## _wp07256 - References

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### I. Introduction and purpose
- Local currency-denominated government securities support fiscal and monetary policy implementation by aiding cash and liquidity management, financing fiscal deficits in a non-inflationary manner, and enabling open market operations.
- Government securities provide instruments for bank recapitalization and a benchmark yield curve for pricing financial assets and risk management tools.
- Developing government securities markets entails policy choices within public debt management and local capital market development.
- The paper reviews trends and developments in WAEMU government securities primary markets and determinants of the cost of local-currency denominated public debt.

### II. Rapid growth of WAEMU local currency debt markets
- Total gross issuance of publicly traded debt grew more than tenfold since 2000 to reach CFAF 382.8 billion in 2006.
- As of July 2007, total outstanding debt reached CFAF 905 billion (about US$2 billion) or 3.5 percent of GDP.
- Primary drivers of market growth:
  - Elimination of central bank financing of government following initiatives starting in 1998; statutory advances consolidated with repayment to the central bank starting in 2003.
  - National treasuries resorted to market financing as the regional central bank (BCEAO) stopped statutory advances.
  - Development of T-Bills market helped reduce excess liquidity by offering banks a more profitable use for excess reserves.
  - Delays in external budget support prompted use of the regional local debt market for cash management.
- Instruments and volumes:
  - T-Bills issuance grew from zero in 2000 to about CFAF 200 billion in 2006.
  - Maturities typically range from 3 months to one year; most popular are 3- and 6-month bills.
  - Government bond issuance increased from CFAF 5 billion in 2000 to about CFAF 120 billion in 2006 and CFAF 265 billion as of July 2007.
  - Bond tenors typically range from 3 to 5 years.
- Figure 1 (Total Gross Issuance of Debt Securities, 1999–July 2007, in billions of CFA francs):
  - 1999: 142.9
  - 2000: 31.7
  - 2001: 78.8
  - 2002: 154.2
  - 2003: 238.8
  - 2004: 225.2
  - 2005: 465.6
  - 2006: 382.8
  - July 2007: 298.6

### III. Issuers and market structure
- Primary issuers: Governments of WAEMU member countries and a few regional development banks (BOAD, BIDC-EBID).
- As of end-2006:
  - Côte d’Ivoire, Senegal, and Burkina Faso account for about two-thirds of WAEMU GDP and 60 percent of total gross issuance.
  - Adding Mali raises the share of the four largest issuers to 78 percent of total GDP and 75 percent of total gross issuance.
- Market concentration:
  - Only 21 bonds listed in the BRVM regional bond segment from WAEMU governments, regional development banks, and very few corporates.
- Kola Bond Market / IFC issuance:
  - IFC issued a CFAF 22 billion five-year bond (AAA rated) at end-2006.
  - Coupon rate: 4.75 percent; issued at 100 percent of face value.
  - More than 30 percent were raised from non-WAEMU investors.
  - Proceeds intended to support long-term local currency financing for local companies and to promote market development objectives.
- Issuance data highlights (selected table entries):
  - WAEMU T-Bills totals: 2001 54.9; 2002 49.9; 2003 85.4; 2004 123.5; 2005 270.6; 2006 198.1; July 2007 69.6.
  - Total Government Bonds (selected): 1999 30.2; 2000 50.0; 2001 63.9; 2002 65.4; 2003 0.0; 2004 131.1; 2005 120.5; 2006 266.4.

### IV. Investor base, cross-border integration, and market functioning
- Major investor classes:
  - Banks and institutional investors are the largest investors in the T-Bills market.
  - Banks prefer government securities due to better remuneration than non-remunerated central bank reserves, tax exemption of interest, zero risk weight for capital adequacy, tradability across WAEMU, and principle ability to refinance at the central bank for liquidity.
  - Regional regulation allows insurance companies to invest in T-Bills.
- Banks’ holdings of securities (2005) — holdings and assets:
  - Benin: 7.9 percent of total assets; Total Assets 726.6 (in billions of CFA francs); Securities 57.6 (in billions of CFA francs)
  - Burkina Faso: 5.4; 653.7; 35.2
  - Côte d'Ivoire: 4.0; 2,025.9; 80.7
  - Guinea-Bissau: 20.4; 23.3; 4.8
  - Mali: 3.5; 927.6; 32.6
  - Niger: 4.6; 236.5; 10.9
  - Senegal: 11.1; 1,760.7; 196.2
  - Togo: 11.0; 418.0; 46.2
  - WAEMU (aggregate): 6.8; 6,856.9; 464.2
- Average share of securities in banking assets: about 7 percent in 2005 (source notes slight overestimate as it includes both government and non-government securities).
- Cross-border transactions:
  - High intra-WAEMU cross-border purchases of T-Bills, especially for countries with smaller banking systems.
  - In 2004–05, nonresident banks within the WAEMU (including BOAD) purchased, on average, half of T-Bills issuance.
  - Cross-border investments lowest for countries with larger investor bases (Côte d’Ivoire, Benin, Senegal) and highest for shallower systems (Guinea-Bissau, Niger).
  - Cross-border participation notable in government bond market (e.g., Togolese issuance in January 2006 raising CFAF 36.3 billion).

