Local Markets Compendium 2014 - Standard Chartered Bank

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Global Research |

Local Markets Compendium 2014

All rights reserved. Standard Chartered Bank 2013


Preface To paraphrase Mark Twain, the reports of the death of EM bond markets have been greatly exaggerated. Increased global allocations to local EM bond markets have been not cyclical but primarily structural in nature, reflecting these markets’ rising economic importance. The BIS triennial FX survey also reflects this shift, highlighting rapid growth in usage of EM currencies. In this third edition of the Local Markets Compendium, we continue our coverage of 41 markets across our footprint of Asia, Africa and the Middle East, as well as the key markets of Brazil and Mexico. The typical view of emerging local-currency bond markets is shaped by index inclusion, but as we show throughout this compendium, this definition excludes many countries that are joining the investable universe. In previous editions, we showed that focusing solely on foreign investors misses the importance of local participants. In this edition, we go further still and show that the broad ‘foreign investor’ label misses important differences within this category. This is not just a question of taxonomy. In the same way that a diverse set of participants between foreign and domestic sources improves market liquidity, diversity among foreign investors contributes to variations in behaviour under different market conditions. We show that dedicated EM bond funds represent slightly less than half of all foreign investors. As a result of this diversity, the scale of selling in aggregate has been far smaller than most reports suggest. We have highlighted since our first edition that while foreign investor demand is critical at the margin, the non-bank financial institution (NBFI) sector is more important in aggregate. Global allocations to emerging markets are typically driven in the first instance by expectations of sustained growth outperformance relative to developed markets. This growth has a critical relationship with domestic savings growth exceeding income growth. As the pace of foreign buying slows, these domestic savings pools will become more important sources of demand. Shifting these savings pools from potential to actual sources of demand requires an assessment of two factors: the ability and willingness to provide that demand. In contrast with developed markets, we find that aggregate allocations to fixed income by pension funds and insurance companies have declined in the past few years, creating capacity for bond buying. The willingness to buy will, however, see greater variation across markets. We hope this publication remains your definitive source for local bond markets. Our country pages include all of the key information on each market, including regulations to monetary policy, account opening and trade settlement, and details on the range of market participants. Finally, we would like to thank all of our Standard Chartered Global Research colleagues (particularly co-heads of Local Markets Strategy, Thomas Harr and Michael Trounce), as well as other colleagues across the bank, without whom this compendium would not have been possible. Will Oswald Global Head, FICC Research Standard Chartered Bank


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ii


Table of contents Foreign investors – Cyclical versus structural Domestic non-bank financial institutions The rise of the CNY

2 11 16

Asia Bangladesh China Offshore Renminbi Hong Kong India Indonesia Malaysia Mongolia

Pakistan Philippines Singapore South Korea Sri Lanka Taiwan Thailand Vietnam

104

112 118 124 130 136

Oman Qatar Saudi Arabia Turkey United Arab Emirates

142 148 154 160 166

Angola Botswana Cameroon

174 178 182

Mozambique* Nigeria South Africa

206 210 216

Côte d'Ivoire Ghana Kenya Mauritius

186 190 196 202

Tanzania Uganda Zambia

222 226 232

240

Mexico

246

Appendix 1 – Foreign exchange framework

252

Appendix 5 – Size of domestic investor base

260

Appendix 2 – Foreign exchange products Appendix 3 – Rates: Bonds Appendix 4 – Rates: Swaps

255 257 259

Appendix 6 – Global bond market indices Appendix 7 – Global government debt treemap Appendix 8 – Global indicator maps

261 262 263

20 24 30 36 42 48 54 60

62 68 74 80 86 92 98

Middle East and North Africa Bahrain Egypt Jordan Kuwait Lebanon

Sub-Saharan Africa

Latin America Brazil

Appendices

Contributors’ contact details

267

Lead authors Will Oswald, Global Head of FICC Research Michael Trounce, Head of Local Markets Strategy, West

Thomas Harr, Head of Local Markets Strategy, East Lawrence Lai, Research Analyst

Jennifer Kusuma, Rates Strategist Becky Liu, Greater China Rates Strategist Delphine Arrighi, Senior Local Markets Strategist

Nagaraj Kulkarni, Senior Rates Strategist Danny Suwanapruti, Senior Rates Strategist

*New countries for this edition of the Local Markets Compendium

1


Foreign investors – Cyclical versus structural Thomas Harr | Michael Trounce | Lawrence Lai

Foreign investors are getting larger and more diverse We show the size and growth of overall foreign demand, and the different types of foreign investors and demand

Foreign investors continue to grow in importance in local-currency emerging markets (EM). In this article, we show the size and growth of the foreign investor base and the reasons why foreigners have been – and will continue to be – attracted to local markets. We also break new ground in showing the different kinds of foreign investors present in our markets, and in examining different types of foreign investor demand for different markets. We show that some markets are dominated by foreign investors with shorterterm (more cyclical) investment horizons, such as Thailand. Other markets are dominated by foreign investors with longer-term (more structural) horizons, such as Korea.

Understanding and quantifying different foreign investor preferences and presences in different markets helps forecast relative price action

Price dynamics during both normal market conditions and periods of market turmoil will vary across different markets where different kinds of foreign investors with different preferences are present. For example, in Thailand, the large build-up of bond holdings of highly cyclical investors (foreign banks, leveraged investors) and the high importance of cyclical investors (EM-dedicated funds) in the foreign investor base have been driving price rises and declines in 2013. The preference of structural investors such as sovereign wealth funds and central banks for lower-yielding, liquid, high-quality credits helps to explain less volatile Korean bond price dynamics during the same period. Understanding and quantifying this heterogeneity of demand helps us to forecast bond prices.

Sizing the growth in foreign holdings: Tracking USD 540bn of holdings We capture foreign holdings in all major EM markets

We continuously capture every available nationally sourced datapoint on foreign holdings in all major EM local-currency bond markets. We capture the following: 1.

The 12 largest markets in the J.P. Morgan GBI-EM-Global Diversified (JPM GBIEMGD) Index, which together account for close to 95% of the index by country weights, and where foreign investors held USD 540bn of EM debt as of 31 July 2013 (Figure 1) Other major EM markets, namely Korea and India Smaller local-currency bond markets in our footprint regions of Asia, Africa and the Middle East, including Ghana, Kenya and Uganda

2. 3.

We provide insight on the major markets (1 and 2) in our monthly SC FIRST publication (see On the Ground, 16 September 2013, ‘SC FIRST – EM/DM bond spreads to narrow’). We provide data on all three market groups in this, the latest edition of the Local Markets Compendium. Figure 1: Trend increase in foreign holdings of EM bonds to USD 540bn Foreign holdings in USD terms and in a synthetic local index (USD bn) 700 Synthetic local 600 500

USD bn

400 300 200 100 0 May-08

May-09

May-10

Source: National sources, Standard Chartered Research

2

May-11

May-12

May-13

Local Markets Compendium 2014 Explaining the growth in foreign holdings to date Flows into EM local debt have been driven by increasing investability, diversification and value

The USD value of holdings varies with exchange rates as well as with net purchases. Figure 1 therefore also shows an index that better reflects pure net increases in stock, and has risen steadily over the years. We think the more cyclical investors, as well as potentially more structural and even longer-term investors – especially the public sector – are driven to different degrees by increasing investability, better diversification and ongoing value. Local-currency emerging markets have become more investable, enabling foreigners to increase their holdings. Nigeria was included in the GBI-EMGD in late 2012 on investability grounds after holding period requirements were dropped. Higher credit quality improves investability, as evidenced by South Africa’s inclusion in the Citigroup World Government Bond Indices (WGBI) in mid-2012. South Africa’s improving credit quality at the time paved the way for index inclusion. Indian policy makers are currently investigating the costs and benefits of making the Indian bond market more accessible.

EM government balance sheets are much better than those in DM

Local-currency emerging markets have also been good sources of diversification and value. The rise in government debt/GDP ratios in advanced economies has outpaced that of EM in the post-GFC period (Figure 2). EM local markets started to outperform DM in 2009, after investors became concerned with the sharp deterioration in DM sovereign balance sheets as private-sector liabilities moved onto the DM public balance sheet (Figure 3). Following some months of better EM performance in 2009, inflows to EM funds and to EM bonds picked up in late 2009. For example, loweryielding markets like Korea, Malaysia and Thailand have attracted large inflows from foreigners seeking diversification from weakening, formerly high-quality DM credits.

Forecasting future foreign appetite EM diversification and valuations should continue to attract inflows to EM local debt

We believe foreign investors will continue to be attracted to local markets for two reasons: diversification and ongoing attractive valuations. Many investors are underallocated to EM. Some are under-allocated by benchmark constraint. Newer GDPweighted global bond benchmarks call for 30% of AUM in EM bonds, compared with 10% in traditional market capitalisation-weighted indices. The potential for further diversification is clear by comparing foreign ownership percentages in EM to most developed countries, which have a higher proportion of debt held by foreign investors (see Figure 5).

Figure 2: Government balance sheets are stronger in EM

Figure 3: EM has outperformed DM since the GFC

Debt to GDP in G7 vs. EM (%)

GEMX vs. UST total return

140%

GEMX Total return index (unhedged)

150 G7

120%

140

100%

130

80%

120

60%

110 EM

40%

UST total return Index

100 90

20%

80 Apr-09

0% 2000

2003

2006

2009

2012

Source: IMF WEO (April 2013), Standard Chartered Research

Apr-10

Apr-11

Source: Bloomberg, Standard Chartered Research

3

Apr-12

Apr-13

Local Markets Compendium 2014 Ongoing attractive valuations will also pull foreign investors towards local markets. The higher yield on offer in EM bond markets is a pull factor (Figure 4). Our work on the distribution of foreign holdings confirms our view that investors tend to hold systematic overweight positions in high-yielding markets (and systematic underweights in lowyielding markets) within EM portfolios; in other words, they systematically favour carry trades. Although this tendency varies in strength over time, we believe that the spread pick-up will continue to support allocations from DM to EM.

Assessing cyclical versus structural demand for local EM debt We distinguish between cyclical and structural demand for local EM debt

Among foreign investors in EM local debt markets, we believe that different types of investors generate different types of demand, best characterised as either cyclical (shorter-term) or structural (longer-term) in nature. Tracking this mix accurately significantly improves our ability to forecast price dynamics. In our approach, cyclical investors are those who are more likely to sell when the outlook for local markets weakens. In almost all cases, structural investors buy as a result of their mandate to increase long-term allocations to EM, and so are less likely to sell during periods of weakness. Demand from local investors varies in a similar way; we provide insight on local investors in the next article.

Events of 2011 and 2013 reveal heterogeneous foreign demand Foreign investors significantly reduced their holdings of EM bonds from AugustOctober 2011, and again from May-August 2013. This was in contrast to the broad and steady rise seen during other periods, according to our index of holdings (Figure 1). Our data also shows sharp declines in foreign ownership of local debt across countries (Figures 6 and 7). We believe this reveals heterogeneous foreign demand for EM as a whole, with most investors staying the course but some investors pulling out. We also believe that it reveals heterogeneous demand across EM markets, with foreign holdings of local debt falling sharply in some markets – Malaysia, Turkey, Thailand and Indonesia – and not in others, such as Mexico and Korea.

Linking different types of demand to different investor groups By gathering data on the holdings of different investor groups, we get a sense of the different types of investor demand

We identify four easily differentiated foreign investor groups. They generate four differentiated types of demand, classified as more structural or more cyclical. Gathering data on the holding dynamics of these foreign investor groups also gives us data on the mix of the different demand categories. The four investor groups are: (1) EM-dedicated investors, (2) global crossover investors, (3) central banks (CBs) and sovereign wealth funds (SWFs), and (4) foreign banks and leveraged funds.

Figure 4: EM/DM bond spread has widened recently

Figure 5: Foreign holdings in most EM are relatively low

WGBI vs. GBI-EMGD bond spread (%)

Percentage of marketable debt held by foreign investors, %

12

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

8 GBI-EMGD 6

Spread

4 WGBI

2 0 Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Source: Standard Chartered Research

EM

DM

India Thailand Philippines Israel Brazil Korea Canada Turkey Czech Republic Indonesia United Kingdom Poland Mexico Slovakia South Africa Malaysia Iceland Russia New Zealand Denmark Spain Sweden Hungary Norway United States Peru Slovenia France Austria Finland

10

Source: OECD, National sources, Standard Chartered Research

4

Local Markets Compendium 2014 Foreign banks and leveraged funds (those with an absolute return target) are the most cyclical investors under ‘normal’ market conditions, in our view. They will view EM as ‘hot’ at times and will put large amounts of leveraged capital to work in local markets, focusing on carry markets. They are quick to withdraw capital when markets turn down. Large capital inflows to the Indian bond market in early 2013 – and outflows later in 2013 – were likely driven by this group of investors (as well as crossover investors), as India is not in the benchmark of EM-dedicated investors and is not typically held by public-sector investors. We believe that benchmarked funds’ demand for EM debt is highly cyclical during extreme periods

EM-dedicated investors and global crossover investors are also quite cyclical, in our view. In ‘normal’ times, when benchmark funds face neither large inflows nor redemptions, we would expect their holdings – both overall and across markets – to be more steady than those of foreign banks and leveraged funds, as tracking error constraints limit how far they can diverge from their benchmarks. However, in extreme periods when benchmark funds face either large inflows or redemptions, they are likely to become highly cyclical as they are ‘forced’ to buy or sell. Hence, while EM-dedicated and crossover funds with significant exposure to EM are by definition structurally exposed to EM, some of the investors who put money into those funds are not. For example, retail investors – who, according to EPFR, account for around 35-40% of investors in local-currency bond funds – tend to be highly cyclical, putting money into EM-dedicated and crossover funds as markets rally and withdrawing during sell-offs. This highly cyclical behaviour forces these funds to behave cyclically during market extremes, despite having a long-term mandate towards EM. CBs and SWFs are the most structural of the foreign investors, in our view. They do not face redemptions in the same way as private-sector funds, although a sharp fall in FX reserves or a need to support public finances may lead to a drawdown of assets. These investors typically invest in higher-quality credits. This should mitigate the incentive to sell during market stresses, as the underlying assets perform better.

Sizing different demand types through investor group holdings For EM-dedicated investors, we have hard data on USD 126bn of AUM (taken from individual fund factsheets); we have country allocations for USD 74bn benchmarked against the GBI-EMGD and USD 18bn benchmarked against other EM indices. We believe that GBI-EMGD-benchmarked local-currency funds had total AUM of around USD 200bn as of 30 September 2013, after recent redemptions and declines in FX valuations. We also have AUM for blended funds, which we assume are benchmarked against the GBI-EMGD. To arrive at an estimate for total EM-dedicated allocation, we scale up the country allocations of USD 74bn benchmarked against the GBI-EMGD to a total AUM estimated at USD 240bn. Figure 6: Asia – Sharp fall in MYR foreign holdings

Figure 7: MXN and BRL have been much more stable

Share of fixed-rate debt held by foreigners (%)

Share of fixed-rate debt held by foreigners (%)

50%

60% MXN 50%

MYR

40%

HUF PEN PLN

KRW

BRL

20% PHP

10%

10% INR

0% Jan-08

ZAR

30%

THB

20%

TRY

40%

IDR

30%

Jan-09

Jan-10

Jan-11

Jan-12

RUB 0% Jan-08

Jan-13


Jan-09

Jan-10

Jan-11


5

Jan-12

Jan-13

Local Markets Compendium 2014 Similarly, by examining individual fund factsheets for crossover funds (global bond funds with large EM exposures), we have found country allocations for USD 121bn. We do not believe that this is a representative sample of global bond funds’ EM exposure, and hence we do not scale up this data. Instead, we use the ‘hard’ data of country allocations for the USD 121bn to capture global bond fund allocations to EM for which we have data. For sovereign holdings, we have hard data for only a few countries. Until July 2013, Indonesia published data on the amount of local debt held by central banks (not including SWFs). The Korea Financial Supervisory Service publishes holdings of KRW local debt by country. From these country allocations, we estimate the share held by CBs and SWFs by focusing on the countries with small domestic investor bases. We use a similar method for Peru. For other countries, we do not have estimates of holdings by CBs and SWFs.

