Written Evidence (ZAF0049)
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London Stock Exchange Group – Written evidence (ZAF0049) Submission on Local Currency Bond Markets for House of Lords International Relations Committee Inquiry “UK and Sub-Saharan Africa - prosperity, peace and development co-operation 1. London Stock Exchange Group (LSEG) is a diversified global financial markets infrastructure business focused on Information Services, Risk and Balance Sheet Management and Capital Formation. The Group supports global financial stability and sustainable economic growth by enabling businesses and economies to fund innovation and manage risk. 2. This submission looks at how raising debt finance from offshore capital pools in local currencies can serve as an important source of investment for African economies, mitigating an issuer’s currency risk associated with borrowing in a hard currency. This topic is especially relevant in light of recent falls in commodity prices and the economic shock of the Covid-19 crisis that has resulted in the appreciation of the US Dollar vis-à-vis emerging market currencies. This submission provides an overview of LSEG’s activity related to the development of local currency bond markets, with a focus on emerging markets. LSEG in Africa: A long-term partnership 3. London Stock Exchange Group has a long history of working in partnership with Africa, supporting the development of African capital markets and investment in African companies and infrastructure. LSEG has a partnership approach and a long- term commitment to the continent. The UK-Africa Investment Summit in January 2020 was an opportunity to deepen and widen links. Associated with the Summit, LSEG commemorated landmark transactions supporting Kenya and Rwanda, described in sections 31 and 32 below. 4. LSEG works closely with exchanges across Africa. LSEG’s market infrastructure technology is deployed in 10 African markets, including Botswana Stock Exchange, Casablanca Stock Exchange and Johannesburg Stock Exchange. FTSE Russell, a global provider of benchmarks, analytics and data solutions and part of LSEG, has worked since 2002 with Johannesburg Stock Exchange to calculate its domestic indexes. Since 2015, our FTSE/JSE Responsible Investment Index Series represents to investors, the performance of South African listed companies that meet environmental social and governance performance thresholds. LSEG has a partnership with the Nigerian Stock Exchange to support African companies seeking dual listings in London and Lagos. With Casablanca Stock Exchange, we share expertise across the full financial markets value chain from listing and trading to clearing and settlement and custody, supporting their ambition to position Casablanca as a regional hub for capital markets and financial infrastructure. 5. There are 121 African companies with equity listed on and / or trading on London Stock Exchange – more than on any other international stock exchange. These companies have a total market capitalisation of over US$185 billion, and since 2008 have raised $25 billion on London’s markets.1 2019 saw two landmark IPOs from telecommunications companies that raised a combined value of over $1bn: Helios Towers and Airtel Africa. 6. LSEG’s Academy delivers specialised training programmes to companies, market practitioners, governments and regulators around the world related to capital markets. In 2019, LSEG delivered a training course to Kenya’s Ministry of Petroleum on Environmental, Social and Governance (ESG) considerations, to support the Ministry and state-owned companies develop planning related to ESG-aligned management practices and work towards achieving international standards. In 2018, we organised a series of capacity building workshops in London and Cairo on capital markets knowledge and practices with the Egyptian Stock Exchange’s management team. Overview to London Stock Exchange’s bond markets 7. London Stock Exchange is a global leader in international sovereign and corporate bond issuances, with over 12,900 debt instruments listed, from more than 1,150 fixed income issuers, from over 70 countries. These issuances have raised more than $5 trillion in debt capital. 8. London is a leading marketplace supporting international sovereign bond issuances, having welcomed 238 foreign government bonds from 40 issuers, denominated in 7 currencies. These sovereign, state and local government bonds raised more than $4tn equivalent on our markets to date. African sovereigns that have recently listed bonds in London include Angola, Egypt, Ghana, Kenya and Nigeria. 9. London is a leading venue for emerging market local currency bond issuances. We currently have listed 124 Chinese RMB (Dim Sum) bonds, 30 Indian Rupee (Masala) bonds and 24 Indonesian Rupiah (Komodo) bonds. 