### V. Issuance mechanism and market functioning
- Issuance mechanism for T-Bills:
  - Issuance through BCEAO auctions; harmonized issuance and distribution across WAEMU; securities dematerialized at BCEAO; negotiable in all countries.
  - Participants in T-Bill auctions: resident institutional investors alone (resident banks, nonbank financial institutions, regional financial institutions such as BCEAO and BOAD, and accredited financial intermediaries (Société de Gestion et d’Intermédiation, SGI)); foreign and retail investors purchase through institutional investors.
  - Auction announcement: BCEAO national agency announces auction in a major newspaper in each member country, seven days before bidding date; includes amount, auction date, maturity date, terms and conditions, macroeconomic data, and auction mechanism description.
  - Auction format: multiple rate single allotment (American) auction; competitive bidding alone allowed and limited to 60 percent of the issue amount for each bidder; bidders specify amounts and rates acceptable; committee accepts competitive bids in ascending order of rates until offering amount reached; BCEAO publishes over- or under-subscription, total amount accepted, and weighted average of accepted rates.
  - On issue day, BCEAO delivers securities to successful bidders and charges their accounts; T-Bills issued at a discount and paid par at maturity.
- Government bonds primarily issued via BRVM regional securities exchange rather than BCEAO auctions; bidding conventions differ (T-Bills: specify rates; Bonds: specify prices), contributing to preference for BRVM issuance.
- Secondary markets are thin; BCEAO willing to settle trades among participants with accounts, but buy-and-hold investor behavior yields little trading.

