The UN has launched a new short-term lending market for African bonds in a move it says could cut borrowing costs for governments across the continent by billions of dollars.
The Liquidity and Sustainability Facility (LSF) will allow investors to use African debt issued in foreign currencies such as the dollar and the euro in repo transactions, the organization said at the climate conference on Wednesday. COP26.
Repo is a key feature of the plumbing market in the developed world, but it is less common in developing economies. It allows market participants to access funding by exchanging bonds for cash in transactions generally considered to be ultra-secure.
A first transaction of $ 200 million is slated for early next year with funding expected to be provided by the Africa Export-Import Bank and investors, including French asset manager Amundi, interested in participating.
Project donors are looking for additional funding sources to expand the facility. The funding is expected to include a tranche of the $ 650 billion in special drawing rights created by the IMF in August to help low- and middle-income countries weather the pandemic. The size of the facility could reach $ 30 billion, according to the United Nations Economic Commission for Africa (ECA).
Vera Songwe, executive secretary of the ECA, said that launching a repo market for African debt would make it more attractive to investors, thereby lowering borrowing costs for governments.
“Money is king and you don’t get money very quickly with a lot of African bonds,” she said. “We need to create a pensions market. The LSF could save African countries $ 11 billion in interest costs over the next five years, the ECA estimates.
“African governments have historically faced a high cost of borrowing,” said Mohamed Maait, Egyptian Minister of Finance and Ken Ofori-Atta, Ghanaian Minister of Finance, in a joint statement.
“Developed countries have long benefited from the existence of large repo markets for their government bonds, facilitating the creation of stable and additional sources of funding. Our goal is to be able to provide the same kind of liquidity-friendly environment to African governments and private investors. “
The facility also aims to encourage the issuance of green bonds or sustainability bonds by African governments, providing investors with favorable conditions to use them as collateral in repo transactions. This debt currently represents only 1% of the total bond market in Africa and the Middle East.
“Today, Africa needs more liquidity than ever to finance its recovery and invest in a bold and sustainable environment,” Songwe said.
African bonds – along with other emerging market debt – fell during the early stages of the coronavirus crisis in March 2020, as panicked investors fled to the safety of liquidity. Even debt issued by countries with healthy finances has been disproportionately punished, said Jay Collins, vice president of banking, capital markets and advice at Citi, who advises the ECA on the structuring of the LSF.
“The asset stabilization mechanisms have come from central banks in the developed world, so the hope is to create appropriate and systemically important liquidity mechanisms for emerging markets, starting with Africa,” Collins said. “If we do this right, it can catalyze more lasting bonds.”
The facility will focus on countries that are not deemed by the IMF to be at high risk of fiscal distress, Songwe said. Several African countries have returned to debt markets this year, with Côte d’Ivoire, Rwanda and Benin all selling bonds this year. Others, like Zambia, which is in the process of restructuring its debt, remain excluded from the markets for the time being.
“Our universe is about 20 countries to begin with,” she said.