial Indicators Table 2: Financial Indicators

Type of Institution No Assets (Ksh Billion) 1 Commercial banks 44 1,353 2 Forex Bureaus 126

N/A

3 Insurance Companies 43 128 4 Pension Companies 1,200 300 5 Savings and Credit Cooperative Societies 5,000 165 6 National Social Security Fund 15 82 7

Investment banks, Fund managers,Stock brokers, I Ad i ll ti I h

71 29

• Inv. Advisers, collective Inv schemes

8 Kenya Post Office Savings Bank 1 17 1US$ @ K h 80 1US$ @ Ksh 80

Highlights of Financial Indicators – Cont’d

• The Banking sector is regulated by the Central Bank of Kenya. The

g g y y regulatory framework is geared towards universal banking allowing competition and innovation among commercial banks, mortgage companies, non-bank financial institutions micro credit institutions and forex bureaus

• The development finance institutions in agricultural, industrial and

commercial sectors are being restructured to make them focused and eliminate reliance on Government funding.

• The capital markets are regulated by the Capital Markets Authority

(CMA). Governance challenges have faced the sector leading to loss

• f confidence in the equity market. CMA has strengthened the legal

framework and regulations and confidence is coming back to the market.

Highlights of Financial Indicators – Cont’d

• The Nairobi Stock Exchange (NSE) is undergoing demutualisation

g ( ) g g as part on the reforms.

• The pensions sector has experienced considerable growth and is

regulated by the Retirements Benefits Authority (RBA). g y y ( )

• The Cooperative Savings and credit societies are also a key player

in mobilization

• f

savings. The Sacco Societies Regulatory Authority (SASRA) has been recently established as the regulator. y ( ) y g

• The National Payment System which is under the Central Bank of

Kenya has made major strides in modernizing payment processes to the electronic age. This has greatly enhanced efficiency in the g g y y

• peration of the equity and debt markets.

Highlights of Financial Indicators – Cont’d

• The reforms in the financial sector with the objective of removing

The reforms in the financial sector with the objective of removing structural impediments have progressed relatively well through donor programs.

• The most targeted program for the sector is the Financial and Legal

The most targeted program for the sector is the Financial and Legal Sector Technical Assistance Program (FLSTAP) which has been running since 2005.

• The performance of the domestic debt market has been significantly

The performance of the domestic debt market has been significantly impacted upon by the reforms in the financial sector.

• The promotion of the domestic market has been assisted greatly by

collaboration with various international organizations, such as, collaboration with various international organizations, such as, Efficient Securities Markets Institutional Development (ESMID) and Organization for Economic Co-operation and Development (OECD). ( )

2 D ti D bt M k t

• 2. Domestic Debt Market

Table 4: The nature and Instruments in the domestic debt market

T f I B l J 2010 Type of Instrument Balance as at June 2010 (Ksh Mn) 1 Government Stocks 753 2 Treasury Bills

• f which: 91 day

182 day 364 day 158,494 23,663 85,337 49,494 364 day 49,494 3 Treasury Bonds

• f which: Special

Infrastructure 448,615 17,781 54,532 f Ordinary 376,302 4 Corporate Bonds 46,892 1US$ @Ksh 80

Domestic Debt Market – Cont’d Domestic Debt Market – Cont d

• Treasury bills: 91 days, 182 days and 364-days regularly issued.
• Bonds types being issued include :–

– Fixed coupon. No floating rate or zero coupon bonds offered – Infrastructure Bonds – Special/securitized bonds. Special/securitized bonds.

• Treasury bonds range from 2-yrs to 25-yrs.

– The 25-yr first issued in June 2010 and reopened in July 2010. 29% f ll b d t ft 10 – 29% of all bonds mature after 10 yrs – 23% mature in less than 2 yrs

• Average life of securities from 2001 to September 2010:

– For all securities, average life rose from 8 months to 5.05 yrs – For Bonds only, average life rose from 1.42yrs to 6.63 yrs

Domestic Debt Market – Cont’d

• Bonds and bills issued through auction-based

g

• pen

tender system to encourage price- discovery which is critical for secondary trading.

• The

Government instruments dominate the k 93% i h h b d ki market at 93% with the corporate bonds taking 7%.

3 E l ti f th D ti D bt M k t 3.Evolution of the Domestic Debt Market

• Prior to 1990 : No significant treasury bills/bonds market. Only

stocks issued in 1960’s and 1970’s stocks issued in 1960 s and 1970 s

• 1991-93, During the first multi party elections, serious irregularities
• ccurred in the banking sector leading to massive injection of

liquidity into the economy and annual inflation rate rose to over liquidity into the economy and annual inflation rate rose to over 46%pa. To mop up the liquidity, Treasury bills with rates as high as 70% were issued There was no bond market.