We estimate that sovereign investors account for 30-40% of foreign investors in KRW debt

Based on our conservations with reserve managers, the top three investment criteria for EM investments are credit rating, market liquidity and FX outlook. Outside of Korea and Indonesia, the most favoured EM markets among sovereign investors are China, Singapore, Malaysia, South Africa, Mexico, Brazil and Poland. In contrast, we believe that sovereign involvement in markets such as the Philippines, Turkey and Thailand is much smaller. We believe that sovereign investors favour Indonesia over Thailand because of higher yields, despite Thailand ranking higher on the three investment criteria of credit ratings, market liquidity and FX outlook. In Figure 8, we provide estimates of total holdings of EM-dedicated funds based on a scaled-up version of the country allocations of our sample of USD 74bn and our other available data. Among the countries in our database, we believe that sovereign investors account for the largest share of foreign holdings in Korea, and they account for a significant share in Indonesia. EM-dedicated investors account for a large share of foreign investors in the bond markets of Russia (RUB), Peru (PEN) and South Africa (ZAR), followed by Thailand (THB), Indonesia (IDR) and Malaysia (MYR). Based on our available data, global bond funds are particularly involved in the bond markets of Hungary (HUF), MYR and Korea (KRW). As highlighted above, we do not claim to capture all EM allocations of global bond funds. For example, we believe that global bond funds are also large holders of ZAR bonds following South Africa’s WGBI inclusion in 2012. In Figure 9, we compare the different foreign investor types’ percentage holdings of the total government bond market. Figure 8: Sovereigns dominate in KRW

Figure 9: Benchmarked funds are large in MYR bonds

Percentage foreign allocation breakdown by investor type relative to total foreign holdings*

Percentage foreign allocation breakdown by investor type relative to total bonds outstanding

Russia South Africa Peru Thailand Indonesia Malaysia Hungary Poland Turkey Brazil Mexico India Philippines South Korea

Estimated EM-dedicated funds

CBs & SWFs CBs & SWFs

Estimated EM-dedicated funds

Available global bond funds

Available global bond funds Foreign banks Data not available

Foreign banks Data not available

0%

20%

40%

60%

80%

100%

0%

*Sovereign holdings of KRW and PEN bonds are estimated from the size of domestic investor bases in individual countries. In Indonesia, sovereign investors refer only to central banks. Source: Various fund factsheets, national sources, Standard Chartered Research

20%

40%

60%

80%

Source: Various fund factsheets, national sources, Standard Chartered Research

6

100%

Local Markets Compendium 2014 Based on our estimates of the relative sizes of investor groups, we would expect foreign demand to be stickier for Korea; more cyclical for Thailand

Based on these criteria and our available data, we would expect foreign investors in Korea to be relatively structural in nature – i.e., stickier during large local-market selloffs. In contrast, foreign investors in Turkey and Thailand are likely to be more cyclical.

Linking recent bond flows to different investor types and demand To get a better sense of the relative size of the different types of foreign demand in local debt markets, we analyse foreign flows since May 2013. On 9 May, The Wall Street Journal published an article by its chief economics correspondent, Jon Hilsenrath, entitled ‘Fed maps exit from stimulus’. This sparked concern that the Fed would soon begin to taper, or slow, the pace of quantitative easing. Our database of foreign holdings indicates that foreigners sold EM bonds in response to this. Since 9 May, foreigners have sold USD 11.5bn in markets for which we have high-frequency data (IDR, THB, MXN, TRY, HUF and ZAR local-currency bonds). EM local-currency bond funds have seen USD 9.4bn of outflows during the same period, according to EPFR data. This shows that some of the investors who held EM bonds on 9 May were cyclical – because they sold – while some may have bought during this period. The relative size of selling versus holdings provides insight into the mix of cyclical versus structural investors in individual markets. During the heavy selling phase from 9 May to 25 June, foreigners were net buyers in some markets: KRW, HUF and PEN bonds. We view evidence of foreign buying of KRW as part of a wider, unobservable trend of buying by structural investors during this time. We view HUF and PEN buying as linked to particular local idiosyncratic stories and less liquid markets. The market entered a new phase of nuanced buying from 26 June to 22 August. This allows us to check flow data for evidence of the different types of investor demand and activity by different investor groups. During this ‘nuanced buying’ phase, foreigners bought USD 1.74bn of MXN, IDR, PLN, ZAR and PEN bonds, and were large net sellers (USD 4.9bn) of THB and TRY bonds. Since 23 August, foreigners have bought USD 3.9bn of MXN and ZAR bonds and, sold USD 1.07bn of THB bonds. Figures 10 and 11 show foreign selling in local markets during these different phases, as a percentage of total foreign holdings as of 9 May and in USD terms. We classify foreign bond selling in the first phase as cyclical.

Thailand – Cyclical investors dominate Thailand is part of the GBI-EMGD, with an estimated weight of 7.6% as of September 2013. We estimate that EM-dedicated investors account for close to 50% of foreign holdings of THB bonds, while global bond funds have a marginal share. Given that sovereign and global bond funds likely have limited involvement in THB bonds, we believe EM-dedicated funds, foreign banks and leverage funds dominate. Figure 10: Foreigners bought KRW, sold THB bonds

Figure 11: Heavy foreign selling of TRY bonds

Foreign selling to total foreign holdings since May (%)

Foreign selling since May (USD bn)

Start of buying (23-Aug to 20-Sep)

10.0% 5.0%

6 4

0.0%

2

-5.0%

0

-10.0% -15.0%

Strong selling phase (9-May to 25-Jun)

-20.0%

Start of buying (23-Aug to 20-Sep)

Nuanced buying phase (25-Jun to 23Aug)

-2 Nuanced buying phase (25-Jun to 23Aug)

Strong selling phase (9-May to 25-Jun)

-4 -6

-25.0%

-8 KRW HUF PEN MXN PLN ZAR TRY MYR IDR

THB

KRW


HUF

PEN

MXN

ZAR

PLN


7

IDR

MYR

THB

TRY

Local Markets Compendium 2014 Foreigners were heavy sellers of THB bonds in May-June 2013. This partly reflects the risk of the imposition of capital controls in April, following sharp FX appreciation of the Thai baht (THB) and heavy long positioning in local markets at the time (see Rates Alert, 25 April 2013, ‘Thailand – Risk of Capital Flow Measures’). We also think this reflects the fact that cyclical investors, including EM-dedicated funds and foreign banks, make up a large share of the foreign investor base in Thailand (see Figure 8). When Fed QE3 tapering talk began, foreigners held close to USD 30bn of Thai bonds. This number appears large assuming that neutral EM-dedicated allocations to Thailand are around USD 18.2bn (7.6% of USD 240bn). Foreign holdings had been built up significantly in 2012 and early 2013. We believe that EM-dedicated funds, foreign banks and leveraged funds drive cyclical flows in THB bonds

This build-up rate – about USD 14bn from end-2011 to March 2013 – appears inconsistent with the build-up that would be expected from inflows to EM-dedicated funds and neutral allocations to Thailand. A highly cyclical and speculative element also appears to have been at work. In particular, foreigners sold Bank of Thailand (BoT) bonds in Q2, while they held onto government Loan Bonds (see Figure 12). We believe that foreign banks typically invest in BoT bonds, which have tenors of up to 4Y. As such, we believe short-term speculative flows were a key driver of the selloff in Thai local markets from May-August.

Korea – Structural investors dominate Sticky sovereign investors explain structural flows into KRW bonds

At the other end of the spectrum is Korea, where we estimate that sovereign investors account for around 30-40% of foreign holdings, while EM-dedicated investors are very small (see Figure 8). This was evident during the period of Fed QE3 tapering talk – foreigners were buyers in May-July and sold only in August (see Figures 10 and 11). Based on estimates of sovereign holdings of Korean bonds, we observe that CBs and SWFs have broadly maintained their holdings (see Figure 13). Note that index-based bond funds, which tend to be highly cyclical during stress periods, are not heavily involved in Korea; this is partly because Korea is not part of the GBI-EMGD index. During the recent period of stress, when benchmarked funds faced large redemptions, the limited involvement of benchmark-based funds in KRW bonds mitigated foreign selling. In sum, foreign involvement in Korean bond markets appears to be highly structural in nature, and hence less vulnerable to the cyclical outlook and short-term developments.

Figure 12: Foreigners have sold BoT bonds

Figure 13: Sovereigns have been a buffer for Korean bonds

Foreign holdings of THB LB, BoT bonds (USD bn)*

Total foreign and sovereign holdings of KRW bonds (USD bn)*

30

95 Total foreign holdings

25

Foreign holdings

90

45

40

20 85

Gov LB 15

35 80

10 75

BoT bonds

5 0 2008

2009

2010

2011

Estimated CBs & SWF holdings (RHS).

70 Feb-13 Mar-13

2012

*Estimated from current USD-THB rate. Source: Bank of Thailand, Standard Chartered Research

30

25 Apr-13

May-13

Jun-13

Jul-13

Aug-13

*Estimated from current USD-KRW rate. Sovereign holdings of Korean bonds are estimated from the size of domestic investor bases in individual countries. Source: Standard Chartered Research

8

Local Markets Compendium 2014 Malaysia – More cyclical than initially thought Malaysia is a rather cyclical market as benchmark funds have faced large redemptions

Foreigners have also been large sellers of MYR bonds, albeit to a lesser extent than in Thailand. Malaysia has faced similar idiosyncratic risks to Thailand in recent months: concerns about a deteriorating current account balance and fiscal deficit. Foreign holdings of MYR bonds were at a record high of 48.3% as of end-April 2013. Based on foreign selling from May-August, foreign demand for MYR bonds appears less cyclical than demand for THB bonds, but more cyclical than demand for KRW bonds. This may be explained by the fact that sovereign investors make up a larger share of holdings in Malaysia than in Thailand, while these holdings are smaller than in Korea. However, during severe stress periods, such as the recent one when EM and global bond funds faced large redemptions, benchmarked funds may be highly cyclical and sell EM bonds. This appears to have happened in Malaysia in recent months, as index-based funds are heavily involved in Malaysia (see Figure 14). In sum, the weights of sovereign and benchmarked investors in Malaysia relative to Korea and Thailand explain why foreigners in Malaysia have been less sticky than in Korea, but slightly stickier than in Thailand.

Indonesia – Cyclical despite the large presence of sovereign investors Foreigners were large sellers of IDR bonds in May-June, and turned small buyers in July. This is remarkable given that (1) foreign investors were already underweight IDR bonds going into May, according to our estimates; and (2) CBs were persistent buyers of IDR bonds throughout the period (see Figure 15). This reflects idiosyncratic negative developments in Indonesia, including a widening current account deficit and poor FX liquidity. However, it also likely reflects the fact that benchmarked funds, as in the case of Thailand and Malaysia, have faced large redemptions that triggered EM bond selling (see Figure 8). Hence, despite the large presence of sovereign investors, foreign demand for IDR local debt appears to be relatively cyclical in nature.

South Africa South Africa’s 10% weight in the GBI-EMGD index makes it a natural place for EMdedicated investors to position. If, as we believe, USD 240bn of AUM were managed against this or similar indices, then a 10% weight in South Africa in aggregate would mean that EM-dedicated investors held around USD 24bn in South Africa. Foreign holdings in South Africa are substantially higher than this, at USD 40bn. We do not believe substantial amounts of South African debt are held by the public sector, although we believe it is held by private-sector funds benchmarked to EM indices that include South Africa and that are managed on behalf of public-sector clients. Figure 14: Benchmarked funds dominate in Malaysia

Figure 15: Sovereigns act as a buffer for IDR bonds

Percentage foreign allocation breakdown by investor type relative to total foreign holdings*

Foreign holdings and CB holdings of IDR bonds (USD bn)* 8

28 THB

CB holdings (RHS)

Estimated EMdedicated funds Available global bond funds

MYR

4

CBs & SWFs

24

Foreign banks

KRW

Foreign holdings

Data not available

0%

20%

40%

60%

80%

6

26

22 Jan-13

100%

*Estimated from current FX rates. Source: National Sources, Standard Chartered Research

2

0 Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13

*Estimated from current USD-IDR rate. Source: MoF, Standard Chartered Research

9

Local Markets Compendium 2014 We believe that crossover investors – global bond funds – are large holders of South Africa due to its inclusion in their indices (it entered the WGBI in 2012) – although we think that the AUM managed against these indices is lower than that commonly thought. Thus, we characterise foreign holdings of South Africa as more cyclical, in that these funds will likely have to sell when they experience short-term outflows (see Figure 8). Still, the size of leveraged demand for South Africa is probably smaller, as it is crowded out by the index demand bid from EM-dedicated and global investors, making it less cyclical. The sell-off of summer 2013 affected South Africa only modestly, supporting this conclusion.

Conclusion Since the GFC, foreign investors have substantially increased their exposure to local EM debt markets. We expect this trend to continue in coming years as underallocated investors diversify into EM. In our view, foreign demand is more cyclical in Thailand and, to a lesser extent, in Malaysia, Indonesia and South Africa. It is much more structural in Korea. This has important implications for market behaviour in these markets. We now turn to the important segment of non-bank financial institutions.

10


Domestic non-bank financial institutions Jennifer Kusuma | Will Oswald

Assessing NBFIs’ ability and willingness to buy bonds As foreign investors have increased allocations to emerging and Asia ex-Japan (AXJ) debt since early 2009, estimates of demand have tended to focus on this segment. However, domestic non-bank financial institutions (NBFI) have not been standing still over this period. Robust growth of NBFIs has been a critical component of demand in emerging and AXJ LCY markets

We established in previous Local Markets Compendia that robust growth of NBFIs in these markets was a critical structural component of demand – as important as (if less volatile than) foreign funds’ rising involvement in emerging and AXJ localcurrency (LCY) markets. The need for domestic NBFIs as a growing investor base in the emerging and AXJ LCY bond markets suddenly became critical as a major investor group – emerging-market (EM)-dedicated funds and global bond funds – were forced to reduce exposure to LCY markets on the back of redemptions in mid2013. To assess whether NBFIs can absorb potentially reduced demand from foreign investors, we look at insurance and pension funds’ ability and willingness to increase participation in LCY bond markets.

Asset growth is faster than income growth in all NBFI segments and over time

As we have shown previously, not only does an increase in per-capita GDP relate strongly to an increase in NBFI assets per capita, but asset growth is faster than income growth (Figure 1 shows per-capita NBFI assets on a log scale). Hence, rising per-capita GDP – as we have seen across a broad swath of emerging markets – has led to strong growth in NBFI assets. This relationship holds true within NBFI segments, including both life insurers and the domestically oriented mutual fund segment (mutual fund assets that are both managed and invested in the same countries). In these segments the rate of increase barely slows even at higher income levels, represented in Figure 4 as an almost linear increase in log terms. This relationship holds not just across countries at a single point in time, but also through time. Examining the changes between end-2008 and end-2012 (Figure 2), we find a positive linear relationship between the percentage change in NBFIs asset and the percentage change in income; given faster EM growth, this also implies faster NBFI asset growth in EM. This growth has indeed been impressive: life insurance premia in EM (Figure 5) went from 9% in 2002 to 19% 10 years later; pension fund assets in EM (Figure 6) grew from 3% of the global total to 8%.

