2010 SOVEREIGN DEBT MANAGEMENT FORUM October 25-27, 2010 - PowerPoint PPT Presentation

2010 SOVEREIGN DEBT MANAGEMENT FORUM October 25-27, 2010 Presentation on ‘Market Development in Lower Income Countries (LICs): Market Development in Lower Income Countries (LICs): Relevance for Financial Sector Development and Structural Constraints’ Kenya Case Study BY Mr. John K. Murugu Director, Debt Management Department, Ministry of Finance, Kenya

PRESENTATION OUTLINE PRESENTATION OUTLINE 1. Highlights of Economic and Financial Indicators 2. Domestic Debt Market 3. Evolution of the Domestic Debt Market 4. Trends in the Government Securities Market 5. Developments in the Corporate Bonds Market 6. Key Reforms and Strategies 7. Outcomes 8 8. Way Forward Way Forward

1.Highlights of Economic Indicators T bl 1 E Table 1: Economic Indicators i I di 2002 2004 2007 2008 2009 2010 GDP GDP at at current current prices prices 13 1 13.1 16 1 16.1 27 0 27.0 28.6 28 6 29 7 29.7 30 8 30.8 (US$bn) GDP per capita (US$) 406.8 470.4 725.8 746.7 769.4 789.7 Real GDP growth (%) 0.5 5.1 7.0 1.6 2.6 4.4 Population (million) 32.2 34.2 37.2 38.3 38.6 39.0 Inflation (Average Annual) 2.0 11.6 9.8 18.5 12.7 5.5 Budget Deficit (% of GDP) Budget Deficit (% of GDP) (3.1) (3.1) (0.1) (0.1) (1.8) (1.8) (3.9) (3.9) (3.7) (3.7) (6.5) (6.5) Current Account (% of (0.9) (0.8) (5.8) (6.2) (6.3) (5.6) GDP) Public Debt (% of GDP) 59.8 61.9 43.6 42.8 45.8 45.7 of which: Domestic of which: Domestic 23.0 23 0 25.3 25 3 21.9 21 9 20.7 20 7 22 5 22.5 22 2 22.2 External 36.8 36.6 21.7 21.1 23.3 23.5

Highlights of Economic Indicators – Cont’d Chart 1: Real GDP Growth h l h 8 7 ) growth (%) 6 5 4 3 3 GDP g 2 1 0 Year Year

Hi hli ht Highlights of Economic Indicators – Cont’d f E i I di t C t’d • Kenya experienced severe Economic and Political problems in 1980s and 1990s and there was practically no growth 1980s and 1990s and there was practically no growth. • In 2002, a new government embarked on reforms under an “ Economic Recovery Strategy (ERS) for the period 2003-07”. This made the Economy register sustained upward trend in GDP made the Economy register sustained upward trend in GDP growth from 0.5% in 2002 to 5.1% in 2005 and 7.0% in 2007. • After expiry of ERS, the Government put in place a new development Blue print – Vision 2030 aimed at transforming the development Blue print Vision 2030 aimed at transforming the country to a middle income country by 2030. The Vision 2030 has 3 pillars namely:  Economic -To achieve and sustain growth 10% in medium term Economic To achieve and sustain growth 10% in medium term  Social - To achieve equitable social development  Political -Aimed for an issue based and accountable democratic political system. political system.

Highlights of Economic Indicators – Cont’d • Controversy over Elections at end of 2007 resulted in serious Post • Controversy over Elections at end of 2007 resulted in serious Post Election Violence (PEV) . When combined with the impact of global financial crisis, it led to a sharp drop of GDP growth to only 1 6% in 2008 This improved to 2 6% in 2009 and growth of 4 5% is 1.6% in 2008. This improved to 2.6% in 2009 and growth of 4.5% is projected for 2010 • The Coalition Government that was formed after the PEV gave priority to putting in place a new constitution to address the priority to putting in place a new constitution to address the identified causes of the problems. This was achieved in August 2010. • While implementation of the Vision 2030 suffered some setback While implementation of the Vision 2030 suffered some setback due to the PEV, the programs in the Medium Term Plan are on course and there is optimism that the Vision will be realized.