• 1995-97 : Two important reforms were effected:

1995-97 : Two important reforms were effected:

• Parliament enacted a law limiting Government borrowing from

Central Bank to 5% of latest Audited Ordinary Revenues; C l D i S (CDS) B k E i f ll

• Central Depository System (CDS) - a Book Entry register for all

government securities was introduced thus facilitating some secondary trading.

Evolution of the Domestic Debt Market – Evolution of the Domestic Debt Market Cont’d

• May 2001: Treasury and Central Bank launched a stakeholders’
• May 2001: Treasury and Central Bank launched a stakeholders –

Market Leaders Forum, to aid in developing domestic bond market

• The status of the market then was as follows:

– ratio of Treasury bonds to bills was 27:73; – ratio of Treasury bonds to bills was 27:73; – average maturity life was 8 months; – no secondary trading; – only floating rate bonds were issued; – only floating rate bonds were issued; – no yield curve; – no auction-based bond issuance method; insignificant corporate bonds market; – insignificant corporate bonds market; – commercial banks’ investment horizons was upto 1 year.

• 2003 - Pension sector liberalized, RBA Act in place, creating demand for

long term bonds. Insurance sector reforms further deepened long term bond long term bonds. Insurance sector reforms further deepened long term bond market.

4 Trends in the Government Securities Market

• 4. Trends in the Government Securities Market

Table 5: Outstanding Government Securities By Type (Ksh Mn)

Y E d Type of the Security Bonds as a Sh f T Year End June TOTAL Share of Total(%) Kenya Stock Treasury Bills Treasury Bonds

2000 3,006 134,131 36,851 173,988 21.2 2001 1,468 116,440 44,499 162,407 27.4 2002 1,468 87,050 106,331 194,849 54.6 2003 1,058 78,744 161,547 241,349 66.9 2004 1,058 62,936 188,624 252,618 74.7 2005 1 058 71 938 193 356 266 352 72 6 2005 1,058 71,938 193,356 266,352 72.6 2006 1,058 94,577 218,355 313,990 69.5 2007 755 94,439 272,200 367,394 74.1 2008 755 76,293 315,190 392,238 80 4 2008 755 76,293 315,190 392,238 80.4 2009 755 119,039 360,744 480,538 75.1 2010 753 158,495 448,615 607,863 73.8

Trends in the Government Securities Market – Cont’d

T d i h G S i i Trends in the Government Securities Market – Cont’d

b ll d b l d d f

• Treasury bills outstanding balance dropped from

Ksh116 bn in 2001 to Ksh76bn in 2008 before rising to Ksh 158bn in J une 2010. g J

• Treasury bonds rose steadily from Ksh 44bn in

2001 to Ksh 448bn in 2010

• The ratio of T/ bills to T/ bonds reversed from 73:
• The ratio of T/ bills to T/ bonds reversed from 73:

27 in 2001 to 74:26 in J une 2010

Trends in the Government Securities Market – Cont’d

Table 6: Treasury Bonds Secondary Market Trading for 2001-2010 (Ksh.m)

MONTH 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 JANUARY 149 3,482 3,799 4,576 1,015 854 1,654 4,871 5,648 27,282 FEBRUARY 15 1,916 3,182 4,992 636 5,332 4,450 3,178 6,862 41,059 MARCH 181 2,108 2,831 3,624 133 3,199 5,733 14,291 8,450 49,049 APRIL 1 241 2 691 2 725 2 141 1 005 6 359 8 511 3 073 4 533 22 377 APRIL 1,241 2,691 2,725 2,141 1,005 6,359 8,511 3,073 4,533 22,377 MAY 216 1,562 2,147 3,177 788 4,785 9,899 3,037 10,477 36,733 JUNE 139 3,013 2,769 5,338 1,295 9,195 10,321 2,447 11,099 93,377 JULY 1,104 3,970 2,421 2,398 1,462 10,113 10,138 1,894 7,543 62,232 AUGUST 4,478 3,340 5,324 843 1,785 5,288 9,779 8,417 6,139 22,866 SEPTEMBER 1,979 3,972 3,550 1,443 1,284 2,861 9,499 10,989 10,673 30,651 OCTOBER 1,708 2,548 6,537 2,254 1,524 1,619 4,217 4,321 11,713 NOVEMBER 2,165 3,727 3,026 2,119 1,232 2,796 3,464 3,119 9,435 DECEMBER 701 1,302 2,818 1,208 1,476 1,759 6,472 3,577 15,280 TOTAL 14,076 33,630 41,128 34,112 13,635 54,160 84,136 63,213 107,851 385,626

Trends in the Government Securities Market – Cont’d

400 000 450,000 ) Chart 3: Treasury Bonds Turnover at the Nairobi Stock Exchange (January 2001‐ September 2010) 200 000 250,000 300,000 350,000 400,000 ume (Ksh Mn 50,000 100,000 150,000 200,000

Traded Volu

‐ Year

T d i h G S i i Trends in the Government Securities Market – Cont’d

• The secondary market has been vibrant with turn over

rising from Ksh 14bn in 2001 to Ksh 385bn during the first 10 months of 2010.