Figure 1: Domestic institutional investor size increases with income growth (2012)

Figure 2: Faster-growing economies have faster-growing NBFI assets

NBFI assets per capita (log scale) vs. GDP PPP per capita

DM in green and EM in blue, 2008-12 200%

1M

NBFI assets per capita (USD)

KR ZA BR

10K 1K 100

SV CN MA INID EG PK PHJO VN

10

MY CL

CS

NO

TW AT

KW TT

PA

HK US

PT

TH MX TR LB RO

CH

SG

% change in NBFI assets

DK

100K

IE

BH SA OM BS

AE

LT

RU

TR

150% CZ

100%

AT HK BR SG MY TW NL CA ZA PEVN KR IE TH CL PH CH MX AU CO LU PL FI GBNO DERU US SE DK JP IT PT FR ES HU

50% GR

0%

UA

1

BW

0

10

20 30 40 50 GDP PPP/capita (USD '000s)

-50% -20%

60

Source: Various sources, Standard Chartered Research

-10%

CN

IN

0% 10% 20% 30% % change in GDP PPP/capita


11

ID

UG

40%

50%

Local Markets Compendium 2014 Figure 3: Life insurance has a positive and accelerated relationship with income (2012)

Figure 4: Domestically focused mutual fund growth is high across all income levels

Insurance density (log scale) vs. GDP PPP per capita

Domestically oriented mutual fund assets per capita (log scale) vs. GDP PPP per capita, June 2013 100,000

CH

MT

Insurance density (USD)

KR

1K

MY BR LB TH MX CN TR

100

10

TW

LT

IE

SG

AE

PT

ZA

JO INIDAO PHLK KEVN EG PK SV BD NG

USHK NO

Mutual fund per capita (USD)

10K

BH OM SA

KW

TT UY

FR DK CA CH

10,000 BR

1,000

ZA TH TN TR

100

PH

CN

US NO FI IL AU SE AT GB IT TW SA NZES KR BE DE NL CLHU PT MY MT HK JP PL SK KW MX GRCZ AR

IN

SI

PKID

10

PE RU BH

MA EG

1 0

10

20 30 40 GDP PPP/capita (USD '000)

50

SG

1

60

BG

0

10

20

30

40

50

60

70

GDP PPP/capita (USD '000)

Source: SwissRe, IMF, Standard Chartered Research

Source: Lipper, Standard Chartered Research

Figure 5: EM life insurance premia have grown, both in absolute terms and as a share of the world market

Figure 6: Robust pension fund growth in Asia and Latam EM assets in USD bn, versus total EM pension assets as % of world assets (RHS)

Annual insurance premia (LHS), % of world premia (RHS) 25

900

9

2,500 Africa

800

Asia

Europe

Latam

8

Synthetic LCY

700

20

2,000

15

1,500

10

1,000

7 6

600

EM and AXJ premia % world premia (RHS)

500 400

5

EM and AXJ % world asset (RHS)

4 3

USD bn

300

5

2

500

200

1

100

0

0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: SwissRe, Standard Chartered Research

Source: OECD, FIAP, National sources, Standard Chartered Research

Figure 7: EM pension and insurance funds have reduced bond holdings as % of their investment portfolios

Figure 8: Bond holdings fell in 2012 versus 2008 Green: pension funds, blue: insurance funds

Bond holdings as % of investment portfolios 10 Bond holdings as % of market outstanding (difference, 2008-2012) ID 5

65% 60%

MX TW CNLK TH

KR

55%

0

50%

-5 Pensions

45%

CN

BR

IN

Bond holdings have fallen

-10

40%

EG IN SG KE TH ID MY MX ZA SG

LK

PK KR MY

-15

35%

TR TR

ZA

Insurance -20

30% 2003

-30 2004

2005

2006

2007

2008

2009

2010

2011

2012

-25

-20

-15

-10

-5

0

5

10

Bond holdings as % of investment (difference, 2008-2012)

Note: Weighted by estimated GBI-EM Global Diversified weights; Source: Various sources , Standard Chartered Research


12

15

Local Markets Compendium 2014 Robust asset growth is a necessary but insufficient indicator of NBFI demand for LCY bonds; we look at bond positioning as a key measure of ability and real yields as a measure of willingness

Robust asset growth is a necessary but insufficient indicator of NBFI demand for LCY bonds. To assess the ability to buy more LCY bonds, we look at NBFIs’ bond positioning relative to their investment portfolios and to the outstanding bond market. NBFIs may not increase demand for bonds in line with their asset growth if their investments in bonds are already high, either in absolute terms or relative to historical trends. We also assess the willingness of NBFIs to buy LCY bonds by looking at the relationship between bond holdings with real yields, as a proxy for investment returns.

Light positioning supports ability to buy bonds The majority of EM and AXJ funds have lower bond holdings as a percentage of investment portfolios and market outstanding, compared to end-2008

EM pension and insurance funds’ bond positioning is favourable, and these funds have the ability to increase investment allocations to bonds. In aggregate, government bond holdings as a percentage of investment portfolios have steadily declined (Figure 7). The downtrend in NBFI holdings coincided with the rise of foreign inflows to LCY bond markets between 2009 and 2012. This is expected, as the combination of falling real yields and robust economic growth in many of these markets should encourage investment rotation out of government bonds and into equities and other risky assets. There will be variations to this global trend. But we show that for countries in the J.P. Morgan GBI-EM Global Diversified (JPM GBI-EMGD) Index that will have the greatest exposure to foreign investment, NBFIs’ bond holdings are light versus historical trends. We have averaged the bond holding percentages of investments across countries by the estimated index weights. We also compare the change in bond holdings as a percentage of investment (x-axis in Figure 8) to the change in funds’ bond holdings as a percentage of the government bond market size (y-axis) between 2008 and 2012. This two-dimensional measure separates funds that have reduced bond holdings with respect to investment portfolios (thus having a lower portfolio concentration risk) and with respect to market size (thus posing lower investor concentration risk to the market) into the bottom left-hand quadrant. Funds that have increased positioning with respect to their size and the market size fall into the top right-hand quadrant. An overwhelming majority of EM and AXJ funds are positioned to the left of the y-axis, consistent with our previous finding, and most of them fall into the bottom left quadrant.

Figure 9: Divergent trends among pension funds

Figure 10: Low relative bond holdings in AXJ markets

Relative positioning of pension funds’ bond holding as % of investment

Relative positioning of insurance funds’ bond holdings as % of investment

1.5 1.0

3.0 2.5

SG

BR KR

TH HU

2.0

MX

PL

1.5

0.5

IN HU TR MX TH

1.0

TR 0.0

0.5

PH MY

0.0

-0.5

TW

-0.5 -1.0 2003

2004

2005

IN 2006

TW ID

ZA 2007

2008

2009

2010

2011

-1.0 2003

2012

Note: Zero indicates neutral bond-holding level compared with the aggregate holding level in the dataset; Countries as in SC FIRST are highlighted; Source: Standard Chartered Research

2004

2005

2006

2007

2008

2009

2010

SG KR MY ID ZA 2011 2012

Note: Zero indicates neutral bond-holding level compared with the aggregate holding level in the dataset; Countries as in SC FIRST are highlighted; Source: Standard Chartered Research

13

Local Markets Compendium 2014 EM and AXJ funds broadly have the ability to increase their demand for bonds

This suggests that growth in funds’ bond investment has fallen behind growth in the investment portfolio and in the bond market, implying that these funds have the ability to increase their demand for bonds. With many NBFI investors also facing minimum regulatory holdings of government bonds within their portfolios, we believe most of the downward adjustment in NBFI bond holdings is probably over. By contrast, very few EM and AXJ pension and insurance funds fall into the top right-hand quadrant.

Relative bond holdings compare those in the market versus the average of those in EM and AXJ

Not all markets are identical, however. We therefore look at bond holdings of pension and insurance funds versus the average of all EM and AXJ funds’ bond holdings over time (Figures 9 and 10). Such relative positioning measures are consistent with our relative foreign investor positioning (RFIP) index, which we monitor on a monthly basis to estimate EM-dedicated positioning across markets. The conclusions generated by this approach are not as strong as for foreign investors, given that pension funds and insurance companies invest only domestically and cannot rotate between bond markets. Nevertheless, the relative positioning measures will indicate key markets that drive global trends (Figure 7).

AXJ insurance funds have low bond holdings relative to EM Latam and European peers

AXJ insurance funds – including Malaysia, India, Indonesia and South Korea – have low bond holdings relative to their EM Latam and European peers (Figure 10). These funds have continued to reduce their relative positioning over time. However, only India and Malaysia score low on investor and portfolio concentration risk, and we think these NBFIs can increase demand for LCY bonds. Indonesian and South Korean insurance funds, meanwhile, had higher investor concentration risk in 2012 than in 2008, as their bond holdings as a percentage of the markets increased during the period.

Real yields are turning more attractive for onshore NBFIs We expect a positive correlation between changes in real yields and bond holdings

We expect a positive correlation between the change in bond holdings as a percentage of assets and the change in real yields, as a proxy for investment returns. We therefore gauge the willingness of NBFIs to increase bond demand by looking at trends in real yields. EM real yields (for countries in the JPM GBI-EMGD) had been on a multi-year downtrend since their peak of 4.5% in June 2009, staying at about 1% between September 2012 and April 2013. EM NBFIs reduced their bond holdings during the same period. The adjustment higher in nominal yields since April 2013 will make LCY bonds more attractive for domestic NBFIs.

Figure 11: EM real yields have turned more attractive in 2013 EM NBFI bond holdings as % of investment (RHS) fell in line with EM real yields (%) 5%

49%

4%

47%

3% 45% EM real yields

2%

43% 1% 41% 0% 39%

-1% -2% 2006

Bond holdings % of investment (RHS) 37% 2007

2008

2009

Source: Various sources, Bloomberg, Standard Chartered Research

14

2010

2011

2012

Local Markets Compendium 2014 The relationship will not be straightforward, with minimum yield requirements and regulations affecting ability and willingness to buy LCY bonds

The relationship will not be straightforward, however. The level of yields rather than the change in yields is a key determinant of bond demand. Many pension funds, especially those with defined-benefit plans, have minimum investment return targets. They will be compelled to diversify asset holdings into higher-yielding assets if yields fall below certain thresholds. This may mean that demand will only pick up when yields rise above the thresholds. The insurance industry is also heavily regulated, as many markets have moved to adopt the Risk-Based Capital (RBC) framework. Industry regulations will affect the willingness (and ability) to invest in LCY bonds.

Identifying markets with the ability and willingness to buy LCY bonds Pension and insurance funds’ bond holdings have broadly fallen across EM and AXJ since end-2008. While we see this light positioning as positive for the bond market, the willingness of these funds to increase their bond holdings is less obvious and depends on various drivers, aside from real yields, that may not always be measurable across markets. However, the measures of ability and willingness we have outlined in this report can help to identify markets with extreme positioning and levels that indicate their vulnerability or strength. Malaysia, India, Brazil, Chile and South Africa stand out as markets that have both favourably light positioning of NBFI bonds holdings and attractive real yields to encourage demand for bonds. In Figure 12, we compare the measure of NBFIs’ ability to buy LCY bonds to the measure of willingness. In the event that demand from other investor groups, including global funds and EM-dedicated funds, weakens and nominal yields rise, we identify the ability and willingness of NBFIs to increase their demand for LCY bonds. In contrast, Singapore and Turkey look vulnerable, with already-heavy positioning of NBFIs and low real yields. Indonesia’s NBFI positioning is still relatively light, but real yields are low at just 0.11% in September 2013 (we have used the benchmark real yield from the iBoxx GEMX sub-index). In case of a market sell-off, we can expect limited support from the NBFIs at current levels.

Figure 12: Malaysia, India, Brazil, Chile and South Africa have the ability to increase demand for LCY bonds as real yields turn attractive 7% LK

6% Real yields (Aug-2013)

Malaysia, India, Brazil, Chile and South Africa have favourably light positioning of NBFIs and attractive real yields; Singapore, Turkey and Indonesia look vulnerable

5%

NG

BR KE

4% NZ 3%

TWTH

2%

PL

PE KR

MX

MY ZA

AU

1%

CO

HU IN CL

ID

0%

CZ SG

TR JP

-1%

PK

-2% 0%

20% 40% 60% 80% 100% 120% 140% 160% 180% 200% Sum of bond holdings as % of investment portfolio and holdings as % of market size (Dec-2012)


15


The rise of the CNY Callum Henderson | Thomas Harr

EM currencies are increasingly prominent in the BIS survey The rise of EM currencies is the key takeaway from the BIS 2013 Triennial Central Bank Survey preliminary results. The top 20 FX markets in 2013 still include 10 EM currencies, as in 2010, but two of them (MXN and CNY) are now in the top 10, versus only one (HKD) before. Within the top 20, EM currencies represented roughly 7.4% of total turnover, up from about 5.8% in 2010 and 5.1% in 2007. At a more granular level, we highlight the following results: CNY and MXN are the big winners

x

The biggest EM gainers were the MXN and CNY, which jumped from 14th and 17th places, respectively, in 2010, to 8th and 9th in the 2013 survey.

x

Looking further back, the CNY was 35 in 2001, 29 in 2004 and 20 in 2007.

x

Other EM winners include the RUB, TRY and ZAR, which improved to 12 , 16 and 18th places, respectively, from 16th, 19th and 20th.

x

By contrast, some EM currencies’ shares declined in 2013 relative to 2010: the HKD (to 13th from 8th), KRW (to 17th from 11th) and INR (to 20th from 15th).

x

The results suggest that the internationalisation of the CNY (in the form of the ‘CNH’) has occurred at the expense of the HKD.

x

Apart from the CNY, all Asia ex-Japan (AXJ) currencies in the top 20 had the same or lower rankings in 2013 relative to 2010. This supports the view that AXJ currencies need to become more internationalised in order not to lose ground to the CNY.

th

th

th

th

Figure 1: The rise of the CNY; the fall of other AXJ currencies Percentage shares of average daily turnover in April 2013* EM currencies are in bold

2007

2010

2013

1

USD (85.6% share)

USD (84.9%)

USD (87.0%)

2

EUR (37.0%)

EUR (39.1%)

EUR (33.4%)

3

JPY (17.2%)

JPY (19.0%)

JPY (23.0%)

4

GBP (14.9%)

GBP (12.9%)

GBP (11.8%)

5

CHF (6.8%)

AUD (7.6%)

AUD (8.6%)

6

AUD (6.6%)

CHF (6.3%)

CHF (5.2%)

7

CAD (4.3%)

CAD (5.3%)

CAD (4.6%)

8

HKD (2.7%)

HKD (2.4%)

MXN (2.5%)

9

SEK (2.7%)

SEK (2.2%)

CNY (2.2%)

10

NOK (2.1%)

NZD (1.6%)

NZD (2.0%)

11

NZD (1.9%)

KRW (1.5%)

SEK (1.8%)

12

MXN (1.3%)

SGD (1.4%)

RUB (1.6%)

13

SGD (1.3%)

NOK (1.3%)

HKD (1.4%)

14

KRW (1.2%)

MXN (1.3%)

NOK (1.4%)

15

ZAR (0.9%)

INR (1.0%)

SGD (1.4%)