10. There are 55 bonds currently listed in London from African issuers (both governments and companies) that have collectively raised over $40bn equivalent. Of these bonds, 50 are dominated in USD, with one each in GBP, Euro, South African Rand, Kenyan Shilling and Ghanaian Cedi. 11. London Stock Exchange has 70 bonds denominated in African local currencies listed on our market, including 63 in South African Rand, 2 in Ghanaian Cedi, 2 in Kenyan Shilling, 2 in Nigerian Naira and 1 in Rwanda Francs. Most African local currency bonds are issued in South African Rand by non-African corporates such as Commonwealth Bank of Australia, Royal Bank of Canada, Lloyds Bank Plc and multilateral development banks such as European Bank of Reconstruction & Development and International Finance Corporation. 1 Data is as of 20th February 2020 2 12. In October 2019, London Stock Exchange launched the Sustainable Bond Market, expanding its green bond market to include new dedicated segments for social and sustainability bonds, and a new issuer-level segment for bonds by issuers whose core business activity is aligned with the green economy. London Stock Exchange is home to 237 active sustainable bonds, which raised over £45bn, in 17 currencies from over 60 issuers; 42 percent are international issuers. On 3rd April 2020, African Development Bank (AfDB) admitted its $3 billion ‘Fight COVID-19’ social sustainable bond to London Stock Exchange. Proceeds from AfDB’s social bond are aimed at alleviating the economic and social impact of the COVID-19 pandemic across Africa. This is the largest social sustainable bond to be admitted to London’s Sustainable Bond Market. Discussion: how international bond markets support emerging market infrastructure investment 13. African countries have experienced strong GDP growth over the last two decades. For the continent to sustain this long-term growth trajectory, substantial investment is required in each economy, especially in the infrastructure sector. The current Covid-19 health crisis may challenge debt sustainability ratios. In the long-term it highlights even further need for health infrastructure and more resilient economies. 14. The size of infrastructure investment required in Africa, as in other rapidly growing emerging markets countries, significantly exceeds the sums that domestic capital markets are currently able to provide. The African Development Bank in 2018 estimated that Africa’s infrastructure investment needs amount to $130 to $170bn a year, with a financing gap in the range of $68 to $108bn.2 15. Raising debt remains the most predictable source of financing for Africa’s economic and social transformation over the long term. African capital markets have developed significantly in terms of sophistication and participation over the last decade. However, they still do not have the local investment capacity to raise sufficient capital to meet the required levels necessary for domestic infrastructure investment. With limited local funds available for investment, raising the required debt from domestic investors may in the near-term create competition with other local investment opportunities, resulting in reduced investment in other important sectors of the local economy. 16. Given these factors, African countries often pursue international debt financing on international exchanges, tapping a diverse pool of global investors. These international investors are attracted to Africa investment opportunities, seeking access to higher yield emerging market debt. Many of these international investors may not have direct access to African capital markets, being restricted by policy or technical considerations. 2 AfDB Africa Economic Outlook 2018 https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/2018AEO/African_Economic_Outlook_2018 _-_EN_Chapter3.pdf 3 Overview of currency risks associated with borrowing in hard currencies 17. Borrowing in hard currency (like US dollars) to fund projects in the local currency leaves African countries (and other emerging economies) vulnerable to currency risk. This becomes costly when currency movements become volatile and when local currencies devalue against hard currencies such as USD. This occurs in circumstances such as when commodity prices fall (like oil) and during economic shocks (such as the Covid-19 crisis) that result in a ‘flight to safety’ to hard currencies like the US dollar, vis-à-vis emerging market currencies. 18. As the dollar appreciates relative to the local currency, the cost to servicing dollar debt increases for African issuers whose revenues are derived in local currency. Accordingly, borrowers will have to post more domestic currency as collateral, and a larger share of revenues accrued in local currency would be channelled to pay back the borrowing.