### VI. Determinants of yields, risk assessment, and market limitations
- Market frictions and limitations:
  - Excess liquidity in the regional banking system and quasi-nonexistence of money markets.
  - Limited secondary markets for government securities leading to limited credit differentiation among issuers.
  - Key determinant of the government yield curve is overall supply and demand conditions rather than issuer-specific credit differentiation.
- Risk determinants for WAEMU investors:
  - Ability and willingness of national governments to repay.
  - Common currency implies no foreign exchange risk for WAEMU investors.
  - Risk weights for capital adequacy calculation are nil for all government securities.
  - Tax convention appears same for all countries.
- Investor access and nonresident participation:
  - Nonresident investors within the WAEMU accounted for more than half (54 percent) of the issue; Togolese residents absorbed the rest.
  - Including BOAD, share of non-Togolese investors amounts to about 70 percent.
  - No restrictions for foreign investment in government securities.
  - Nonresident entities cannot participate directly in T-Bills auctions but can purchase T-Bills indirectly through resident banks, nonbank financial institutions, and accredited financial intermediaries.
  - Nonresident investors can purchase government bonds listed at the BRVM.
- Yield differentials and indicators:
  - 2005 T-Bill rates ranged from 3.490 percent (Benin) to 5.06 percent (Guinea-Bissau).
  - 2006 T-Bill rates ranged from 3.900 percent (Burkina Faso) to 5.450 percent (Guinea-Bissau).
  - 2005: difference between highest (Guinea-Bissau, 5.060 percent) and lowest (Benin, 3.490 percent) averaged 157 basis point (bp); excluding Guinea-Bissau, difference decreased to 38.5 bp.
  - 2006: difference between highest (Guinea-Bissau, 5.450 percent) and lowest (Burkina Faso, 3.900 percent) was 155 basis point (bp); excluding Guinea-Bissau, difference increased to 110 bp.
- Sovereign ratings and spreads (selected entries preserved as in source):
  - Benin: Standard and Poor's Rating B; Bond Yield 4.34 (In percent); Bond Spread -56 (In basis points)1; Bond Maturity -15 (In years)...
  - Burkina Faso: Standard and Poor's Rating B; Bond Yield 4.48 (In percent); Bond Spread -4 (In basis points)10...
  - Côte d'Ivoire: Not Rated; Bond Yield 7.00 (In percent); Bond Spread 100 (In basis points)3...
  - Guinée Bissau: Not Rated; Bond Yield 5.45 (In percent); Bond Spread 569 (In basis points)7...
  - Mali: B; Bond Yield 3.90 (In percent); Bond Spread -99 (In basis points) -58...
  - Niger: Not Rated; Bond Yield 5.01 (In percent); Bond Spread 125 (In basis points)3...
  - Senegal: B+; Bond Yield 5.50 (In percent); Bond Spread 0 (In basis points)54.89 041...
  - Togo: Not Rated; Bond Yield 6.50 (In percent); Bond Spread 100 (In basis points)5...
  - Notes: 1/ Spread over Senegalese securities; 2/ Spread over Burkinabé securities.
- Relative pricing vs. EU T-Bills (January 19, 2007):
  - France (A-1+): 1 Month 3.50; 3 Month 3.60; 6 Month 3.70; 1 Year 3.91 (In percent).
  - Germany (A-1+): 1 Month 3.49; 3 Month 3.59; 6 Month 3.69; 1 Year 3.89 (In percent).
  - Italy (A-1+): 1 Month 3.53; 3 Month 3.63; 6 Month 3.72; 1 Year 3.93 (In percent).
  - Belgium (A-1+): 1 Month 3.52; 3 Month 3.62; 6 Month 3.72; 1 Year 3.92 (In percent).
  - Spain (A-1+): 1 Month 3.50; 3 Month 3.59; 6 Month 3.68; 1 Year 3.91 (In percent).
  - Relative pricing: average Senegalese T-bills rates (B+ rating) are about 130 bps higher than French 6-months T-Bill rates (A-1+ rating).
- Indebtedness:
  - Guinea-Bissau has total Debt-to-GDP in excess of 300 percent (convergence criterion is 70 percent) and history of payment delays; Guinea-Bissau pays the highest T-Bill rate in the WAEMU.
- Liquidity conditions:
  - Over 2005–06, T-Bill rates broadly higher for countries with lower excess liquidity.
  - Banks’ deposits with central bank are unremunerated; demand for government securities depends on credit growth pace and availability/returns of government securities.

### VII. Policy challenges, directives, and recommended actions
- Debt management directives (WAEMU and CEMAC, 2007) require member countries to:
  - elaborate a public debt strategy and a public debt financing plan;
  - implement international best practices in debt management.
- Directive expectations for annual budget laws:
  - attach a strategy including portfolio structure of new borrowing, financing terms, borrowing and guarantee ceilings, justification for borrowing, and a forecast of the debt profile over 15 years.
- Transparency and accountability mechanisms mandated:
  - annual debt reports presenting debt strategy objectives and debt profiles, debt sustainability analyses, and results achieved with respect to debt objectives and use of debt proceeds;
  - debt management units to have clear operating procedures and be audited.
- Debt coordination:
  - a debt coordinating structure chaired by the Ministry of Finance to monitor implementation, coordinate relevant institutions, act as a middle office, and be consulted on all debt issuances for conformity with guidelines.
- Recommended market and institutional actions:
  - Improve cash and liquidity forecasting methods to support market-based financing and better cash management.
  - Regularly assess the sustainability of new debt and implement a medium-term debt strategy.
  - Develop and ensure proper functioning of money markets as excess liquidity diminishes to support deeper and more liquid government securities markets.
  - Increase the role of BOAD as a benchmark issuer and raise medium-to long-term funding for public infrastructure projects.
  - Develop risk mitigation instruments to attract private funding for infrastructure.
  - Provide technical assistance in regulation, training, public education, and tax harmonization.
  - Promote international best practices in bond documentation, syndication, and selling techniques to reinforce credit differentiation and rationalize market regulations.
- Market development actions:
  - Develop efficient money markets as excess liquidity abates.
  - Address obstacles to interbank market development: absence of legal framework, appropriate collateral, network to match supply and demand, and counterparty risk assessment framework.
  - Continue improving payment systems (noted progress in WAEMU).
- Monetary policy and financial stability implications:
  - Conduct of monetary policy must adapt as financial markets integrate.
  - Differentiated reserve requirements have been used; as liquidity tightens, BCEAO has conducted reverse repo operations, including T-Bills as collateral.
  - Monitor rollover risk and possible adverse pressure on the exchange rate with increased foreign investor involvement.
- Country-level policy measures recommended:
  - Ensure cost of debt is minimized while managing risks.
  - Issue and respect issuance calendars and disclose timely and adequate information to investors.
  - Coordinate issuance policies in the regional market to help reduce national governments’ cost of funding.
  - Implement sound debt strategies to manage rollover risk in T-Bills markets.
  - Improve budgetary planning and projections to avoid arrears buildup and delays in repaying investors; minimize idle balances and manage delayed aid payments.