16

DKK (0.8%)

RUB (0.9%)

TRY (1.3%)

17

PLN (0.8%)

CNY (0.9%)

KRW (1.2%)

18

RUB (0.7%)

PLN (0.8%)

ZAR (1.1%)

19

INR (0.7%)

TRY (0.7%)

BRL (1.1%)

20

CNY (0.5%)

ZAR (0.7%)

INR (1.0%)

*Because two currencies are involved in each transaction, the sum of the percentage shares of individual currencies totals 200% instead of 100%. Source: Bank for International Settlements, Triennial Central Bank Survey, preliminary results, September 2013

16

th

Local Markets Compendium 2014 The potential is still large; CNY is making waves 2013 average daily FX turnover relative to total trade and GDP suggests that enormous growth potential remains. The relationship between FX turnover on the one hand and GDP and trade on the other is clear and positive. However, this relationship is not proportional across countries and is influenced by other variables. Non-G10 currencies generally have lower average daily turnover relative to total trade and GDP than G10 currencies (see Figures 2 and 3). We highlight two key points in this regard. First, most FX trading is likely driven by cross-border financial flows rather than output or trade dynamics. The 2013 survey results confirm this. Within average daily FX turnover of USD 5.345tn, ‘non-financial customers’ – corporates – make up only 9.2% of spot transactions, 6.4% of FX swaps and 14.2% of outright forwards. By comparison, the shares of ‘other financial institutions’ – investors and smaller, nonreporting banks – are 57.8%, 44.9% and 59.1% respectively. Convertibility is an important driver of FX turnover

Second, convertibility is clearly an important driver of daily FX turnover. With the exceptions of the CNY and RUB, the EM winners – including the MXN, TRY and ZAR – are convertible currencies. In contrast, EM losers such as the KRW and INR are only partially convertible and non-deliverable. The MXN, TRY and ZAR have large and open capital markets in common. In addition, Mexico, Turkey and South Africa are part of large EM bond indices such as the J.P Morgan Emerging Markets Global Diversified (GBI-EMGD) Index, in contrast to Korea and India. The four top 20 currencies with the lowest daily average FX turnover to total trade, and the six with the lowest daily average FX turnover to GDP, are all not fully convertible. The top 10 most actively traded currencies include the AUD, CHF and CAD. There are several reasons for this, in our view. To start with, there are only 15 fully deliverable and convertible currencies, limiting investor choice and focus. In addition, the G5 currencies (USD, EUR, JPY, GBP and CHF) have traditionally taken the lion’s share of central bank reserve allocations, with the 10 others providing diversification. There is also evidence of higher trading volumes in higher-yielding currencies, reflecting the apparent failure of interest rate parity and the prevalence of forwardrate bias models. Crucially, G10 currencies tend to have deeper, more liquid and more sophisticated markets, attracting many kinds of private- and public-sector investors. Finally, G10 currencies that have active exchange-traded futures markets tend to be the most actively traded by trading models.

Figure 2: Non-G10 currencies have room to catch up

Figure 3: The CNY has the biggest potential

Ratio of average daily FX turnover to total trade

Ratio of average daily FX turnover to GDP

1.4

0.7

1.2

0.6

1.0

0.5

0.8

G10

0.4

0.6

0.3

0.4

0.2

G10 Non-G10

Non-G10

0.2

0.1

0.0

NZD CHF AUD USD GBP JPY SEK NOK EUR CAD HKD SGD HUF ZAR DKK MXN TRY PLN KRW TWD RUB INR BRL CNY

NZD USD AUD JPY CHF GBP NOK SEK CAD EUR ZAR DKK TRY MXN BRL HUF RUB PLN SGD HKD INR KRW TWD CNY

0.0

Source: BIS, World Bank, Standard Chartered Research

Source: BIS, World Bank, Standard Chartered Research

17

Local Markets Compendium 2014 The internationalisation of the CNY may encourage other AXJ countries to internationalise their currencies

Convertibility is a critical driver of the CNY’s rise; this supports our assumptions on CNY trading volumes until 2020. We expect China’s capital account to be basically open by then. While some prudential controls are likely to remain in place, the opening of the capital account, and the potential for CNY use as an investment tool, suggests enormous further upside potential despite significant gains to date. CNY daily average FX turnover is only around 3.1% of China’s trade and 1.4% of its GDP. These figures compare with 89.3% and 30.4% for the AUD, and 7.4% and 29.2% for the HKD. As China’s capital account opens, two things will happen: (1) proxy trades for CNY appreciation, such as being long the SGD or the MYR, will diminish in favour of the CNY itself; and (2) the CNY will dominate Asian FX trading, encouraging other AXJ countries to internationalise their currencies to maintain regional relevance.

The Renminbi Globalisation Index (RGI) We have developed a proprietary index to measure the internationalisation of the CNY. The Standard Chartered Renminbi Globalisation Index (RGI) tracks the development of the offshore Renminbi market (see On the Ground, 9 September 2013, ‘Offshore Renminbi – Taiwan joins the RGI’). It tracks developments in four areas: (1) offshore Renminbi deposits, (2) Renminbi cross-border trade settlement and other international payments, (3) CNH FX turnover volume, and (4) Dim Sum bond issuance. It currently covers four offshore Renminbi markets: Hong Kong (since end-2010), Singapore, London (both included since August 2011), and Taiwan (included Since July 2013). As of end-July, the RGI index was at a record high of 1,112, up 50% year-to-date, supported by growth in CNH trading volume (up 114%), rising trade settlement and other international payments (up 98%), and Taiwan’s inclusion in the index (Figure 4). Offshore Renminbi deposits were up 29% and the Dim Sum bond market had grown 35% year-to-date. Average monthly CNH FX turnover – including spot, swaps and CNY NDFs – grew to USD 435bn in Q2-2013, a c.80% increase from Q4-2012, based on our estimates (Figure 5). CNH FX swap turnover has more than doubled in the past year to around c.USD 200bn per month. In contrast, average monthly turnover of CNY NDFs shrank further to USD 60-70bn in Q2-2013 from about USD 80bn as of Q4-2012 as they are gradually replaced by deliverable CNH products.

Figure 4: The RGI grew 50% in the first 7 months of 2013

Figure 5: The rise of CNH; the fall of CNY NDF

Index currently includes HK, Singapore, London and Taiwan

Average CNH daily turnover rose to c.USD 18bn (USD bn)

1,200

12

Index as of July 2013 = 1,112

CNH swap 10

800

8

HK + SG + LDN+TW

1,000

600 400 HK + SG + LDN

200

CNH spot 6 4 CNY NDF

2

HK 0 Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

0 Jul-10

Jun-13


Jan-11

Jul-11


18

Jan-12

Jul-12

Jan-13

Jul-13

Asia


Bangladesh Nagaraj Kulkarni | Samantha Amerasinghe | Samiran Chakraborty

Asia

General Monetary policy framework

Monetary policy tools

Name Policy target

Reserve requirements x Cash reserve ratio: The proportion of total demand and time liabilities (excluding interbank deposits) that a scheduled bank has to maintain in cash with the BB; current weekly average of 5.5% (minimum 4.75%). x Statutory liquidity requirement: The minimum that a scheduled bank has to maintain in liquid assets; includes cash in till, balances with the country’s leading state-owned commercial bank , BDT and foreign-currency balances with the BB. Currently 13%.

Bangladesh Bank (BB) Average CPI inflation of 7.0% y/y in FY14 Independence High, under BB Order, 1972 (P.O. No. 127 of 1972) Policy rate 1-day repo and reverse repo rates Bloomberg ticker NA Deciding body Monetary Policy Committee Policy decision-making Monetary Policy Committee Decision meeting Half-yearly frequency Announcement time NA Press conference Usually around midday Minutes published Occasionally releases summary Open-market To manage liquidity operations (OMOs) Quarterly inflation 4th week of Jan, Jul report

OMOs Aimed at keeping the extent of liquidity tightness consistent with announced monetary policy. To drain liquidity, the BB 30-day bill is usually used. To inject liquidity, the reverse repo and Primary Dealer (PD) special repo are used. Standing facilities Banks and PDs can borrow funds from BB via the liquidity support facility. PDs can also borrow via the special repo facility, where the cost of borrowing is 50bps higher than the repo rate. Also, for PDs, BB will supply liquidity for the amount equivalent to the devolvement of government securities in primary auctions in the previous month.

Source: Bangladesh Bank, Standard Chartered Research


Exchange rate framework Exchange rate regime

Other managed arrangement (IMF)

Exchange rate target

No target, but BB intervenes actively to mitigate BDT volatility

Intervention instruments

Verbal intervention and through spot USD-BDT

Convertible?

Partially

Deliverable?

No

Fixing time and place Spot date, fixing

NA

Fixing methodology

NA

T+2, but most deals are based on today’s value

Source: IMF, Bangladesh Bank, Standard Chartered Research

Economic and financial indicators^

Government balances (% of GDP)

2011

2012

2013F

2014F

Real GDP, change

6.7

6.1

6.3

6.5

CPI inflation*

8.8

10.6

7.7

7.5

Current account/GDP

0.9

1.5

3

2.5

FX res./imports**

3.7

3.19

4.65

4.65

Fiscal balance/GDP

-4.49

-3.38

-4.8

-4.8

Primary balance/GDP

NA

NA

NA

NA

Gen. govt. debt/GDP

37.4

37.2

37.1

37.0

External debt/GDP

19.7

19.7

19.6

19.6

1-day repo***

7.75

7.75

7.25

6.75

S&P

BB-

BB-

Moody’s

Ba3

Ba3

NA

NA

Country rating

Fitch

0

60

-1

50

-2 40 -3 30 -4 20

Fiscal balance -5 -6

General govt. debt (RHS)

-7

0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F

^Fiscal year starts in July; *yearly average; **months of imports; ***year-end; Source: IMF, IIF, MoF, Standard Chartered Research


20

10


Bangladesh FX Exchange rate products Spot Availability Daily trading volume (USD mn) Average trade size (USD mn) Bid/ask spread in BDT onshore* Bid/ask spread in BDT offshore* Reuters ticker

Outright forwards Yes

21

3

0.5

2

NDFs

Options FX swaps On a case-by-case basis

NA

NA

Quotes are usually one-sided

Asia

NA

*Versus USD; for FX swaps, bid/ask spread refers to swap points vs. USD; Source: Standard Chartered Research

Exchange rate regulation – Non-residents

Underlying asset – Trade and FDI Underlying asset – Financial asset No underlying asset

Spot BB approval required for selling BDT No restrictions Not allowed

Forwards

NDFs

Not allowed

NA

Options

FX swaps

Not allowed

For more details, see the BB website at www.bangladesh-bank.org/ including the following links: http://www.bangladesh-bank.org/aboutus/regulationguideline/foreignexchange/fegv1cont.php

Exchange rate regulation – Residents x x x x

Interbank participants can freely buy and sell spot and forwards, provided they remain within the NOP limit prescribed by BB. Interbank participants are not allowed to quote out of market rates. A resident corporation can access both spot and forward markets, provided there is a genuine underlying transaction. All forward contracts are treated as firm and closed out on expiry.


Market participants Corporates Real-money funds Hedge funds Interbank

70% x Both exporters and importers tend to hedge when the trend is against them. x Overall hedging activity is low. 0% x NA 0% x NA 30% x Most interbank transactions are need-based, and few dealers engage in speculative trading. x Deals are mostly concentrated at the front end of the forward curve, i.e., 3-6M.


USD-BDT and BDT REER – Stabilising

The BoP surplus is reviving (USD mn per quarter) 3,000

110 100

2,000

REER

90

C/A

80

FDI

Portfolio

Other

BoP

1,000 USD-BDT

70

0

60 50

-1,000

40 30 1994

-2,000 1996

1998

2000

2002

2004

2006

2008

2010

Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13

2012

Source: Bangladesh Bank

Source: Bangladesh Bank

21


Bangladesh Rates Bonds BGTBs

Asia

Issuer Use of proceeds Curve span Common tenors Coupon Coupon frequency Day count

T-bills Government of Bangladesh Fiscal financing

5Y-20Y 5Y,10Y,15Y,20Y Fixed Semi-annual Act/365

Primary market Auction day Auction cut-off Auction results Auction style Average issue size

3M, 6M, 1Y Zero NA Act/364

Tuesday

Sunday 11:00 15:00 Multiple-price

BDT 1.5-5.0bn

Secondary market Average trade size Daily trading volume Quotation convention Settlement period Bid/offer spread

BDT 2.5-7.0bn BDT 100-150mn BDT 200-250mn Yield T+0; primary auction is T+1 50bps

Regulations Custodian

Local custodian


Fiscal deficit financing pattern (BDT bn)

Fiscal deficit financing pattern (%)

300

80 70 60 50 40 30 20 10 0 -10 -20 2006

250

Domestic bank

200 150

Foreign

100 Domestic non-bank

50 0 -50 2006

2007

2008

2009

2010

2011

2012

2013

Domestic bank

Foreign Domestic non-bank

2007

2008

2009

Source: Bangladesh Bank, MoF


Government borrowing from banking system (BDT bn)

Outstanding stock (BDT bn)

Borrowing from banking system

250 200

900 800 700 600 500 400 300 200 100 0 2008

150 100 50 0 Borrowing from central bank

-50 -100 -150 2006

2007

2008

2009

2010

2011

2012

2013


2011

2012

2013

BGTBs

NSD certificates T-Bills

2009


22

2010

2010

2011

2012


Bangladesh Rates Market participants Commercial banks x There are 52 scheduled commercial banks, including 4 state-owned commercial banks, 30 private commercial banks, 9 foreign-owned commercial banks, and 4 government-owned specialised banks. x Commercial banks are the largest investors in Bangladesh Government Treasury Bonds (BGTBs). x Scheduled commercial banks have to maintain 13% of their net demand and time liabilities in government securities. x As at end-June 2013, banks held c. 20% of their deposits in government securities and T-bills. x Banks prefer to invest in T-bills and BGTBs with maturities up to 5Y. x Regulated by BB (http://www.bangladesh-bank.org)

Foreign investors x The participation of foreign investors is not significant although inflows into debt have picked-up recently. x Non-resident individuals and institutions are eligible to purchase BGTBs, provided they are purchased with funds from a nonresident foreign-currency account with a bank in Bangladesh in the name of the purchaser. x Non-residents cannot resell BGTBs to a resident in Bangladesh within one year of purchase. However, resale to other nonresidents (subject to the above conditions) is permitted. x Coupon payments and resale/redemption proceeds are transferrable abroad in foreign exchange. Others x Primary Dealers underwrite primary issuance of BGTBs and facilitate secondary-market trading by making markets. x The role of pension and mutual funds in the government securities market is still limited. Source: Bangladesh Bank, JBC, IRDA, Standard Chartered Research

Ownership by participant – Banks dominate (BDT bn)

Ownership by participant – Banks dominate (%) 100

Deposit money banks

600 500

Deposit money banks

80

400

60

300 40

200 Others

100 0 2007

2008

2009

2010

Bangladesh Bank

2011

Others

20 0 2007

2012

2008

2009

2010

Bangladesh Bank

2011

2012



Yield curve over time – Moving higher (%)

Commercial banks – Improving domestic asset growth

14

6,000

2013

12

5,000

End 2012

10

Assets (BDT bn)

End 2010

2

3,000

1

6 2,000

End 2009

4

0 2009

0 O/N 1Y

5Y

10Y

15Y

20Y

23

-1 -2

2010

2011


Source: Reuters, Bangladesh Bank, Standard Chartered Research

0

m/m growth (%, RHS)

1,000

2

4 3

4,000

End 2011

8

5

2012

2013

Asia

Insurance companies x The life insurance segment is the largest buyer of government securities, mainly investing in government securities and national investment bonds. x Life insurance companies are mandated to hold 30% of their assets in T-bills, T-bonds, and national investment bonds. x Of the 62 insurance companies, state-owned Jiban Bima Corporation (JBC) and Sadharan Bima Corporation are the largest in the life and non-life segment, respectively. x As of 2011, total assets of life and non-life businesses were BDT 203bn and BDT 55.4bn respectively x Insurers prefer to invest in BGTBs with maturities of 5-20Y. x Regulated by Insurance Regulatory and Development Authority (www.idra.org.bd)


China Becky Liu | Li Wei | Robert Minikin | Eddie Cheung | Stephen Green | Lan Shen

Asia



Name Policy target

People’s Bank of China (PBoC) NA, but GDP growth above 7.5% in 2013 and CPI below 4% y/y are key levels Independence Low; controlled by the State Council (SC) Policy rate 1Y PBoC lending and deposit rates Bloomberg ticker CHLR12M and CNDR1Y Deciding body PBoC Monetary Policy Committee, controlled by the SC Policy decision-making SC, signed off by the Premier Decision meeting Quarterly, but decisions can be made frequency at any time Announcement time NA, as decisions taken at any time Press conference NA Minutes published Brief minutes from quarterly meeting Open-market Repos and reverse repos are used to operations (OMOs) manage interbank liquidity; sales of PBoC bills to be gradually phased out Quarterly inflation Quarterly monetary policy report implementation report

OMOs x OMOs include repos and reverse repos conducted on Tuesday and Thursday to manage interbank liquidity. x PBoC resumed bill issuance as an OMO tool in May 2013. x Central treasury cash management, a system via which the PBoC injects term fiscal deposits into the market at a bid rate.

