The African Development Bank and IFC, a member of the World Bank Group, have signed an ISDA Master Agreement to enter into cross-currency swap transactions to facilitate local currency lending and bond issuance in Africa. It is the first ISDA Master Agreement either institution has signed with another multilateral financial institution.
The agreement will enable IFC and the AfDB to collaborate and benefit from each other’s local currency bond issues, enhancing their local currency funding capacity to support their clients’ development projects.
Local-currency bond markets provide long-term, local currency finance for projects, protecting them from foreign exchange risks. These markets are a vital potential source of finance, particularly in the wake of the global financial crisis, when foreign capital inflows to Africa have diminished.
Last year, the Group of 20 called for a concerted effort to develop and strengthen local currency bond markets in emerging markets. The agreement is the first step in an initiative for greater collaboration among multilateral institutions to accelerate local capital market development and increase local currency financing options.
”Expanding long-term currency initiatives is a cornerstone of IFC’s strategy to strengthen capital markets in developing countries,” said IFC vice president and Treasurer, Jingdong Hua. “Helping to establish and strengthen such markets allows us to work with regulators and local institutions to ensure that capital market regulations are effective and entrepreneurs are able to grow and create jobs.”
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AfDB vice president for Finance, Charles Boamah said: “Promoting the development of local capital markets in Africa is paramount to successful, sustainable economic development. This agreement supports our African Financial Markets Initiative, which aims to further the development of domestic African capital markets, enlarge the investor base, and reduce African countries’ dependence on foreign currency denominated debt.”
In Africa, IFC has issued local currency bonds in Morocco, the Western CFA zone, and the Central CFA zone, and has obtained approvals to issue local currency bonds in Kenya and Nigeria. Under its Pan-African Domestic Medium-Term Note Programme, IFC is working with authorities in Botswana, Ghana, Kenya, South Africa, Uganda, and Zambia to obtain consent to issue local currency bonds. IFC is also working with eight members of the West African Economic and Monetary Union to establish local currency bond programes. Since 2007, IFC has committed more than $650 million in 17 different local African currencies through a combination of swaps, bonds,and structured finance products.
For its part, since 2005 the AfDB has issued bonds denominated in or linked to the Botswana pula, Ghanaian cedi, Kenyan shilling, Nigerian naira, Tanzanian shilling, Ugandan shilling,and Zambian kwacha. The AfDB is also a regular issuer in South African rand (ZAR), its third largest lending currency. Since 2005, the AfDB has issued more than ZAR 25 billion in the ZAR domestic and Euro markets.
The AfDB has also received authorisations to issue bonds denominated in the currencies of more than 15 African countries including, Cameroon, Egypt, Gabon, Mauritius and Senegal and is currently seeking authorisations from several more.
The AfDB is currently in the process of launching in Uganda an inward listing off its Global Debt Medium Term Note Programme. The Programme will provide readily available local currency financing for the AfDB’s projects in the country. The first issue under the Note Programme is expected in the coming weeks.
Forex Magnates team wrote a detailed overview on FX in Africa, available in the Q1 2012 quarterly report.