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UN launches African repo market in bid to lower borrowing costs

The UN has launched a brand new short-term lending marketplace for African bonds in a transfer that it says might trim billions of {dollars} from authorities borrowing prices throughout the continent.

The liquidity and sustainability facility (LSF) will permit traders to make use of African debt issued in foreign currency echange resembling {dollars} and euros in repo transactions, the organisation mentioned on Wednesday on the COP26 local weather convention.

Repo is a key characteristic of market plumbing within the developed world, however is much less frequent in growing economies. It permits market individuals to entry funding by exchanging bonds for money in transactions which might be sometimes thought of to be ultra-safe.

An preliminary $200m transaction is deliberate for early subsequent yr with funding anticipated to be offered by Africa Export-Import Financial institution, and traders together with French asset supervisor Amundi excited about taking part.

Backers of the challenge are searching for extra sources of funding to scale up the power. The funding is predicted to incorporate a slice of the $650bn of particular drawing rights created by the IMF in August to assist low and middle-income nations climate the pandemic. The scale of the power might attain $30bn, in line with the UN Financial Fee for Africa (UNECA).

Vera Songwe, government secretary of UNECA, mentioned the launch of a repo marketplace for African debt would make it extra enticing to traders, reducing borrowing prices for governments.

“Money is king, and also you don’t get money very quick from quite a lot of African bonds,” she mentioned. “We have to create a repo market.” The LSF might save African nations $11bn in curiosity prices over the subsequent 5 years, UNECA estimates.

“African governments have traditionally confronted a excessive price of borrowing” mentioned Mohamed Maait, Egypt’s finance minister and Ken Ofori-Atta, Ghana’s finance minister, in a joint assertion.

“Developed nations have lengthy loved the existence of huge repo markets for his or her authorities bonds, facilitating the creation of steady and extra funding sources. Our purpose is to have the ability to present the identical kind of liquidity-supportive setting to African governments and personal traders alike.”

The ability additionally goals to encourage the issuance of inexperienced bonds or sustainability-linked bonds by Africa governments, by providing traders beneficial phrases for utilizing them as collateral in repo transactions. Such debt presently includes simply 1 per cent of the overall bond market throughout Africa and the Center East.

“At this time Africa wants extra liquidity than ever earlier than to finance its restoration and to put money into a daring, and sustainable setting,” Songwe mentioned.

African bonds — together with different rising market debt — plummeted in worth throughout the early levels of the coronavirus disaster in March 2020 as panicked traders fled to the protection of money. Even debt issued by nations with sound funds was punished disproportionately, mentioned Jay Collins, vice-chair of banking, capital markets and advisory at Citi, which is advising UNECA on structuring the LSF.

“Asset stabilisation mechanisms have come from central banks within the developed world, so the hope is to create acceptable, systemically necessary liquidity mechanisms for the rising markets, starting in Africa,” Collins mentioned. “If we do that proper, it could actually catalyse extra sustainability bonds.”

The ability will concentrate on nations who aren’t judged by the IMF to be at excessive threat of fiscal misery, Songwe mentioned. A number of African nations have returned to debt markets this yr, with Ivory Coast, Rwanda and Benin all promoting bonds this yr. Others, resembling Zambia, which is within the midst of restructuring its debt, stay shut out of markets for now.

“Our universe is about 20 nations to begin with,” she mentioned.

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