### VIII. Key numerical facts and aggregates (preserved exactly)
- Total gross issuance of publicly traded debt: CFAF 382.8 billion (2006).
- Total outstanding debt: CFAF 905 billion (about US$2 billion) as of July 2007; equals 3.5 percent of GDP.
- T-Bills issuance: about CFAF 200 billion (2006).
- Government bond issuance: CFAF 5 billion (2000) to CFAF 120 billion (2006) and CFAF 265 billion (as of July 2007).
- IFC bond: CFAF 22 billion, five-year, AAA rated, 4.75 percent coupon, issued at 100 percent of face value; more than 30 percent from non-WAEMU investors.
- Figure 1 data points (1999–July 2007): 142.9; 31.7; 78.8; 154.2; 238.8; 225.2; 465.6; 382.8; 298.6.
- Auction participation limit: competitive bidding limited to 60 percent of the issue amount for each bidder.
- T-Bill rate examples:
  - 2005: Benin 3.490 percent; Guinea-Bissau 5.060 percent.
  - 2006: Burkina Faso 3.900 percent; Guinea-Bissau 5.450 percent.
- Nonresident participation example: nonresident investors within the WAEMU accounted for 54 percent of a Togolese issue; including BOAD, non-Togolese share about 70 percent.
- Guinea-Bissau Debt-to-GDP: in excess of 300 percent (convergence criterion 70 percent).
- France 6 Month T-Bill rate (January 19, 2007): 3.70 (In percent); Senegal T-Bill average roughly 130 basis point higher than French 6-months T-Bill rates.

*Source: _wp07256 - References (extracted content from the supplied PDF).*

### References      ........................................................................................................

### _wp07256 - References

### I. Introduction and purpose
- Local currency-denominated government securities support fiscal and monetary policy implementation by aiding cash and liquidity management, financing fiscal deficits in a non-inflationary manner, and enabling open market operations.
- Government securities provide instruments for bank recapitalization and a benchmark yield curve for pricing financial assets and risk management tools.
- Developing government securities markets entails policy choices within public debt management and local capital market development.
- The paper reviews trends and developments in WAEMU government securities primary markets and determinants of the cost of local-currency denominated public debt.

### II. Rapid growth of WAEMU local currency debt markets
- Total gross issuance of publicly traded debt (public, private, and from regional institutions) grew more than tenfold since 2000 to reach CFAF 382.8 billion in 2006.
- As of July 2007, total outstanding debt reached CFAF 905 billion (about US$2 billion) or 3.5 percent of GDP.
- Comparison points cited: South Africa 47 percent; Russia 3 percent of GDP (estimates from BIS, “Financial Stability and Local Currency Bond Markets,” BIS, June 2007).
- Primary drivers of market growth:
  - Elimination of central bank financing of government following initiatives starting in 1998; statutory advances consolidated with repayment to the central bank starting in 2003.
  - National treasuries resorted to market financing as the regional central bank (BCEAO) stopped statutory advances.
  - Development of T-Bills market helped reduce excess liquidity by offering banks a more profitable use for excess reserves.
  - Delays in external budget support prompted use of the regional local debt market for cash management.

- Instruments and volumes:
  - T-Bills issuance grew from zero in 2000 to about CFAF 200 billion in 2006.
  - Maturities typically range from 3 months to one year; most popular are 3- and 6-month bills.
  - Government bond issuance increased from CFAF 5 billion in 2000 to about CFAF 120 billion in 2006 and CFAF 265 billion as of July 2007.
  - Bond tenors typically range from 3 to 5 years.

