Developing the Domestic Debt Market The South African Experience

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1 Commonwealth Secretariat Debt Management Forum Developing the Domestic Debt Market The South African Experience June 2008

2 Challenges for South African Debt Market 2

3 Challenges. Domestic debt management strategies not well developed Issuance on an ad hoc basis No proper coordination between debt management and monetary policy Domestic primary issues through the South African Reserve Bank (SARB) and Public Investment Corporation Market making risk for account of Government Domestic debt instruments limited to TB s, fixed income bonds and zero coupon bonds Domestic maturity profile fragmented and up to 15 years Low bond market turnover 3

4 Challenges... Issuance in foreign markets limited Limited to syndicated loans/private placements Limited to 5-year maturity Foreign holdings limited to investors in UK and Germany No formal credit rating Domestic debt markets not well developed Prescribed assets No formal bond exchange No clearing house for bonds No prevailing market price No daily electronic trade reporting, matching and settlement 4

5 Challenges. No cash management operations No interest earned on surplus cash Limited cash flow forecasting by SARB Borrowing at beginning of year Receipt and expenditure flows impacted on money market liquidity No transparency Limited information to market Investor relations programme limited to foreign loans Issuance programme not transparent 5

6 What did South Africa do? 6

7 Establish institutional and legal frameworks Establish institutional framework ALM Division Take over responsibility for funding decisions from the SARB and Public Investment Corporation Compile Public Finance Management Act Develop philosophies and principles for debt management 7

8 Domestic debt reforms started 1989 Abolished prescribed assets Appointed SARB as market maker for Government Consolidated debt maturities Issued split maturity bonds which Enhanced liquidity Managed refinancing risk Bond Market Association formed Open outcry Paper script based market Debt management strategies focused on reducing debt cost within acceptable levels of risk Government bonds became benchmarks 8

9 Multi year maturity bond R153 (13.0% 2009/10/11) bond Nominal amount R98.7 billion 1st maturity - 31 August 2009 R32.9 bn 2nd maturity - 31 August 2010 R32.9 bn 3rd maturity - 31 August 2011 R32.9 bn Return 9

10 Domestic debt reforms since 1995 Market reforms Formal Bond Exchange licensed Bond automated trading system launched (price transparency) Electronic settlement and dematerialition Settlement period reduced Electronic stripping facility participates actively in Exchange Treasury bills immobilised Money market dematerialised Competition between exchanges 10

11 Domestic debt reforms since 1995 Government initiatives Achieved credibility Credible and stable Government Sound fiscal and macro-economic policies Effective legal and regulatory framework Domestic primary issues through Primary Dealers Market making risk for account of Primary Dealers System of regular auctions implemented (uniform price auctions) Maturity profile further restructured through switches and buy-backs Diversified domestic debt portfolio (floating, ILB s, retail bonds and STRIPS added) Maturity profile extended to 30 years Establish full yield curve of index-linked bonds, fixed interest bonds and treasury bills 11

12 Debt reforms as borrower in foreign markets Foreign debt management concentrated on: Establishing country s name in market Establishing benchmarks for RSA financial institutions Thereafter elimination of the NOFP Now refinancing of maturing loans Foreign loan issues up to 20 years maturity, concentrating in 10 year area Foreign investor base extended to a wide range of high quality investors spread across Africa, Europe, Asia, America and Middle East Top notch investment grade credit ratings assigned by all major Credit Rating Agencies 12

13 Benefits to South Africa 13

14 Diversified domestic funding instruments As at 31 March 1994 As at 31 May % 0.3% 12.4% 1.6% 13.3% 96.4% 72.4% Fixed income ILB Floating rate Treasury bills Retail 14

15 Liquidity in domestic bond market increasing 25 BESA Euroclear R trillion Calendar years 15

16 Net government debt continues to decline R b illio n P e r c e n t G D P Gross loan debt Net loan debt Total net loan debt as % of GDP (right axis) / / / / / / / / / / / / / / / / / /11

17 Debt service cost as percentage of GDP declines Per cent GDP / / / / / / / / / / / / / /11 17

18 Declining debt service as % of revenue & expenditure Per cent GDP Per cent total revenue Per cent total expenditure / / / / / / / / / / / / / /11 18

19 Evolution of debt management continuing Reducing debt cost subject to acceptable risk levels Shift from exclusively deficit financing to active pursuit of macroeconomic objectives Addressing external vulnerability Reserves accumulation Restructuring of foreign debt portfolio 19

20 Foreign exchange reserves continue to increase US$ millions (purchases) SARB funded Government funded US$ 9,6 bn Gross reserves (RHS) International liquidity position (RHS) US$34,4 bn US$33,2 bn US$ millions Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 20

21 Government s foreign debt exposure reduced R billion Historic value Revaluation Sterilisation deposits 2006/ / / / /11 21

22 External vulnerability reduced External vulnerability ratio A ratio of 100 indicates that the official reserves are equal to liabilities while a ratio below 100 indicates that the foreign reserves/assets are more than the liabilities

23 Thank you 23

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