Last week, the World Bank’s private sector lending arm, the International Finance Corporation (IFC) and the Government of Rwanda co-hosted a two-day forum, dubbed “East Africa Capital Markets Conference.” The forum brought together over 350 capital markets experts from within and outside East Africa to discuss issues affecting the development of African capital markets, especially in sub-Saharan Africa. The New Times’ Collins Mwaicaught up with Jingdong Hua, vice-president and treasurer of IFC, for insights on the role of capital markets in developing economies and how best to improve them. Excerpts;-
What would you say is the role of capital markets in developing economies such as Rwanda and its neighbours in the East African Region?
As East Asian countries have demonstrated, developing capital markets is an integral part of the economic growth because, in addition to banks, capital markets provide the efficient intermediary to connecting savings, whether domestic or foreign, to productive use.
Capital markets are important for private sector to finance its expansion, new business ventures and infrastructure development. When you look at countries like North Korea, Malaysia, China and India, their ability to use capital markets for infrastructure financing has been very successful.
We had a recent example where we used an Indian Rupee bond on a foreign stock exchange with tremendous interests; we used the proceeds to support a local infrastructure bond issued by a local bank in India.
There is a direct link between the capabilities of capital markets in connecting savings to infrastructure financing.
In Rwanda, capital market still very young; it needs to further deepen liquidity to attract more people to come on board. Once it reaches a certain point in liquidity, there will be more and more investors interested in investing in the markets and, therefore, projects would be able to use capital markets to source funding.
I think it will take a bit of time. On the other hand, Rwanda was able to issue a government bond not only domestically but even in Euro/ Dollar bond. These are all building blocks that will eventually lead to the stage when large scale infrastructure financing can be sourced through capital markets.
What’s the government’s role in developing capital markets in any country?
There are quite a number of roles. First, as the conference highlighted, governments, through the ministries of finance, capital markets and central banks, have a role to set up a regulatory framework and marketing infrastructure so that market participants can come in.
The government should also establish the basic trust by issuing its own bond programme, whether in Europe or emerging markets. It is critical that government sets up a bond that will serve as a reference for other issuers to come to market.
The East African Community member states have an agenda to work together to jointly develop their markets, from your previous experience are their efforts feasible?
I am glad to see that governments of the East African Community have already pledged to work on developing the capital markets in the region to make it much easier for investors to be able to tap into capital markets but that will take a bit of time.
The region can take encouragement from regions that have already done it, for example, in the Asian bond market initiative, where in several Asian countries, including Japan, Korea and China, have been working on the innovative Asian bond markets where a South Korean investor could easily buy a bond issued in Malaysian currency and vice versa.
I am very confident that the East African Community, with the support from the World Bank Group, can help accelerate the process.
There is a tendency by African governments to issue bonds in foreign currencies, doesn’t it somewhat disadvantage them if the value of their currency depreciates?
When you look at the world, if domestic governments would issue a foreign currency bond, normally it is the currency they need to import and there are in need of foreign currency. To attract foreign investors to put their money in domestic activities, governments tend to issue the bonds in foreign currency to attract investor attention.
It also gives the domestic corporates a chance to issue in other currencies, especially in dollars.
What has been the role of IFC in developing regional and local markets and what support will be forth coming in the near future?
There are different sets of elements that go into developing and supporting capital market environments in the East African region. The World Bank Group, through our interventions in capacity building, supporting regulatory reforms, supporting market infrastructure, supporting regional integration, we have been doing a lot.
Specific to IFC, what we do is supporting local currencies so that we can denominate more and more investment projects in local currency. That brings the benefit because when we issue in domestic currency we have a certain requirement in terms of the regulatory market infrastructure.
The ability to issue bonds in local currency sends a very strong market signal for multiple investors to come to the markets.