Highlights of Financial Indicators Table 2: Financial Indicators Table 2: Financial Indicators Type of Institution No Assets (Ksh Billion) 1 Commercial banks 44 1,353 2 Forex Bureaus 126 N/A 3 Insurance Companies 43 128 4 Pension Companies 1,200 300 5 Savings and Credit Cooperative Societies 5,000 165 6 National Social Security Fund 15 82 7 Investment banks, Fund managers,Stock brokers, 71 29 I Inv. Advisers, collective Inv schemes Ad i ll ti I h 8 Kenya Post Office Savings Bank 1 17 1US$ @ K h 80 1US$ @ Ksh 80

Highlights of Financial Indicators – Cont’d • The Banking sector is regulated by the Central Bank of Kenya. The g g y y regulatory framework is geared towards universal banking allowing competition and innovation among commercial banks, mortgage companies, non-bank financial institutions micro credit institutions and forex bureaus • The development finance institutions in agricultural, industrial and commercial sectors are being restructured to make them focused and eliminate reliance on Government funding. • The capital markets are regulated by the Capital Markets Authority (CMA). Governance challenges have faced the sector leading to loss of confidence in the equity market. CMA has strengthened the legal framework and regulations and confidence is coming back to the market.

Highlights of Financial Indicators – Cont’d • The Nairobi Stock Exchange (NSE) is undergoing demutualisation g ( ) g g as part on the reforms. • The pensions sector has experienced considerable growth and is regulated by the Retirements Benefits Authority (RBA). g y y ( ) • The Cooperative Savings and credit societies are also a key player in mobilization of savings. The Sacco Societies Regulatory Authority (SASRA) has been recently established as the regulator. y ( ) y g • The National Payment System which is under the Central Bank of Kenya has made major strides in modernizing payment processes to the electronic age. g This has greatly enhanced efficiency in the g y y operation of the equity and debt markets.

Highlights of Financial Indicators – Cont’d • The reforms in the financial sector with the objective of removing The reforms in the financial sector with the objective of removing structural impediments have progressed relatively well through donor programs. • The most targeted program for the sector is the Financial and Legal The most targeted program for the sector is the Financial and Legal Sector Technical Assistance Program (FLSTAP) which has been running since 2005. • The performance of the domestic debt market has been significantly The performance of the domestic debt market has been significantly impacted upon by the reforms in the financial sector. • The promotion of the domestic market has been assisted greatly by collaboration with various international organizations, such as, collaboration with various international organizations, such as, Efficient Securities Markets Institutional Development (ESMID) and Organization for Economic Co-operation and Development (OECD). ( )

2 D 2. Domestic Debt Market ti D bt M k t Table 4: The nature and Instruments in the domestic debt market T Type of Instrument f I Balance as at June 2010 B l J 2010 (Ksh Mn) 1 753 Government Stocks 2 Treasury Bills 158,494 of which: 91 day 23,663 182 day 85,337 364 day 364 day 49,494 49,494 3 Treasury Bonds 448,615 of which: Special 17,781 Infrastructure f 54,532 Ordinary 376,302 4 Corporate Bonds 46,892 1US$ @Ksh 80

Domestic Debt Market – Cont d Domestic Debt Market – Cont’d • Treasury bills: 91 days, 182 days and 364-days regularly issued. • Bonds types being issued include :– – Fixed coupon. No floating rate or zero coupon bonds offered – Infrastructure Bonds – Special/securitized bonds. Special/securitized bonds. • Treasury bonds range from 2-yrs to 25-yrs. – The 25-yr first issued in June 2010 and reopened in July 2010. – 29% of all bonds mature after 10 yrs 29% f ll b d t ft 10 – 23% mature in less than 2 yrs • Average life of securities from 2001 to September 2010: – For all securities, average life rose from 8 months to 5.05 yrs – For Bonds only, average life rose from 1.42yrs to 6.63 yrs

Domestic Debt Market – Cont’d • Bonds and bills issued through auction-based g open tender system to encourage price- discovery which is critical for secondary trading. • The Government instruments dominate the market at 93% with the corporate bonds taking k 93% i h h b d ki 7%.

3 E 3.Evolution of the Domestic Debt Market l ti f th D ti D bt M k t • Prior to 1990 : No significant treasury bills/bonds market. Only stocks issued in 1960’s and 1970’s stocks issued in 1960 s and 1970 s • 1991-93 , During the first multi party elections, serious irregularities occurred in the banking sector leading to massive injection of liquidity into the economy and annual inflation rate rose to over liquidity into the economy and annual inflation rate rose to over 46%pa. To mop up the liquidity, Treasury bills with rates as high as 70% were issued There was no bond market. • 1995-97 : Two important reforms were effected: 1995-97 : Two important reforms were effected: - Parliament enacted a law limiting Government borrowing from Central Bank to 5% of latest Audited Ordinary Revenues; - Central Depository System (CDS) - a Book Entry register for all C l D i S (CDS) B k E i f ll government securities was introduced thus facilitating some secondary trading.