Source: PBoC, Standard Chartered Research

Source: PBoC, Standard Chartered Research

Administrative tools Banks can offer up to a 10% premium on deposit rates. The lending rate floor was removed in July 2013. The PBoC may also set a loan quota via window guidance. Standing facilities Rarely used, but these facilities include lending windows, a rediscount facility and FX swap facilities. Reserve requirement Reserve requirement ratio (RRR) is currently at 20% for large banks, 18% for smaller banks. Additional ‘differentiated’ RRRs can be applied. Central treasury cash management PBoC can inject term fiscal deposits into the market at a bid rate.

Exchange rate framework Exchange rate regime Exchange rate target Intervention instruments Convertible? Deliverable? Fixing time and place Spot date, fixing Fixing methodology

Crawl-like arrangement (IMF) Gradual appreciation in the medium term to reduce trade surplus and to prompt rebalancing of economic growth Buys/sells CNY in the spot market through the China Foreign Exchange Trade System (CFETS) to manage its daily movements; daily trading band of +/-1% around fix Partially No 09:15, Beijing Spot date T+2, fixing is 2 days prior to settlement PBoC fixing is based in part on input from market makers

Source: PBoC, SAFE, Standard Chartered Research

Economic and financial indicators


2011

2012

2013F

2014F

Real GDP, change

9.2

7.8

7.5

7.2

CPI inflation*

5.4

2.6

2.5

3

Current account/GDP

2.8

2.6

3.3

3.7

FX res./imports**

22.0

19.0

16.0

14.0

Fiscal balance/GDP

-1.1

-1.3

-2.5

-2.5

Primary balance/GDP

-1.0

-1.4

-1.6

-1.6

Gen. govt. debt/GDP***

15.3

14.9

15.0

16.0

9.5

10.6

11.9

13.0

6.00

6.00

External debt/GDP Policy rate**** Country rating

6.56

6.00

S&P

AA-

AA-

Moody’s

Aa3

Aa3

A+

A+

Fitch

0.5

25

0.0 20 -0.5 15

-1.0 -1.5 -2.0

Fiscal balance 10 General govt. debt (RHS) 5

-2.5 -3.0

0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F

*Yearly average; **months of imports; ***only includes official MoF-issued debt; ****year-end; Source: NBS, CEIC, Standard Chartered Research

Source: NBS, MoF, CEIC, Standard Chartered Research

24


China FX Exchange rate products Availability Daily trading volume (USD mn) Average trade size (USD mn) Bid/ask spread in CNY onshore*

Spot

Outright forwards

NDFs Yes

Options

FX swaps

34,000

28,000

4,000

17,000

41,000

10 0.0007

30

Included in ‘FX swaps’ due to convergence of onshore forwards and swap curve

1M 0.001, 3M 0.002, 6M, 0.002, 12M 0.003

See CNH SCSHFX

0.3

See CNH

OTC

SCSHFX

Asia

Bid/ask spread in CNY offshore* Reuters ticker

1M 0.0005, 3M 0.001, 6M 0.0015, 12M 0.002

NA

*Versus USD; for FX swaps, bid/ask spread refers to swap points vs. USD; Source: BIS, Triennial Central Bank Survey, September 2013, CFETC, Standard Chartered Research

Exchange rate regulation – Non-residents Underlying asset – Trade and FDI Underlying asset – Financial asset No underlying asset

Spot Forwards NDFs Requires SAFE approval and trade documentation Subject to QFII quota and interbank No bond-market quota Not allowed restrictions Not allowed

Options

FX swaps

NA

Not allowed

For more details, see the links below to the websites of the PBoC and State Administration of Foreign Exchange (SAFE) PBoC Decree [2008] no. 532, PBoC Release [2010] No. 217, SAFE Decree [2009] No. 1, CSRC Decree [2006] no.36 http://www.safe.gov.cn/model_safe/laws/law_detail.jsp?ID=80100000000000000,68&id=4 Also refer to www.safe.gov.cn, www.pboc.gov.cn, www.csrc.gov.cn

Exchange rate regulation – Residents x Foreign investment enterprises and corporates must go through authorised financial institutions to undertake FX transactions. Hedging in onshore forwards is allowed, subject to documentation and provided the transactions are approved by SAFE. x Onshore USD-CNY options trading permitted since 1 April 2011; currently restricted to firms and banks for hedging purposes. For more information on options regulations see http://www.safe.gov.cn/model_safe/laws/law_detail.jsp?ID=80600000000000000,32&id=4

Market participants Corporates Real-money funds

Hedge funds

Interbank

22% x Importers typically buy USD-CNY given easing expectations of CNY appreciation. x Exporters typically sell USD-CNY in the context of overseas FX receivables. 3% x Only QFIIs can access the onshore CNY FX market via custodian banks, but they are not allowed to run proprietary trading accounts. x CBs and SWFs have limited access to the onshore bond and equity markets, while onshore CNY needs are mainly met by official sources. 3% x Hedge funds do not participate in the onshore market. x They access offshore NDF markets to take directional positions on CNY vs. USD; level of trading activity is volatile. 72% x Interbank flows constitute the largest share of the CNY onshore FX market.


CNY REER and NEER – CNY appreciation is not over

The BoP surplus is moderating (USD mn per quarter) C/A

400,000

200 REER

180

FDI

Portfolio

300,000

Other BoP

200,000

160

100,000 140

NEER

0

120

-100,000

100 80 1994

-200,000 -300,000 1997

2000

2003

2006

2009

2012

2001

Source: BIS, Standard Chartered Research

2003

2005

Source: SAFE, Standard Chartered Research

25

2007

2009

2011

2013


China Rates Bonds PBoC bills People’s Bank of China

Government bills Government bonds Ministry of Finance

Use of proceeds

Liquidity management

Fiscal funding

Curve span Common tenors

3M to 3Y 3M, 6M, 1Y

Issuer

Coupon

91 to 273 days 91D, 182D, 273D

3M-50Y 1Y, 3Y, 5Y, 7Y, 10Y Fixed

Zero coupon/Fixed Zero coupon

Asia

Coupon frequency

Zero coupon/Annual

Day count Primary market Auction day Auction cut-off

Annual, semi-annual

Policy bank bonds Ex-Im bank, ADB, CDB Infrastructure, development 3M-50Y 1Y, 3Y, 5Y, 7Y, 10Y Zerocoupon/fixed/floating Zerocoupon/quarterly/semiannual/annual

Act/Act Tuesday/Thursday

Friday

Wednesday

10:00

Auction results Auction style Average issue size Secondary market Average trade size Daily trading volume

10:30

Variable Usually 11:30 or 14:30 Immediately after auction Single/multiple/hybrid CNY 20-30bn CNY 15-30bn

Single-price CNY 2-50bn

Single/hybrid CNY 10-20bn

CNY 1-5bn

CNY 10-100mn CNY 10-20bn CNY 20-30bn

Quotation convention

Yield (2 decimals)

Settlement period Bid/offer spread Regulations Custodian

CNY 20-30bn Yield for fixed, spread for floating

T+0/T+1 5-30bps

1-10bps CDC/local custodian

Source: Chinabond, PBoC, Standard Chartered Research

Fast growth in China’s onshore bond market 9 8 7 6 5 4 3 2 1 0 2001

Quarterly trading turnover ratio – Stagnated in recent years 1.6

1.2

1.4

1.0

1.2 CNY tn (LHS)

1.0

0.8

0.8

0.6

0.6

USD tn (RHS)

0.4

0.4

2003

2005

2007

2009

2011

0.2

0.2

0.0

0.0 2001

2013

2003

2005

2007

Source: Chinabond, PBoC, Standard Chartered Research

Source: ADB, Standard Chartered Research

Swaps

Floating-rate reference calculation

Main product Average daily market size Average ticket size Average bid/offer spread Term Liquid up to Settlement Coupon frequency Convention Floating-rate reference Floating-rate ticker Ticker (2Y)

Non-deliverable interest rate swaps CNY 1.5-2bn CNY 10-100mn 1-5bps 1-10Y 5Y T+0/T+1 (usually T+1) Quarterly Act/365 7D repo/3M SHIBOR CNRR007/SHIF3M (Bloomberg) CCSWNI2/CCSH2 (Bloomberg)

2009

2011

2013

Repo: Calculated based on trading rates between 09:00-11:00 each trading day. The median of all trading rates during the period is taken to be the fixing rate for that day. The fixing repo rate is then released to the public at 11:00 each trading day. SHIBOR: calculated as prime banks’ arithmetic average of the uncollateralised offered rates in the Shanghai interbank market. Banks submit SHIBOR rates before 11:20, and SHIBOR fixing is released daily at 11:30.


Source: CFETS, Standard Chartered Research

26


China Rates Account opening

Trade and settlement flowchart China interbank bond market 1.Place Order

3. Order Execution

Bank/broker 5. Trade Confirmation

• Order Booking • Order Confirmation • Settlement /cash Instruction • Settlement/cash Confirmation • Reconciliation

TD Securities & Cash Settlement

Interbank investors

2. funding/ holding check 7. Settlement/ cash Instruction 10. Settlement Confirmation

5. Trade Confirmation

Bank/broker

12. Cash/Holding Statement EOD

CFETS

4. Confirmation

6. Executed Data

8. Recon Ins vs. CCDC record

DVP

DAP

PAD

FOP

CCDC

9. Settle with CCDC for both securities & cash

11. Cash/Stock Reconciliation

China exchange market 1. Place Order 3. Order Execution

TD Securities Settlement

• Order Booking • Order Confirmation • Settlement Instruction • Affirmation • Settlement Confirmation

Broker 2. Funding/ holding check

TD+1 Cash Settlement


6. Executed Data

8. Depositories’ data – Update holding by TD

DEPOSITORIES

7. Settlement Instruction

Interbank investors • Cash Clearing with CSDCC • Cash Clearing with RQFII account • Cash Statement

EXCHANGES 4. Confirmation


9. Settlement Confirmation 11. Holding Statement MT535/536 EOD TD

10. Stock Reconciliation

Bank/ custodian

12. Payment to/from Depository on TD+1 Cash entry to RQFII account

13. Cash Reconciliation

CLEARING BANK OF DEPOSITORY

14. Cash Statement MT940/950 EOD TD+1


Regulations and taxation Tax types Foreign investment regulations Restricted

Income tax for non-residents Capital gains tax

Additional notes Foreign investors can access China’s domestic bond market via three different schemes: (1) PBoC interbank programme, (2) QFII, (3) R-QFII. Regulatory approval is required under all programmes, and investment amount is limited by quota approved. Tax exemption possible 10% or lower subject to DTA under DTA Not exempted but not 5% formally implemented

Source: SAT, Standard Chartered Research

27

Asia

Cash account Depository account Trading account Process duration Local custodian Local custodian Yes Up to 6 months Special requirements Foreign investors can access China’s domestic bond markets (interbank and/or stock exchange) under three different programmes. The process is heavily regulated; regulators typically involved include the People’s Bank of China (PBoC), China Securities Regulatory Commission (CSRC) and State Administration of Foreign Exchange (SAFE) for investment licences and quota approvals. The three programmes are: x The PBoC’s interbank bond programme allows four types of institutions (foreign central banks, Renminbi settlement banks, Renminbi clearing banks and insurance companies) to invest in the interbank bond market within quotas approved by the PBoC. x The Qualified Foreign Institutional Investors (QFII) programme is available to investors that meet minimum requirements (AUM, years of operation, etc.) outlined by the CSRC. The programme requires licence approval by the CSRC followed by quota approval by SAFE. Additional PBoC approval is needed if the investors require access to the interbank bond market in addition to securities traded on Shanghai/Shenzhen stock exchanges. x The Renminbi Qualified Foreign Institutional Investor (R-QFII) programme, for which only Hong Kong-based financial institutions (SFC type 9 licence holder and meeting other minimum requirements) are currently eligible. Application requires PBoC/CSRC/SAFE approval. Local authorities have indicated an expansion of the programme from Hong Kong to other offshore Renminbi centres, including Taiwan, Singapore and London.


