The International Finance Corp, the World Bank's private sector arm, plans to issue local currency bonds in 10 African markets from next year to build capital in one of the world's fastest growing regions.
Jingdong Hua, vice president and treasurer at IFC, said the group is looking at Nigeria, South Africa, Ghana, Zambia, Rwanda, Namibia, Botswana, Uganda, Kenya and the West Africa franc bloc.
The bonds would be priced in the likes of South Africa rand, Botswana pula, Nigerian naira, Ugandan shilling or Zambian kwacha rather than the US dollar or euro, Hua told Reuters in an interview.
The project could prove a boon to Africa which is growing on average at 5 to 6% a year and is eager to develop transport and power infrastructure. But financing has been hard to come by for these capital-intensive projects.
Triple-A rated IFC will offer proceeds from the bond sales to companies seeking financing in the countries, Hua said.
"We will have something coming up in the market soon but it's too premature to disclose which country," he said.
While IFC has been involved in local bond markets in West Africa, it is now pursuing multi-year agreements with governments that would allow it to issue bonds whenever market conditions permit or when financing is needed for projects.
That would avoid the need to seek approval each time it wants to issue local currency debt, Hua said.
Despite a swathe of financial reforms over the past decade, Africa's local bond markets mostly remain underdeveloped and too thinly traded for most foreign investors or to meet the growing funding needs of small and medium-sized companies.
Domestic bond issuance in Africa is mainly confined to governments or state entities and foreign-affiliated banks, while investors are mainly banks or local pension funds. "It's a no-brainer. Only when a country develops a fully-functioning financial system can money and finance flow efficiently giving the private sector many choices depending on the nature of their financing needs," Hua said.
"Only the capital market has the scale to channel the amount of money needed for infrastructure financing, we're talking $500 billion to $1.2 trillion," said Hua.
IFC's involvement could spur inflows from foreign investors who want to diversify from low-yielding Western bonds but often view local African debt as too risky despite high yields.
African issuers have been successful in raising financing in international markets, with Zambia's debut $750 million Eurobond this year garnering bids of around $12 billion. Earlier dollar bonds from Nigeria and Namibia also were oversubscribed.
Hua is confident local bonds could have the same results in future. He points to Asia where countries used the 1997-98 financial crisis as an opportunity to develop domestic capital markets to insulate them from future economic shocks.
IFC's involvement could spur inflows from foreign investors who want to diversify from low-yielding Western bonds but often view local African debt as too risky despite high yields. Nigerian 5-year naira bonds for instance yield over 12%.
That is the case especially with cash-rich but risk-shy pension funds. "You have $30 trillion in pension money that could be tapped, so just imagine you switch one percent of that pension money from developed market to developing market, that's $300 billion dollars," said Hua.
"The fact that IFC goes to the country and says we want to issue a bond - this triggers the development of an enabling regulatory framework from the bottom up," he added.
Hua acknowledged however that high nominal interest rates, making local financing costly, is a deterrent for companies. "Governments have a responsibility to tame inflation, to ensure macro economic stability therefore with a long term goal of lowering nominal interest rates," he said. "Only when the nominal interest rate is lowered within single digits does local currency financing become much more viable."