The AfDBs bid to mobilize domestic savings by creating
a regional bond fund will hit a wall unless it stumps up cash
and provides a credit guarantee, monetary policy officials
warned this week.
The AfDB is considering forming an African Domestic Bond
Fund, through which it, together with African central banks,
would invest in long-dated local currency government bonds in
the region in order to jumpstart local capital markets.
But key potential stakeholders said thin liquidity and
credit quality concerns would hamper the effort.
Konrad Reuss, director of sovereign ratings at Standard
& Poors, said: Barring countries in North
Africa, South Africa and Botswana, the majority of [local
currency government] bonds are rated BB or single-B.
He said the lowest rated country would the primary driver in
determining the credit quality of a fund unless the AfDB
provided a credit guarantee.
As a result, Lamido Yuguda, acting director of the reserves
management department at the Central Bank of Nigeria, suggested
Nigeria would be cool on the local bond fund in its prospective
We will not throw away our reserves. The AfDB must
address the fact that we can only invest in high quality assets
that have strong liquidity, he said.
Yuguda who argued that Nigerias $39.8 billion
foreign exchange reserves were excessive
said the AfDB should work on developing a collateralized debt
obligation, an investment-grade bond backed by a pool of junk
The AfDB, which is AAA rated, is not planning to guarantee
the fund and would be constrained in its financial backing,
Stefan Nalletamby, coordinator of the banks Making
Finance Work for Africa project, said.
Nalletamby, who is spearheading the bond initiative, said:
We need to make sure our Treasury book itself is
high-quality and that new investments dont comprise our
He declined to give a figure on how much the AfDB could
provide. AfDB financial specialists will pitch the initiative
to board members next year, he said.
As well as aiding financial market development, Nalletamby
said the fund would enhance monetary policy by helping African
central banks to diversify their reserves, which across the
continent are concentrated in low-yielding US-dollar
But former AfDB president Babacar Ndiaye shot down this
rationale. African central banks are all talking about
diversifying their assets but wont be able to do it
because no asset in Africa is AAA or liquid enough.
The non-convertibility of most currencies in the region is
the biggest constraint, Benno Ndullu, central Bank
governor of Tanzania, said. The AfDB should work on providing
African central banks with currency swaps to incentivize the
reserve managers to invest in local currency government bonds
of neighbouring states, he said.
The AfDB initiative received strong backing from Emmanuel
Assilamehoo, deputy director of market operations at Central
Bank of West African States (BCEAO). He said: this
initiative will help us add liquidity to long-dated government
paper and so aid the creation of sources of long-term
Nalletamby said the local bond fund did not have to be
big to make an impact as it would establish a