China Rates

Asia

Market participants Banks x Commercial banks are by far the biggest holders of onshore bonds. They have held around 70% of total government bonds in recent years. A key reason for banks to hold CGBs is the zero-risk weighting stats. Banks’ investment and trading books typically invest out to 10Y; average duration for trading book is typically short (1-3Y). x Only cash (not bonds) can be used for reserve requirement purposes. x Regulated by China Banking Regulatory Commission (www.cbrc.gov.cn) Securities companies x Securities companies are important underwriters of domestic credit bonds, mainly corporate bonds and enterprise bonds. In 2012, 69 securities companies underwrote a total CNY 1.47tn of bonds, led by CITIC Securities and CICC. x They are relatively small investors in domestic bonds. Their investments are more skewed towards domestic credits, which are higher-yielding than rates products. Hold around 3-4% of outstanding MTNs and enterprise bonds, and less than 0.1% of outstanding CGBs and policy bank bonds. Mutual funds x As of 22 July 2013, there were 1,782 funds in China, including 1,702 domestic funds and 80 QDII funds, according to China Galaxy Securities’ H1-2013 funds research. x Most funds are open-ended funds (94%). By investment nature, equity funds have the biggest share (38% of the total, 672 funds), followed by bond funds (36%, 644), balanced funds (14%, 255), money-market funds (7%, 129), QDII (4%, 80), and others (0.1%, 2). x Money-market funds usually invest out to 1Y; bond funds typically invest out to 10Y and focus on credit instead of rates. Insurance companies x China adopts a minimal solvency margin framework, and there are no plans to move to risk-based capital yet. x Chinese insurance companies allocate 45% of total investment to bonds (CNY 3.2tn), 31% to bank deposits, 12% to equities and 12% to other investments (as of May 2013). x Negotiable deposits are available to certain institutions, i.e., insurance and pension funds (minimum amount of CNY 30mn, tenor over 5Y for insurance companies). Interest rates are typically materially higher than PBoC benchmark deposit rates. x Regulated by the China Insurance Regulatory Commission (www.circ.gov.cn) Pension funds x The largest pension fund is the National Social Security Fund (NSSF) and the largest commercial fund is China Life. x Employees typically contribute a pension to their city pension fund, which is sometimes consolidated into provincial funds. x The long-term goal is to consolidate provincial funds into the NSSF; approximately 40% of NSSF assets are in deposits. x Provincial funds invest in both bonds and deposits. Foreign investors x Foreign investors can currently access China’s domestic bond market under three separate programmes: (1) the PBoC interbank programme, (2) the QFII programme, and (3) the R-QFII programme. x Preferential treatment given to CBs and SWFs. x Total investment quota given to foreign investors for the interbank market was CNY 475bn as of end-2012. Source: Standard Chartered Research

Ownership by participant – Banks dominate (CNY tn) 20

Ownership by participant – Banks dominate (%) 80

Commercial bank

15

Commercial bank

60

10

40

Credit cooperative Special member

5

Individual

Securities

Insurance

Credit cooperative Special member Others (PBoC, MoF and policy banks) Individual Insurance Exchange NBFI Securities

Exchange Others Funds

20

Source: Chinabond, Standard Chartered Research

Source: Chinabond, Standard Chartered Research

Yield curve flattened on slow growth and tight liquidity (%)

Debt profile – Government bonds and bills (CNY tn) 1.2

4.5 End-2010

4.0

1.0

2013

3.5

0.8

End-2011

3.0

End-2012

0.6

End-2009

2.5

0.4

2.0

0.2

1.5 1.0

Funds

0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0 NBFI 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0.0 3M6M 1Y

2Y

3Y

4Y

5Y

6Y

7Y

2013 2016 2019 2022 2025 2028 2031 2034 2037 2040 2043

10Y



28


China Rates Commercial banks – Asset growth is falling

Commercial banks – Constrained ability to expand loan books further

160

40

140

35

120

30

100

25

80

20

60

y/y growth (%, RHS)

40

0 2000

7 75

2004

15

50

10

2008

2010

25 Q4-99

2012

Source: PBoC, Chinabond, Standard Chartered Research

70 Bond % of assets (RHS)

Insurance density (USD)

50

5

40

4 30

3

0 1999

20

Assets (CNY tn)

1 2003

2005

Q4-05

Q4-07

Q4-09

Q4-11

CH

MT KR

TW

1K

TH

MY

CN

100

INID PHLK VN

10

USHK NO

SG

AE

PT BH OM

LT TT UY

SV

PK BD

10 1

0 2001

Q4-03

10K

60

2

2 Q4-01

Cross-sectional comparison of insurance density (2012)

8 6

2007

2009

0

2011

5

10

15

20 25 30 35 40 45 GDP PPP/capita (USD '000)

50

55

60


Source: Swiss Re, IMF, Standard Chartered Research

Mutual funds – AUM breakdown (CNY tn)

Cross-sectional comparison of mutual funds (2012)

3.0

Equities

Fixed income

Money market

Balanced/mixed

Others

IE

Mutual fund/capita (USD)

2.0 1.5 1.0 0.5

100K

AU

10K 1K

MA

100 10

2010

DE

AE

LT

BG RU PA

VN JO

0

2009

NO

TW

TH CN

INID PH PK

SG

HK CH US

KR

MY

1

2008

5

BW

10

15

2011


50

55

60

Source: AIMC, ICI, Standard Chartered Research

Source: ICI, Swiss Re, IMF, Ministry of Finance, central banks

Pension funds – Social security fund

Cross-sectional comparison of pension funds (2012)

Held-tomaturity investment, % of assets

1.0

100K

50 Pension fund/capita (USD)

1.2

40

0.8

30

0.6 Assets (govt. pension fund CNY tn, LHS)

0.4 0.2

65

1M

2.5

0.0 2007

3

Source: PBoC, Chinabond, Standard Chartered Research

Insurance sector – Bonds’ share is falling 7

4

Government bonds % of assets

5

2006

6

LDR (%, LHS)

5

0 2002

8

20 10

CH

10K

MY

NA

1K LK TH PH ID CN IN

100

BG

HK

SG NO

TW AT

HU DE MT

CS

VN

10

IL KR JP FR

US

65

GR

UA

1

0.0 2000

2002

2004

2006

2008

2010

0 2012

0

Source: SSF, CEIC, Standard Chartered Research

5

10

15


Source: OECD, FIAP, Swiss Re, IMF, local sources including pension fund associations, Ministry of Finance, central banks

29

50

55

60

65

Asia

Assets (CNY tn)

20

100


Offshore Renminbi Becky Liu | Robert Minikin | Kelvin Lau | Eddie Cheung

General and FX For monetary policy and economic and financial indicators, please see the China section. Policy backdrop Clearing bank CNH deposit rate for participating banks Reserve requirement

Bank of China (Hong Kong) – BoC (HK) Gross rate set by PBoC; BoC (HK) pays net rate plus distribution from returns on its investment in the interbank bond market. Minimum 25% CNH liquidity ratio must be held by authorised institutions, calculated on the same basis as standard statutory liquidity ratio.

Asia



China’s exchange rate regime is classified as a crawl-like arrangement; USD-CNH typically trades close to USD-CNY onshore, albeit not at exactly the same level


None for USD-CNH


Clearing bank is active in spot and forwards

Convertible?

Fully convertible outside mainland China

Deliverable?

Yes

Fixing time and place

11:00, published at 11:15, Hong Kong

Spot date, fixing

T+2

Fixing methodology

Reflects a weighted average from a survey of 18 contributing banks, with top and bottom 3 quotes excluded


USD-CNH has converged with onshore rate

Divergence in forwards persists 6.30

6.9 USD-CNY

6.8

6.26

6.7

USD-CNH

6.24

6.6

USD-CNY Onshore

6.22

6.5 6.4

USD-CNY NDF

6.28

6.20

USD-CNH

6.18 6.16

6.3

6.14

6.2

6.12

6.1

6.10 0.0

6.0 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13

0.2

0.4 0.6 Years forward

0.8

1.0

Source: Bloomberg

Our estimates of daily market turnover (USD bn)

China’s projected annual total CNY trade settlement volume (USD tn) 1.4

12 CNH swap

1.2

10

1.0

8 CNH spot

0.8

6

0.6 4

0.4 CNY NDF

2 0 Jul-10

0.2 0.0 Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

2009-10


2011

2012

Sources: PBoC, Standard Chartered Research

30

2013

2014

2015


Offshore Renminbi FX Exchange rate products Spot Availability Daily trading volume (USD mn) Average trade size (USD mn) Bid/ask spread in CNH onshore*

NDFs

Options

FX swaps Yes

6,000

1,000

750

10,000

20

20

30-50

30

See CNY

NA

NA

1M 0.0005, 3M 0.001,6M 0.002, 12M 0.003 SCBHK08

10

Reuters ticker

1-2Y: 0.3 vol

1M 0.0005, 3M 0.001, 6M 0.002, 12M 0.3

SCHK

SCBHK08

* For FX swaps, pips = FX swap points; Source: Standard Chartered Research

Exchange rate regulation – Non-residents Underlying asset – Trade and FDI Underlying asset – Financial asset No underlying asset

Spot Forwards Non-residents have free access to CNH FX market, but trade or FDI documentation is typically required to make transfers into the mainland.

NDFs

NA

Options FX swaps Non-residents have free access to the CNH FX market, but trade or FDI documentation is typically required to make transfers into the mainland.

Standard Chartered Research

Exchange rate regulation – Residents Resident corporations have access to the onshore FX spot and forward markets. However, in the context of trade documentation, they can make CNY transfers from the mainland into Hong Kong (or in the reverse direction). Using related entities, resident corporations therefore have limited indirect access to the USD-CNH spot and forward markets. Source: Standard Chartered Research

Market participants Corporates

Real-money funds Hedge funds

Interbank

40% x Two-way flows. Chinese importers buy USD for cross-border settlement. Foreign corporates buy USD forward to hedge Renminbi receivables, and as such, interest grows as they increase their hedge ratios. x Chinese exporters have incentive to sell USD forward to hedge USD receivables, though there is reduced interest in this as expectations of CNY appreciation decline. 15% x Mainly buy CNH for investment purposes; they also borrow CNH from the FX swap market. x CBs and SWFs buy CNH for diversification given liberal offshore regulatory regime. 20% x Two-way interest to express views on CNY appreciation/depreciation. They also trade swaps to express views on offshore interest rates. x Relative trade against CNY NDF when the opportunity arises. 25% x FI activity is an important mechanism for the global delivery of CNH FX products. x Activity reflects FX conversion and funding demand from the broader set of end users they serve.


31

Asia

Bid/ask spread in CNH offshore*



Offshore Renminbi Rates Bonds China Government Bonds (CGBs)

Asia

Issuer

Ministry of Finance

Use of proceeds Curve span Common tenors Coupon Coupon frequency Day count Primary market Auction day Auction cut-off Auction results Auction style Average issue size Secondary market Average trade size Daily trading volume Quotation convention Settlement period Bid/offer spread Regulations Custodian

Budget deficit 2Y to 30Y at issue 3Y, 5Y, 7Y, 10Y, 15Y, 30Y Fixed Semi-annual Act/365

Policy bank bonds China Development Bank (CDB), Agricultural Development Bank of China (ADBC), Export-Import Bank of China (EXIMCH) General funding 2Y to 15Y at issue 3Y, 5Y Fixed/floating Semi-annual/quarterly Act/365

Irregular 09:30-10:30 Irregular Dutch auction CNY 1-5bn

NA (issued via book building)

CNY 10-50mn CNY 50-200mn

CNY 1-20mn CNY 10-150mn

NA CNY 1-3bn

Cash price (2 decimals) T+3 3-10bps

5-20bps

CMU, with linkage to Euroclear, Clearstream


USD-CNH CCS curve over time (%) 3.0 Jul-13

2.5 End 2012

2.0

End 2011

1.5 1.0 0.5

End 2010

0.0 -0.5 -1.0 1Y

2Y

3Y

4Y

5Y

Source: Bloomberg

Swaps Main product Average daily market volume Average ticket size Average bid/offer spread Term Liquid up to Settlement Coupon frequency Convention Floating-rate reference Floating-rate ticker Ticker (2Y)

Floating-rate reference calculation Cross-currency swaps USD 100-300mn USD 10-50mn 2-7bps 1-7Y 7Y T+2 Quarterly Act/360 3M US LIBOR US0003M CGUSSW1

CNH HIBOR was launched on 24 June 2013, covering tenors including O/N, 1W, 2W, 1M, 2M, 3M, 6M, and 12M. It is published at 11:15 Hong Kong time each business day, by taking the average of quotations submitted by 15-18 banks (currently 16) between 10:30-11:00 and removing the highest and lowest 3 quotes. Value date for overnight tenor is T+0, and for all other tenors is T+2.


Source: TMA, HKMA, Standard Chartered Research

32


Offshore Renminbi Rates Account opening Cash account

Depository account

Trading account

Process duration

Local bank account Local custodian Yes Up to 1 week Special requirements Offshore Renminbi bonds are now traded in various markets, and the settlement process varies across different domestic settlement systems. We summarise the existing systems below. The diagram illustrates the Hong Kong settlement process. x Hong Kong: Bonds are settled via CMU, with linkage to Euroclear/Clearstream. x Taiwan: Bonds are settled via TDCC, with linkage to Euroclear/Clearstream. Only domestic investors and foreign investors that have licence (FINI) can currently access Formosa bonds. x Singapore: bonds are settled via CDP, with linkage to Euroclear/Clearstream.

Asia

Trade and settlement flowchart Input of SI on S in batches

Send SI Delivering Participant

Securities Settlement of Matched Transaction

Trade confirmation Pre-matching on S-1/S

CMU

Client

Securities Settlement of Matched Transaction

Trade confirmation Receiving Participant

Input of SI on S in batches

Send SI

Electronic Money Instructions (for DVP only) Credit Instruction

Designated Bank A/C of Delivering Participant Trade Data or Settlement Instruction (SI) – automatic

RTGS of the Hong Kong Interbank Clearing Limited

Securities Settlement – automatic Money Settlement – automatic Debit Instruction

Designated Bank A/C of Receiving Participant

Pre-matching by Phone/Fax - manual

Source: Standard Chartered Research, HKMA, BIS

Regulations and taxation Tax types

Additional notes

Foreign investment regulations Subject to local regulation

Investment in offshore Renminbi securities is subject to local regulations. Currently, Hong Kong and Singapore do not restrict foreign investment in Renminbi securities issued/traded locally, but there are restrictions on foreign investors’ participation in Taiwan’s domestic securities denominated in Renminbi (i.e., Formosa bonds).

Income tax for non-residents

Subject to local regulation

Hong Kong and Singapore do not have WHT, but Taiwan applies a 0-20% tax to Formosa bonds.

Capital gains tax

Subject to local regulation

Hong Kong and Singapore do not have capital gains taxes. In Hong Kong, a corporate income tax rate of 16.5% is applied to all profits derived from Hong Kong, including bond investments. Offshore CGBs, in addition to EFB/Ns and Hong Kong government bonds, are exempt.


