Regional African Domestic Bond Fund (ADBF) Technical Assistance
- Reference: P-Z1-KF0-012
- Approval date: 05/02/2010
- Start date: 18/02/2011
- Appraisal Date: 10/12/2009
- Status: OngoingOnGo
- Implementing Agency: AFRICAN DEVELOPMENT BANK
- Location: Multinational
The AfDB seeks to contribute to the development of sound domestic debt markets in Africa through the creation of the African Domestic Bond Fund (ADBF).
The ADBF will be invested in local currency denominated sovereign and sovereign guaranteed sub-national bonds. In order for the investments to be defined as foreign reserves according to the definition of the International Monetary Fund (IMF), the ADBF will be funded by African Central Banks. The management of the Fund will be conducted by a reputable international asset manager. The Bank of International Settlements (BIS) will act as an administrator.
The proposed ADBF project will be organized into the following four components: Component 1: The ADBF Feasibility Study Component 2: Construction of the African Domestic Bond Index (ADBI) Component 3: Pan-African workshop and creation of mutli-disciplinary working groups Component 4: The creation and launch of the ADBF.
Component 1: The ADBF Feasibility Study
Component 1 will entail a report ranking the African bond markets within 4 broad groups. For example, categories of countries could be those with
(i) fully developed bond markets with global significance
(ii) bond markets that are well-established
(iii) bond markets that are at a moderate to low level of development and
(iv) non-existent bond markets i.e. countries yet to develop bond markets.
The study will cover detailed country by country analysis on: ?Macroeconomic environment (monetary and fiscal policy) ?The state of debt markets in Africa, including among other issues, the tax and regulatory framework, issuers, issuance strategies, market access, the investor base and participation of economic agents.
Given the required information and data collection in part, the duration of the study is expected to be 6 months.
Component 2: Construction of the African Domestic Bond Index (ADBI)
The ADBI will be constructed as a weighted benchmark index to mimic the underlying performance of African domestic bond markets. It will adhere to a strict set of rules for selecting countries and instruments for inclusion.
If need be, other sub-indices may be constructed to take into consideration other frontier markets that would otherwise be excluded from the main ADBI.
The ADBI is expected to be an objective indicator of performance in underlying domestic markets, over time. It will also be predictable in terms of inclusion and exclusion of constituents, and will be investable enough for domestic and international fund managers to replicate its performance.
The duration of the index construction, including the index construction rules, is expected to be for 1 month. The backtesting of the index(es) and consultations with institutional investors is expected to be over an extended period, 18 months at most. On a monthly basis, index performance reports will be submitted to the AFMI by the chosen consulting firm.
Component 3: Pan-African workshop and creation of multi-disciplinary working groups
One of the objectives of ADBF is to enhance bond market infrastructure in Africa. This component of the project will enable the AFMI to engage effectively with stakeholders and development partners, and to work in close cooperation and coordination through multi-disciplinary working groups. These working groups will serve as platforms for policy dialogue, knowledge sharing, South-South collaboration, and will identify synergies between bond market development initiatives, including funding and TA needs of stakeholders.
To encourage country ownership and to empower the existing RECs, the multi-disciplinary working groups will be created according the existing REC structures. As the administrators of sovereign debt and supervisors of national financial systems, the working groups will be led by the Central Banks for coordination between the various government agencies in indentifying impediments to bond market development. The involvement of the public sector will draw attention to governance issues in the implementation of market reforms.
The Central Banks will be supported by the Secretariats of the RECs as channels for dissemation of information. The various stakeholder workshop and ongoing meetings of the regional multi-disciplinary working groups will be organised through the Secretariats. It is expected that this will foster a regional approach to bond market development. To some extent, countries have already adopted the regional approach, for example: the EAC's initiative to harmonise regulatory frameworks, and the WAEMU and SADC are developing payment systems at domestic and regional level. A pan-African conference will be held annually to coincide with the Bank's annual meetings. At this conference, the Secretariats will be invited to share the progress made in each region and will provide an opportunity for countries to share experiences.
Component 4: Creation and launch of the ADBF
Component 4 will consist of the creation of an ADBF invested in local currency denominated sovereign African bonds. The initial investors in the fund will be African Central Banks. To strengthen its development role in African domestic bond markets, the Bank will seek approval from ALCO and the Board to invest in the ADBF, upon proposal from the Financial Products Working Group. The investments will be part of the Bank's Treasury Investments. This will assist FTRY in acquiring local market knowledge, in the expectation of local liquidity management needs arising from the Bank's local currency issuances.
It is envisaged that the ADBF will be an index tracker fund, with its returns closely correlated to the ADBI, and will be administered by the BIS. The investments will also be held through a BIS investment vehicle.
To create a bond fund that will invest in local currency denominated debt
Rationale for the Bank's involvement: The development of African debt markets has been central to the Bank's borrowing programme, including the publication of the "African Fixed Income Guidebook". Through the ADBF, the Bank has a unique opportunity to break new ground and be in promoting the development of African domestic bond markets. At present no other African institution offers a fund solely dedicated to investing in local currency denominated debt. This will enable the Bank to further build on its expertise as an issuer and lender in local currency, to become the focal point for African domestic bond markets
his project will put in place the structure for a long-term relationship among financial market stakeholders in Africa.
The ADBF will seek to empower RECs as the focal points for the establishment of the regional multi-disciplinary working groups. Stakeholder meetings to identify development projects and funding needs will be organised through the RECs' Secretariats and will be led by Central Banks.
It is also envisaged that Central Banks (as administrators of government debt) and DMOs/MoFs as issuers and policy makers will benefit from the capacity building funded through the multi-disciplinary working groups. Private sector market participants will be provided with a platform to engage fully with legislators and policy makers to remove restrictions to bond market development and provide constructive feedback on new legislation and implemented policies. Lastly, the ADBF will provide the Bank with an opportunity to play a coordinating role between stakeholders and donors, through the creation of the regional multi-disciplinary working groups.
MBENG MEZUI Cedrique Achille - OFSD3