Strategy and Tools to Improve Regional Public Debt in WAEMU Region
Project Development Objective (PDO)
This project aims to contribute to securities market development and regional financial integration in the West African Economic and Monetary Union (WAEMU) region, through improved regional public debt management.
The West African Economic and Monetary Union (WAEMU) includes eight member countries which share (i) a common currency pegged to the euro (a peg guaranteed by the French Treasury), (ii) a regional central bank (BCEAO), (iii) regional financial authorities, and (iv) a regional capital market. The gradual ending in the 2000s of the central bank’s statutory advances to governments both supported and necessitated the development of the government securities market. Domestic debt securities funding is now close to a third of public debt with the balance financed externally (public debt stood at 45 percent of GDP in 2015).
There are two segmented markets for debt issuance: (i) through auctions via the BCEAO that are traded over the counter and (ii) through syndications that are listed on the stock exchange (this represents a small percentage – about a tenth - of the domestic debt, as is commonly observed across the world). On the issuers’ side, Cote d’Ivoire and Senegal issue more than half of the total amount of T-bills traded. On the buyers’ side, financial institutions from Cote d’Ivoire, Senegal, Burkina Faso and Mali bought 75 percent of the securities. Foreign participation remains marginal.
There is no reliable risk-free yield curve as there is limited secondary market activity and medium and long term issues are scarce. The reference yield curve is essential to broaden the investor base and facilitate the development of other market products (e.g. corporate bonds, covered bonds etc.). The secondary market for government securities is inactive and the investor base is dominated by the banking sector. This is leading to a (i) potentially higher cost of financing, (ii) an inability to manage risks in the government securities portfolio and, (iii) most importantly for financial sector development, a lack of development of reliable reference interest rates.
The project aims to implement a comprehensive set of measures to establish reliable government debt benchmark.
Activities / Output
The expected activities include the following:
Component 1: Benchmark building strategy
Component 2: Developing tools to manage the refinancing risk that may arise from pursuing a benchmark building strategy.
Component 3: Developing tools and mechanisms to improve price transparency and remove impediments to secondary market activity.
The expected outcome are:
1. Harmonized government debt issuance practices by member countries, resulting in issuance of larger size instruments at standard tenors, reduction of fragmentation, helping to construct the sovereign yield curve;
2. Effective implementation of tools/procedures to manage the refinancing risk that may arise from implementing the benchmark building strategy; and
3. Improved price transparency encouraging more secondary market activity.