33


Offshore Renminbi Rates

Asia

Market participants Central banks x Foreign central banks are among the biggest holders of offshore China Government Bonds (CGBs). We estimate that they currently hold 30-50% of total outstanding offshore CGBs as part of their reserve diversification effort. While their investments in China’s onshore bond markets are subject to approvals and quota restrictions, there are no restrictions on their participation in the offshore bond market. x Some foreign central banks invest in bonds issued by Chinese policy banks and multilateral issuers, and in deposit products in the offshore Renminbi bond market. Commercial banks x With a few exceptions (such as CGBs, which are issued via auction), Dim Sum bonds are generally underwritten by commercial banks, mostly based in Hong Kong. They are market makers for all Dim Sum bonds and are also important holders of the securities. x Their holdings of Dim Sum bonds are currently skewed towards credit owing to the diminishing advantages of holding offshore CGBs (due to factors such as liquidity ratio calculation). While there are no statistics on the holding structure of the Dim Sum bond market, we estimate that they hold 30-40% of outstanding Dim Sum bonds (and a lower percentage, likely around 10%, of offshore CGBs). Real-money investors (funds, insurance companies) x Real-money investors hold a mixture of CGBs and credit products. Most dedicated Dim Sum bond funds invest more heavily in credits and certificates of deposit (CDs), while macro strategy funds typically invest in CGBs. Due to the currently limited availability of long-dated securities in this market, insurance companies also participate in shorter-dated securities such as 3Y-5Y or above. x In January 2013, the SFC authorised the first Renminbi-denominated money-market fund, which is also eligible for MPF investment in Hong Kong. In March 2013, the first Renminbi-denominated paper gold was authorised. In May 2013, the first Dim Sum bond ETF denominated in Renminbi was authorised for listing on the Hong Kong stock exchange. Hedge funds x Hedge fund investors’ participation in the cash bond portion of the offshore Renminbi market remains light, mainly focused on high-yield credits such as Chinese property bonds. x Hedge funds have a much bigger share of activity in the CNH interest rate derivatives market, in particular USD-CNH CCS. Retail x Retail investors typically invest in retail offshore Renminbi bonds, mainly issued by the Ministry of Finance (CGBs) and policy banks. These securities typically have higher yields than conventional institutional tranches of similar tenors. Source: Standard Chartered Research

Offshore centres Hong Kong

Singapore

Taiwan 2

London

RMB deposits

RMB 695bn

RMB 100bn

RMB 77bn

RMB 5.1bn4

Clearing bank

BOC HK

ICBC Singapore branch

BOC Taipei branch

Under discussion

Personal account arrangement

Local residents can convert up to CNY 20,000/day under personal account, at CNY exchange rate. No limit for non-residents, but at CNH exchange rate

No conversion limit for residents or nonresidents, at CNH rate

Local residents can convert up to CNY 20,000/day under personal account, at CNY exchange rate

No conversion limit for residents or nonresidents, at CNH rate

PBoC swap

CNY 400bn

CNY 300bn

No (under discussion)

CNY 200bn

Offshore RMB bond issuance

x No regulatory approval x No regulatory approval x Formosa bond needed locally needed locally issuance requires regulatory approval x Settled via CMU, x Settled via CDP, locally; mainland linkage to linkage to issuers are not yet Euroclear/Clearstream Euroclear/Clearstream eligible x Subject to 0-15% tax depending nature of issuers and investors x Greater China RTC x Southeast Asia RTC x Domestic/cross-straits RMB usage x Pilot schemes/new x Commodities hub Products x Private banking x Dim Sum bond market

Focus markets

1

3

1

As of Jul-2013, 2Reported Jul-2013 3As of Jul-2013, 4As of Dec-2012; Source: Standard Chartered Research

34

x No restrictions on bond issuance/investment

x Global treasury centre x Global FX trading x Asset management


Offshore Renminbi Rates Offshore China government bond market has grown modestly in 2013 (Outstanding offshore CGB, CNY bn)

Offshore CGB bond yield curve over time (%)

70

3.5

60

3.0

50

Sep-13 End 2012

2.5

End 2011

40 2.0

30

End 2010

20

1.5

10

1.0 0.5 2009

2010

2011

2012

2013

1Y

2Y

3Y

4Y

5Y

6Y

7Y

8Y

9Y

10Y

Source: Bloomberg


Monthly redemption profile of Dim Sum bonds and CDs

Deposit growth across various offshore Renminbi centres

CNY bn

CNY bn

45

800

40

Hong Kong

700

35

600

30

500

25

400

20 15

300

10

200

5

100

0 Sep-13 Nov-13

Jan-14

Mar-14 May-14

Jul-14

Taiwan

0 2004

Sep-14 Nov-14

2005

2006

2007

2008

2009

2010

2011

2012

2013



Dim Sum bond market is skewed towards short-dated securities (%)

Financial issuers have the biggest share of Dim Sum bond market (%)

60%

CD

50%

Greater China corporates

40%

CGBs

30%

Chinese banks

20%

Foreign corporates Foreign banks

10%

Supernationals

0% 200% versus H1-2011, largely due to the attractive yield pick-up and the upgrade by Moody’s to Baa1. Retail Limited participation at the front end of the curve or secondary market on stock exchange through security brokers. Source: Standard Chartered Research

Yield curve over time (%)

Debt profile (MUR bn)

11

End-2009

9

50

End-2011 End-2010

40

2013

30

End-2012

7 5

20

3

10

3M 1Y

2Y

3Y

4Y

5Y

7Y

Source: BoM, Standard Chartered Research

10Y

12Y

20Y

2013 Source: BoM

205

2015

2017

2019

2021

2023

2025

2027

2029

Sub-Saharan Africa

0

1


Mozambique Victor Lopes



Name Policy target Independence Policy rate Bloomberg ticker Deciding body

Bank of Mozambique Price stability Yes Standing Lending Facility

Standing facilities The Bank of Mozambique targets money supply growth. It signals its monetary policy stance by setting the interest rates on its standing lending and deposit facilities. Currently, these rates are 9% and 1.75%, respectively

Monetary Policy Committee (CPMOacronym in Portuguese)

Reserves requirement The reserve requirement ratio is currently set at 8%

Policy decision-making Decision meeting frequency Announcement time Press conference Minutes published Open-market operations (OMOs) Quarterly inflation Report

OMOs The Bank of Mozambique intervenes to manage liquidity through T-bills auctions and repo and reverse repo operations. The BoM can also complement liquidity management operations through intervention in the Interbank Foreign Exchange Market (MCI).

Monthly NA Yes NA Yes Yes

Source: Bank of Mozambique


Sub-Saharan Africa


Floating


No target, but the Bank of Mozambique regularly intervenes in the market to smooth volatility


NA

Convertible?

yes

Deliverable?

yes

Fixing time Spot date, fixing

NA

Fixing methodology

NA

T+2


Economic and financial indicators Real GDP, change CPI inflation* Current account/GDP FX res./imports** Fiscal balance/GDP Primary balance/GDP Gen. govt. debt/GDP External debt/GDP Policy rate*** S&P Country Moody’s rating Fitch

2011 7.3 10.4 -25.8 3.3 -4.3 -2.9 45.1 32.6 15.00 B+ NR B

*Yearly average; **months of imports; ***year-end; Source: Standard Chartered Research

Government balances (% of GDP) 2012 7.5 2.1 -26.1 3.5 -3.0 -1.0 46.6 36.3 10.50 B+ NR B

2013F 8.4 5.4 -25.4 2.8 -4.7 -2.7 47.0 41.7 9.00

0

2014F 8.0 5.6 -40.6 2.9 -6.6 -1.7 47.6 44.7 10.00

90 80

-1

70 -2 60 -3 -4

50 General govt. debt (RHS)

40 30

-5 Fiscal balance

-6

10 0

-7 2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F Source: Standard Chartered Research

206

20


Mozambique FX Exchange rate products Spot LHS only

Availability Daily trading volume (USD mn) Average trade size (USD mn) Bid/ask spread in MZN onshore Bid/ask spread in MZN offshore Standard Chartered Reuters ticker

Outright forwards

NDFs

Options

FX swaps

NA

NA


Exchange rate regulation – Non-residents Spot Mozambique replaced prior approval with registration for current payments. Capital account operations require Bank of Mozambique approval NA

Underlying asset – Trade and FDI

Underlying asset – Financial asset No underlying asset

Forwards

NDFs

Options

FX swaps

NA


Mozambique replaced prior approval with registration for current payments. Source: Standard Chartered Research

C/A deficit increasing over time (USD bn per quarter) C/A

8

FDI

Portfolio flows

Other

6 BoP

4 2 0 -2 -4 -6 2003

2004

2005

2006

2007

2008

2009

2010

2011

2012


207

Sub-Saharan Africa

Exchange rate regulation – Residents


Mozambique Rates Bonds T-bills

Issuer Use of proceeds Curve span Common tenors Coupon Coupon frequency Day count Primary market Auction day Auction cut-off Auction results Auction style Average issue size Secondary market Average trade size Daily trading volume Quotation convention Settlement period Bid/offer spread Regulations Custodian

T-Bonds Republic of Mozambique Government financing and liquidity management Government financing 90-364 days 3Y-10Y 90, 180 and 364 days 3Y-5Y NA

NA

NA

Local custodian


Domestic debt has been rising (MZN bn)

Sub-Saharan Africa

8 7 6 5 4 3 2 1 0 Jan-10

Jan-11

Jan-12

Source: IMF

208


Mozambique Rates Regulations and taxation Tax types

Additional notes

Foreign investment regulations Exchange controls exist Income tax for non-residents

20% withholding tax

Capital gains tax

20% withholding tax


Market participants There are 20 financial institutions in Mozambique. The presence of offshore investors is low as they can participate only in some specific bond issuance, not the T-bills. Source: Standard Chartered Research

Yield curve over time 13

End-2011

11 9 2013

7 5 3

End-2012

1 3M

6M

1Y

Commercial banks – Slowdown in asset growth

Commercial banks – LDR starts to pick up?

180

40

90

160

35

80

140

30

70

120 80 40

y/y growth (%, RHS)

20 0 2008

40

15

60

2010


2011

2012

Government bonds % of assets

30

10

20

5

10

0 2009

15

50

20

Assets (MZN bn)

20

60

25

100

25 LDR (%, LHS)

0 Q4-07

2013

5 0 Q4-08

Q4-09


209

10

Q4-10

Q4-11

Q4-12

Sub-Saharan Africa



Nigeria Delphine Arrighi



Name Policy target Independence Policy rate Bloomberg ticker Deciding body Policy decision-making Decision meeting frequency Announcement time Press conference Minutes published Open-market operations (OMOs) Quarterly inflation report

Monetary Policy Rate (MPR) The MPR serves as an indicative rate for transactions in the interbank money market, and for other interest rates in moneymarket transactions. It is currently set at 12%, with a symmetric interest rate corridor of +/-200bps.

Central Bank of Nigeria (CBN) Single-digit headline CPI inflation Medium Monetary Policy Rate (MPR) NGCBRATE index 12-member committee One man, one vote Every 2 months NA Day of the MPC meeting MPC communiqué Very actively used to manage liquidity Monthly and quarterly economic reports, MPC communiqué every 2 months starting Jan

Open-market operations (OMOs) OMO instruments include government securities of 91, 182 and 364 days issued by the central bank. The central bank can issue or sell these instruments on an outright basis or under repurchase agreements to mop up excess liquidity. Cash reserve requirement (CRR) x 12% of banks’ total deposit liabilities (i.e. demand, savings and time deposits of both private and public entities), certificates of deposit, promissory notes held by the non-bank public sector, and other deposit items. In July 2013, the CBN raised the CRR to 50% on public-sector deposits only. x Maintenance period is 4-5 weeks.

Source: CBN

Sub-Saharan Africa

Discount window The central bank implements its discount window policy by either changing the discount rate or providing credit to banks. Changes in the discount rate signal the bank’s policy stance. Discount window operations include CBN standing facilities, repo and reverse repos, and the cash reserve requirement.

Source: CBN, Standard Chartered Research

Exchange rate framework Exchange rate regime Exchange rate target Intervention instruments Convertible? Deliverable? Fixing time and place Spot date, fixing Fixing methodology

Other managed arrangement (IMF) CBN currently targets USD-NGN at 155 +/- 3% Bi-weekly WDAS auctions were suspended and replaced with retail DAS auctions effective from 2 October 2013. FX is sold to authorised dealers strictly for client transactions. Partially Yes 06:40, Abuja T+2, NIFEX01 Based on average of 8 reference banks. The average of the quotes (bid and offer) is then calculated to derive the spot fixing.

Source: CBN



2011

2012

2013F

2014F

7.2

6.6

6.6

7.4

CPI inflation*

10.9

12.1

8.8

10.7

Current account/GDP

12.2

4.7

4.0

3.6

Real GDP, change

FX res./imports** Fiscal balance/GDP

4.5

5.1

5.9

0.71

0.92

0.43

-0.61

2.147

2.534

2.077

0.853

Gen. govt. debt/GDP

17.20

17.76

17.85

18.10

2.7

2.5

2.5

2.8

12.00

13.50

External debt/GDP Policy rate*** Country rating

12.00

12.00

S&P

B+

B+

Moody’s

NR

NR

Fitch

BB

BB

*Yearly average; **months of imports; ***year-end; Source: IMF

60

10

50 Fiscal balance

6.2

Primary balance/GDP

15

5

40

0

30 20

-5 General govt. debt (RHS)

-10 -15

0 2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F

Source: IMF, Standard Chartered Research

210

10


Nigeria FX Exchange rate products Spot Availability Daily trading volume (USD mn) Average trade size (USD mn) Bid/ask spread in NGN onshore* Bid/ask spread in NGN offshore* Reuters ticker


NDFs Yes

400

20

15

0.5

Case by case

5

0.1

NA

NA

NA

Options

FX swaps Yes 10

No – Awaiting CBN approval process and prudential guidelines on FX options

Case by case NA

0.5

NA

SCNL

SCNL


Exchange rate regulation – Non-residents Spot Underlying asset – Trade and FDI Underlying asset – Financial asset No underlying asset

Forwards

RHS requires documentation

NDFs

Options

FX swaps

No restrictions

NA

RHS requires documentation

LHS only

Applications for private capital transfers abroad are processed by banks with documentation/evidence of exposure. Foreign investors need to obtain a Certificate of Capital Importation (CCI) from the CBN to repatriate capital proceeds and income on the investment. http://www.cenbank.org/out/2011/circulars/fmd/guidelines%20for%20foreign%20exchange%20derivatives%20in%20the%20nigerian%20financial%20markets.pdf, http://www.cenbank.org/out/2011/circulars/ted/ted.fem.fpc.gen.01.009.pdf


Market participants Corporates

Real-money funds Hedge funds Interbank

35% x Exporters (mainly oil and energy companies) with USD receivables typically sell USD at month-end to fund NGN obligations, usually prompting NGN appreciation. x Importers of end-user products; telecommunication companies make periodic dividend remittances to their parent companies, which tends to push USD-NGN higher. They also inflow USD for investment/upgrading purposes. 25% x Mainly offshore investors; need to sell foreign currency owing to onshore regulation on accessing NGN for investment in Nigerian equities, money-market and fixed income products. They buy foreign currency upon repatriation. 5% x Need to sell foreign currency owing to onshore regulation on accessing NGN for investment in Nigerian equities, money-market and fixed income products. They buy foreign currency upon repatriation. 35% x Interbank trading is mainly flow-driven and short-term in nature.


NGN REER and NEER – Trend REER appreciation 220

C/A surplus is declining (USD bn)

200

40

180

30

160

20

140

Portfolio

Other

0

100

-10

80

BoP

-20

60

Source: BIS

FDI

10

120

40 1999

C/A

50

REER

NEER 2001

2003

2005

2007

2009

-30 2007

2011

Source: IMF

211

2008

2009

2010

2011

2012

2013

Sub-Saharan Africa

x Authorised dealers can only import foreign banknotes with the prior approval of the CBN, and must state the amount that they require and its purpose to the CBN. x Authorised dealers can continue to sell FX to BDCs, subject to a limit of USD 250,000 per week per BDC. x BDCs have to submit weekly returns to the CBN on the utilisation of funds purchased from all sources. x Receipt of proceeds from inward money transfers will now be paid only in NGN. x The applicable FX rate will be the interbank rate on the day of the payment. Authorised dealers have to make these rates public in a transparent manner (in banking halls, etc).