• There was a crash in 2005 when interest rates sharply

declined arising from a loose monetary policy g y p y

• 5. Developments in the Corporate Bonds

p p Market

• The corporate bonds have not been as vibrant as the Government Bonds.
• However there has been gradual growth and the current holdings and

However, there has been gradual growth and the current holdings and types are as follows:

Bond Issuer Issue Date Issued Value (Ksh.m)

1 Safaricom 2- Nov- 2009 7 513 1 Safaricom 2- Nov- 2009 7,513 2 KENGEN 2- Nov- 2009 25,000 3 Shelter Afrique 24- Aug- 2009 1,000 4 CFC Stanbic Bank 7- J ul- 2009 2,500 5 Mabati Rolling Mills 27- Oct- 2008 3,379 6 Sasini 4- Dec- 2007 600 7 Barclays Bank 14- J ul- 2008 3,500 8 Athi River Mining 27- Oct- 2005 800 9 PTA Bank 15- Oct- 2007 1,800 10 East African Development Bank (EADB) 9- Aug- 2004 800

TOTAL

46 892

TOTAL

46,892

6 Key Reforms and Strategies in the Debt

• 6. Key Reforms and Strategies in the Debt

Market

• Market Leaders Forum – Consultative forum for key market players

i l f k t d l t crucial for market development.

• Transparency – Availability of securities issuance calendar has been

instrumental in investor planning and offer take-up

• Benchmark bonds

Government adopted 2 5 10 15 and 20 year as

• Benchmark bonds – Government adopted 2,5,10,15 and 20-year as

benchmark maturities in 2007. Reopening started in 2009.

• Tax treatment has created demand for bonds:

Tax exemption to most institutional investors

• Tax exemption to most institutional investors
• reduced withholding tax for bonds maturing after 10yrs from 15% to

10% removal of tax on capital gains on bond trading margins

• removal of tax on capital gains on bond trading margins
• Pension and Insurance Sector Reforms – Created demand for long

term bonds

Key Reforms and Strategies – Cont’d

• Automated Trading System (ATS) – Adopted in 2009, ATS has

g y p improved efficiency and safety of secondary trading for bonds, since transactions are on Delivery Vs Payment (DvP).

• Market Awareness – Investor Education through print and electronic

media has created market demand media has created market demand

• Review of the Securities Law – Allowed dematerialisation of the

Register to facilitate secondary trading.

• Infrastructure bonds

Key benchmark to corporate debt issuers

• Infrastructure bonds -

Key benchmark to corporate debt issuers besides funding key government projects.

• Horizontal Repos Transactions(HRT) - Adoption of HRT platform

in 2008 enhanced liquidity distribution across the financial system q y y and created more demand for government paper used as collateral.

• 7. Outcomes
• Low Refinancing risk – The current 5-years average

maturity has significantly reduced refinancing/redemption risk associated with short term debt risk associated with short term debt.

• Yield Curve (YC) –the market has well-established and

reliable yield curve. YC is a critical pricing tool for both government and corporate bonds issuers.

• Vibrant Secondary market– Bonds turnover has increased

significantly

• 8. Way Forward
• Market Makers(MMs)

T d l p nd r m rk t

• Market Makers(MMs) – To develop secondary market

further, plans are at hand to rollout Market makers window to achieve 2-way price quote and commitment by MMs to make the market.

• Over-the-Counter (OTC) platform – OTC trading for bonds

will operate alongside the exchange traded platform will operate alongside the exchange-traded platform

• Primary Market structure

– introduce on-line bidding for institutional investors; g ; – agency arrangement for retail investors – direct participation by non-institutional investors in primary market

Way Forward – Cont’d

• Financial Literacy Programme – More

structured investor education programme in the structured investor education programme in the pipeline.

• Close

co ordination between Monetary and

• Close

co-ordination between Monetary and Fiscal Policy

• Development of a Bond Index

Development of a Bond Index

• Expand range of products e.g. Sukuk Bonds

Q & A Q THANK YOU THANK YOU