ISSUES SURROUNDING THE DEVELOPMENT OF MUNICIPAL

AND CORPORATE BOND MARKETS IN ZAMBIA

“DEVELOPING GOVERNMENT BOND MARKETS IN SUB-SAHARAN AFRICA” WORKSHOP

17 – 19 JUNE 2003, JOHANNESBURG, SOUTH AFRICA

Presented by Lloyd Chingambo, General Manager / Chief Executive Officer, Lusaka Stock Exchange Ltd.

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1. THE PLAYERS

• Corporate entities (private / parastatals) / municipalities

• Arranger (Stock Brokers)

• Investors (individuals and institutional)

• Regulators (Government, Securities & Exchange Commission, Lusaka Stock Exchange)

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1.1 Why would a Corporate / Municipal issue a Bond?• Diversification of funding base (into institutional markets)

and increased stability in the capital structure.

• To secure intermediate maturity funding for long term projects and capital expenditure

• Mitigation against exposure to interest rate risk through rate protected instruments (cap, floor, swaps)

• Mitigation of Foreign Exchange risk

• Funding costs relative to maturity tends to be cheaper than rolling over short-term bank facilities

• Positive impact on branding through market publicity

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1.2 Arrangers of Capital Market TransactionsWhat does the Arranger contribute?

• Managing the debt issue to ensure overall success of the transaction (structuring, underwriting and obtaining credit enhancements where required)

• Assists the issuer in producing the documentation and obtaining regulatory approvals

• Marketing and placement of the bonds (distribution)

• Makes market in the securities to support the Issue

• Overtime, looks to also develop interest rate and cross currency derivative applications (swaps, repos, etc.)

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1.3 Investors in Debt SecuritiesWhy an investor would buy a bond – Investor base includes insurance companies, pension funds, asset managers, broker dealers and banks

• Higher yield pick-up over government securities• Diversification of investment portfolio to reduce

overall risk profile• Matching duration of assets and liabilities• To fulfill criteria set by asset allocation policies• Contribute towards development of the domestic

capital markets

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1.4 The Regulators• Government has overall responsibility to institute,

political stability, macroeconomic measures and a strong legal framework that creates an enabling environment

• The SEC ensures investor protection through supervision of the securities industry

• The Stock Exchange provides a market place for secondary trading activity and approves the listing of new issues

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2. BENEFITS• An efficient domestic Corporate and Municipal Bond

Market provides:– Alternative financing to bank loans and equity– More transparent pricing of corporate credit risk– Diversification of credit risk– Potentially lower Foreign Exchange risk in debt

repayments– A wider variety of investible products– Improved secondary market liquidity– An impetus for the fuller development of Africa’s

financial services sector

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3. THE CHALLENGESMost markets in Africa will experience one or more of

the following:• Chronically high interest rates and inflation• Lack of comprehensive market regulation• No intermediate maturity benchmarks (yield curve)• Absence of credit rating agencies (credit culture)• Lack of deep investor base (non-bank

Financial Institutions)• Limited market liquidity • Fear of the “unknown” by potential borrowers (young &

unsophisticated market)• Development of the 10 year bond (benchmark)• Buy and hold attitude

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4. PROMOTING MARKETS DEVELOPMENT

4.1 The GovernmentGovernment can create an enabling environment through the following measures:

• Ensuring political stability

• Prudent economic and fiscal management to achieve greater market stability

• Create a culture of transparency that enforces discipline, promotes business growth and attracts foreign investment

• Have in place the necessary Infrastructure, Regulatory and Legal Systems

• Create a foundation for the domestic bond market by issuing fixed rate benchmarks (development of yield curve)

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4.2 The Securities and Exchange CommissionThe SEC as the prime industry regulator should

consider the following:• Comprehensive securities law that clarifies treatment of

various asset classes and issuer types (e.g. SPVs)

• Work towards regional integration through uniformity of regulatory standards

• Market liberalisation (structural) within a prudent supervisory framework

• Incentive schemes to encourage debut issues (e.g. lower approval / registration fees, tiered withholding tax structures)

• Competitive approval fee structures

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4.3 The Stock ExchangeInfrastructure and uniform standards:

• Physical infrastructure – an electronic trading platform capable of processing a wide range of transaction types

• Flexible, interlinked and automated Clearing and Settlement Systems based on Delivery Versus Payment (DVP) and Real Time Gross Settlement (RTGS)

• Links to other regional and international exchanges (e.g. BESA, Clearstream and Euroclear)

• Similar listing requirements to facilitate cross listing

• Lobby for relaxation of foreign exchange controls to broaden the investor base (regional flow)

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5. STRATEGIES FOR ZAMBIA

5.1 Economic Management• Manage fiscal position

• Lower inflation

• Manage currency and capital account policies

• Statutory Boards and Government linked corporations encouraged to issue bond and extend maturity profile.

• Specifically encourage municipalities to issue municipal bonds through SPVs

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5.2 Infrastructure, Regulations, Legal System• Clarify regulatory and legal treatment of securities

• Best practice Clearing and Settlement systems

• Physical infrastructure

• Consider more incentives

• Consultative and proactive approach

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5.3 Government Bond Markets• Issue fixed rate benchmarks

• Lengthen maturity profile

• Publish issuance calendar

• Increase market liquidity (Institutional Investments Guidelines)