Nigeria Rates Bonds T-bills Issuer Use of proceeds Curve span Common tenors Coupon Coupon frequency Day count Primary market Auction day Auction cut-off Auction results

FGN bonds Federal government


Fiscal financing 2Y-20Y 3Y, 5Y, 7Y, 10Y, 20Y Fixed Semi-annual

91D-1Y Issued at discount NA Act/Act Wednesday 11:00 Wednesday

NGN 60-130bn per tranche

17:00-18:00 Single-price auction – An auction in which the lowest price necessary to sell the entire offering becomes the price at which all securities offered are sold NGN 50-90bn per tranche

NGN 250mn NGN 44bn Discount (two decimal places)

NGN 100mn NGN 37bn Price (two decimal places)

Auction style

Multiple-price

Average issue size Secondary market Average trade size Daily trading volume Quotation convention Settlement period

T+2

Bid/offer spread

15 kobo (8-12bps) for 3Y and below, 30 kobo (3-6bps) for tenors over 3Y

25bps

Regulations Custodian

Local custodian

Sub-Saharan Africa


Steady rise of the government bond market

Quarterly FGN bond turnover ratio – Rising

7

45 40 35 30 25 20 15 10 5 0

6 5 4

USD bn (RHS)

3 2

NGN tn (LHS)

1 0 2005

2006

2007

2008

2009

2010

2011

1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 2005

2012

2006

2007

2008

2009

Source: DMO

Source: DMO

Swaps

Floating-rate reference calculation

Cross-currency swap/interest rate swap Average daily market volume NA Average ticket size NA - Bilateral trades Average bid/offer spread 150bps Term 1-5Y Liquid up to NA Settlement T+2 Coupon frequency Quarterly/semi-annually Convention Act/360 - Act/365 Floating-rate reference As applicable Floating-rate ticker As applicable Ticker (2Y) NNSWL2/NNSW2

For CCS: 3M US LIBOR

Main product

Source: Bloomberg, Reuters, Standard Chartered Research

2010

2011

2012

For IRS: Nigeria Interbank Treasury Bills 3M: processed and published by the Money Market Association of Nigeria. This is a fixing processed from marked-to-market T-bill bid discounts. The discounts are converted to money-market equivalent as true yields with interpolation and extrapolation for standardtenor benchmarks. NITTY published on T+1 represents MTM of T, which is for value T+1. This allows for the synchronisation of settlement dates for the repricing of assets and liabilities of floating instruments, and for the settlement of derivatives. Source: Bloomberg

212


Nigeria Rates Account opening Cash account Local bank Special requirements None

Depository account Local custodian

Trading account Yes

Process duration Approximately 2-5 days

Trade and settlement flowchart Local custodian 5. Settlement Instruction 6. Money Wire and FX & Transfer Instruction

7. Match settlement instruction

Omnibus/Investor’s sub-account

Local Bank FX conversion 1. Order placement

Foreign Investor

Counterparty

Investor FCY A/C

4. Confirmation

Investor NGN A/C

Settlement and clearing 2. Execution

CSCS Bond A/C Investor 8. DVP Settlement (T+2)

Settlement bank - NIBSS

NSE: Nigerian Stock Exchange CSCS: Central Securities Clearing System, Limited NIBSS: Nigerian InterBank Settlement System

Cash A/C Investor

Counterparty



Additional notes

Foreign investment regulations Not restricted

One-year minimum holding period for foreign investors in government securities was lifted in June 2011. Foreign investors still need a Certificate of Capital Importation (CCI) to repatriate funds.


None

Capital gains tax

None


213

Sub-Saharan Africa

3. Trading report

NSE

Counterparty


Nigeria Rates Market participants Primary Dealers x Currently 25 Primary Dealers (PDMMs), reportedly accounting for 80% of total bond-market transactions. x PDMMs are typically active in secondary trading since they hold a separate trading account. x Regulated by the CBN (http://www.cenbank.org/) Domestic banks/discount houses x 25 entities; biggest holders of government bonds, accounting for more than 60% of the total outstanding. x Discount houses are defined as dealers in T-bills, commercial bills and other securities. x Very active in secondary trading; typically invest across the curve. x Banks are more involved in T-bills; their bonds have been moved to the held-to-maturity account. Greater bond appetite from offshore investors has meant local banks have stayed largely invested in T-bills. x Regulated by CBN (http://www.cenbank.org/) Insurance companies and pension funds x Second-biggest holders of government bonds; account for around 17% of secondary trading x 17 pension fund administrators x Became more active in secondary market in 2012 x Prefer longer tenors to match their liabilities x Regulated by the National Pension Commission (http://www.pencom.gov.ng/) under the 2004 Pension Reform Act and the National Insurance Commission (www.naicom.gov.ng/)

Sub-Saharan Africa

Foreign investors x Foreign investors open a book-entry account and fund account with a clearing bank. x They were active in the local government bond and commercial paper markets from 2006-08, and have become more active again since Nigeria’s inclusion in the GBI-EM indices in September 2012. x Can invest across the curve; their holdings are typically concentrated in T-bills and indexed bonds (2015, 2017, 2019 and 2022). Source: CBN, Pencom, Naicom

Bonds and bills ownership by participant (NGN tn) 5

Ownership by participant (%) 80 70 60 50 40 30 20 10 0 Dec-09

Banks

4 3 2

Foreigners

Pension

1 0 Dec-09

CBN Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Banks

Pension

CBN Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Source: DMO, Standard Chartered Research

Source: DMO, Standard Chartered Research

Yield curve over time (%)

Debt profile – Government securities (NGN tn)

20

Foreigners

5 4

End-2011 15

2013

3 End-2012

2

End-2010

10

1

End-2009

0

5 O/N 1Y 2Y 3Y 4Y 5Y

7Y

10Y

Source: Reuters, Standard Chartered Research

20Y

2013

2015

2017

2019

2021


214

2023

2025

2027

2029


Nigeria Rates Commercial banks – Steady growth in assets 25

Commercial banks – LDR is trending higher Assets (NGN bn)

20

90

60

80

17

70

15

60

13

50

LDR (%, LHS)

40

15

30 y/y growth (%, RHS)

10 5 0 2000

19

70

2002

2004

2006

2008

2010

20

50

10

40

0

30

-10

20 Q4-00

2012

11 Government bonds % of assets

9 7 5

Q4-02

Q4-04

Q4-06

Q4-08

Q4-10

Q4-12

Source: CBN


Insurance sector – Slowdown in growth rate (NGN bn)

Cross-sectional comparison of insurance density (2012)

250 Insurance density (USD)

10K

200 150 100

TT

AO UY

KE

10

SG

BH OM

LT

100

USHK NO AE

PT

ZA

1K

SV

NG

50 0 2001

CH

MT

1

2002

2003

2004

2005

2006

2007

2008

2009

0

2010

5

10

15


50

55

60

Source: Swiss Re, IMF, Standard Chartered Research

Pension funds – Growing ownership of bonds

Cross-sectional comparison of pension funds (2012) 70

3.0

60

2.5 2.0

50

Govt. bonds as % of assets (RHS)

40

1.5

30

1.0

20

Assets (NGN tn)

0.5

100K Pension fund/capita (USD)

3.5

CH IL

10K NA ZA

1K KE

100

LK

NG

TH

BG

HK

JP FR

SG NO

AT

HU DE MT

GH

UG

US

Sub-Saharan Africa

Source: Swiss Re

65

CS

10

GR

UA

10 1

0.0 2006 Source: Pencom

0 2007

2008

2009

2010

2011

0

2012

5

10

15


Source: OECD, FIAP, Swiss Re, IMF, local sources including pension fund associations, Ministry of Finance, central banks

215

50

55

60

65


South Africa Michael Trounce



Name Policy target

Repo rate Weekly 7-day repurchase auction, which is conducted with commercial banks at the repo (policy) rate as determined by the MPC. The SARB lends funds to banks against eligible collateral, which comprises assets that also qualify as liquid assets under the prudential liquid asset requirement.

South African Reserve Bank (SARB) Flexible 3-6% target band for CPI inflation Independence High Policy rate Repo rate Bloomberg ticker SARPRT index Deciding body Monetary Policy Committee (8 SARB officials) Policy decision-making One person, one vote Decision meeting Every two months (6 meetings) frequency Announcement time 10:00-12:00 Cape Town time Press conference 15:00 Minutes published Press statement released after MPC meeting Open-market To ensure policy rate maintained, operations (OMOs) manage liquidity Quarterly inflation 3rd week of Dec, Mar, Jun, Sep report Source: SARB, Standard Chartered Research

OMOs OMO instruments include issuance of SARB debentures, reverse repos, the movement of public-sector funds between the market and the SARB, and money-market swaps in the foreign exchange market. Cash reserve requirement (CRR) x 2.5% of a bank’s total deposit liabilities x Financial institutions are also required to hold 5% of their total liabilities in liquid assets such as T-bills, government bonds, SARB debentures and Land Bank bills.

Source: SARB, Standard Chartered Research

Sub-Saharan Africa


Floating (IMF)


No target, but ad-hoc FX intervention to curb ZAR strength and ensure ZAR NEER reflects fundamentals


Through spot USD-ZAR and sell/buy FX swaps both onshore and offshore

Convertible?

Yes

Deliverable?

Yes

Fixing time and place Spot date, fixing

16:00, London

Fixing methodology

Average of dealing prices for every second between 30 seconds before and 30 after the hour

T+2, WMR fix

Source: IMF, SARB, Standard Chartered Research



2011

2012

2013F

2014F

2

Real GDP, change

3.5

2.5

2.2

3.1

1

CPI inflation*

5.0

5.8

5.8

5.0

-3.4

-6.3

-6.2

-6.3

0

4.9

4.8

4.7

4.7

-1

-5.52

-3.9

-4.8

-4.8

Current account/GDP FX res./imports** Fiscal balance/GDP Primary balance/GDP

-1.2

-1.8

-1.8

-1.2

39.60

42.30

42.70

43.60

External debt/GDP

27.3

32

33.8

34

Policy rate***

5.50

5.50

5.00

5.00

Gen. govt. debt/GDP

S&P Country rating

Moody’s Fitch

A

A

A3

BAA1

A

A

*Yearly average; **months of imports; ***year-end; Source: SARB, IMF, Standard Chartered Research

General govt. debt (RHS)

45 40 35 30 25

-2 20 -3

15

-4

10 Fiscal balance

-5

0

-6 2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F Source: SARB, MoF, Standard Chartered Research

216

5


South Africa FX Exchange rate products Spot Availability Daily trading volume (USD bn) Average trade size (USD mn) Bid/ask spread in ZAR onshore* Bid/ask spread in ZAR offshore* Reuters ticker


19

7

1.5

5

NDFs

Options

FX swaps Yes

2

31

20

100

NA 0.004

1M 0.003

0.75 vol

1M 0.0025

EXOT

NA

SCOL

SCEX

*Versus USD; for FX swaps, bid/ask spread refers to swap points vs. USD; Source: BIS, Triennial Central Bank Survey, April 2013, Standard Chartered Research

Exchange rate regulation – Non-residents Spot

Forwards

Underlying asset – Trade and FDI Underlying asset – Financial asset No underlying asset

NDFs

Options

FX swaps Documentation may be required

No restrictions

No restrictions

Non-residents are permitted to hold foreign-currency accounts. There are no restrictions on profit, interest, dividend and branch profit repatriation. However, director’s fees, management fees and royalties require SARB approval. http://www.resbank.co.za/RegulationAndSupervision/FinancialSurveillanceAndExchangeControl/Legislation/Documents/Exchange%20Control%20Regulations.pdf http://www.resbank.co.za/RegulationAndSupervision/FinancialSurveillanceAndExchangeControl/EXCMan/Section%20O/Section%20O.pdf http://www.resbank.co.za/RegulationAndSupervision/FinancialSurveillanceAndExchangeControl/EXCMan/Section%20V/Section%20V.pdf


Source: SARB

Market participants Corporates Real-money funds Hedge funds Interbank

50% x Exporters with USD receivables typically sell USD-ZAR forwards given trend ZAR appreciation. x Importers rarely enter into USD-ZAR forward contracts owing to ZAR trend appreciation. 15% x Real-money funds constitute a large part of the ZAR FX market given South Africa’s open capital account. x Real-money funds typically leave their ZAR exposure unhedged owing to ZAR trend appreciation. 35% x Hedge funds are heavily involved in ZAR. 0% x Interbank trading is mainly flow-driven and short-term in nature.


ZAR REER and NEER – The ZAR is consolidating

Structural C/A deficit persists (ZAR bn) 80

110

FDI

Portfolio

0

Other

60

100

-2

40

90

20 80 REER

70

-40

50

-60

Source: BIS

-6

-20

60

40 1994

-4

0

1997

2000

2003

2006

2009

2012

C/A (%, RHS) -8

-80

NEER

-10 2007

Source: IMF

217

2008

2009

2010

2011

2012

Sub-Saharan Africa

x Capital account restrictions exist for residents, including restrictions on currency speculation. Capital transfers are subject to SARB approval. x Exchange control restrictions on outward FDI of under ZAR 500mn by South African companies have been eased, although an application still needs to be made to the SARB for monitoring purposes. Qualifying international headquarter companies are allowed to raise and deploy capital offshore without exchange control approval (since 1 January 2011). x The exchange control limit for individuals is ZAR 4mn a year, versus a previous lifetime amount of ZAR 4mn.


South Africa Rates Bonds T-bills Issuer Use of proceeds Curve span Common tenors Coupon Coupon frequency Day count Primary market Auction day Auction cut-off Auction results Auction style Average issue size Secondary market Average trade size Daily trading volume Quotation convention Settlement period Bid/offer spread Regulations Custodian

SAGBs National Treasury


Inflation Linked Bonds Fiscal financing

1Y-30Y 2Y, 5Y, 10Y

91- to 364-day

7Y-30Y

Zero NA

Fixed Semi-annual Act/365

Friday 10:00 12:00 Multiple-price (2 decimals ZAR 5-7bn (across all tenors)

Tuesday

Friday 11:00

11:30

11:00 Multiple-price (3 decimals) ZAR 800-1,100mn ZAR 600mn NA Yield (two decimals) T+3

2-4bps

3-5bps

Local custodian or Euroclear


Sub-Saharan Africa

Steady rise of the government bond market

Quarterly trading turnover – Trending higher

1.2

140

6

1.0

120

5

100

0.8 USD bn (RHS)

4

80

3

0.6 60 0.4 0.2 0.0 2001

2003

2005

2

40

ZAR tn (LHS)

2007

2009

2011

20

1

0

0 2001

2013

Source: SARB

Swaps Main product Average daily market volume Average ticket size Average bid/offer spread Term Liquid up to Settlement Coupon frequency Convention Floating-rate reference Floating-rate ticker Ticker (2Y)

2003

2005

2007

2009

2011

2013

Source: SARB, JSE

Floating-rate reference calculation Interest rate swaps ZAR 6bn ZAR 200mn 3-5bps 1-30Y 1-10Y T+0 Quarterly Act/365 3M JIBAR JIBA3M (Bloomberg) SASW2 Curncy (Bloomberg)


JIBAR: Johannesburg Interbank Agreed Rate Average of the rates indicated by local and international banks. JIBAR is calculated as a yield and then converted into a discount. The rate is calculated daily after all of the rates are received by participating banks.

Source: Bloomberg

218


South Africa Rates Account opening Cash account Euroclear or local custodian Special requirements None

Depository account Euroclear or local custodian

Trading account Yes

Process duration Approximately 2-5 days

Trade and settlement flowchart Foreign Investor

Strate: the authorised Central Securities Depository (CSD) for the electronic settlement SARB: South African Reserve Bank BESA: previously known as the Bond Exchange of South Africa

1. Transaction execution

Counterparty 3.

4. Settlement Instruction

2. Order match

5. Money Wire (USD)

Global Custodian

BESA

6. Trading report

Local Custodian

8. Debit/Credit Request

Strate

Investor Safe Keeping A/C

SARB ZAR

Investor

10. DVP Settlement (T+3)

AD

Investor

AD

Linked Linked Source: Standard Chartered Research


Additional notes

Foreign investment regulations Not restricted

Capital controls for residents (institutions’ overseas investments are restricted to 20% of retail assets for retirement funds and long-term issuers).


Exempt

Capital gains tax

Companies and trusts 50%, individuals 25%

This portion of the net gain will be taxed at the marginal tax rate. This means a maximum effective rate of 10% is payable; for corporate taxpayers, the maximum is 15%.


219

Sub-Saharan Africa

Bond A/C

6. ZAR Conversion

Investor ZAR A/C

9. Debit/Credit Confirmation

7. Trade dispute/Settlement Order


South Africa Rates Market participants Banks x Banks have to retain 5% of their total deposits in liquid assets. x For reserve requirement purposes, banks tend to buy bonds of