- Figure 1 data points (Total Gross Issuance of Debt Securities, 1999–July 2007, in billions of CFA francs):
  - 1999: 142.9
  - 2000: 31.7
  - 2001: 78.8
  - 2002: 154.2
  - 2003: 238.8
  - 2004: 225.2
  - 2005: 465.6
  - 2006: 382.8
  - July 2007: 298.6

- Table 1 (WAEMU: Treasury Bills Issuance, in billions of CFA francs):
  - Benin: 2001 0.0, 2002 0.0, 2003 0.0, 2004 0.0, 2005 23.4, 2006 45.6, July 2007 (blank)
  - Burkina Faso: 2001 0.0, 2002 49.9, 2003 30.9, 2004 41.5, 2005 43.3, 2006 50.9, July 2007 26.6
  - Côte d'Ivoire: 2001 0.0, 2002 0.0, 2003 16.3, 2004 15.7, 2005 47.5, 2006 0.0, July 2007 (blank)
  - Guinea-Bissau: 2001 0.0, 2002 0.0, 2003 0.0, 2004 0.0, 2005 6.0, 2006 6.7, July 2007 (blank)
  - Mali: 2001 12.0, 2002 0.0, 2003 15.2, 2004 21.0, 2005 84.9, 2006 20.8, July 2007 28.1
  - Niger: 2001 0.0, 2002 0.0, 2003 0.0, 2004 0.0, 2005 30.0, 2006 23.3, July 2007 14.9
  - Senegal: 2001 42.9, 2002 0.0, 2003 23.0, 2004 45.3, 2005 35.5, 2006 50.8, July 2007 (blank)
  - Togo: 2001 0.0, 2002 0.0, 2003 0.0, 2004 0.0, 2005 0.0, 2006 0.0, July 2007 (blank)
  - WAEMU totals: 2001 54.9, 2002 49.9, 2003 85.4, 2004 123.5, 2005 270.6, 2006 198.1, July 2007 69.6
  - Source: BCEAO

- Table 2 (WAEMU: Gross Issuance of Publicly Placed Government Bonds, in billions of CFA francs) — aggregated presentation in source:
  - Total Government Bonds (selected years/entries): 1999 30.2; 2000 50.0; 2001 63.9; 2002 65.4; 2003 0.0; 2004 131.1; 2005 120.5; 2006 266.4; July 2007 (aggregate entries shown)
  - BOAD, BIDC, IFC entries and totals are reported in the source tables (see source for full tabulation).
  - Sources: BCEAO, BRVM, and Staff estimates

### III. Issuers and market structure
- Primary issuers: Governments of WAEMU member countries and a few regional development banks (BOAD, BIDC-EBID).
- As of end-2006:
  - Côte d’Ivoire, Senegal, and Burkina Faso account for about two-thirds of WAEMU GDP and 60 percent of total gross issuance.
  - Adding Mali raises the share of the four largest issuers to 78 percent of total GDP and 75 percent of total gross issuance.
- Market concentration:
  - Only 21 bonds listed in the BRVM regional bond segment from WAEMU governments, regional development banks, and very few corporates.
- Kola Bond Market (new segment for non-WAEMU resident issuers) started in 2007 with an IFC listing:
  - IFC issued a CFAF 22 billion five-year bond (AAA rated) at end-2006.
  - Coupon rate: 4.75 percent; issued at 100 percent of face value.
  - More than 30 percent were raised from non-WAEMU investors.
  - Proceeds intended to support long-term local currency financing for local companies and to promote market development objectives.

### IV. Investor base, cross-border integration, and market functioning
- Major investor classes:
  - Banks and institutional investors are the largest investors in the T-Bills market.
  - Banks favor government securities due to better remuneration than non-remunerated central bank reserves, tax exemption of interest, zero risk weight for capital adequacy, tradability across WAEMU, and principle ability to refinance at the central bank for liquidity.
  - Regional regulation allows insurance companies to invest in T-Bills.
- Banks’ holdings of securities (2005) — Table 3 (holdings and assets, exact figures as presented):
  - Benin: Holdings of Securities (In percent of total assets) 7.9; Total Assets (In billions of CFA francs) 726.6; Securities (In billions of CFA francs) 57.6
  - Burkina Faso: 5.4; 653.7; 35.2
  - Côte d'Ivoire: 4.0; 2,025.9; 80.7
  - Guinea-Bissau: 20.4; 23.3; 4.8
  - Mali: 3.5; 927.6; 32.6
  - Niger: 4.6; 236.5; 10.9
  - Senegal: 11.1; 1,760.7; 196.2
  - Togo: 11.0; 418.0; 46.2
  - WAEMU (aggregate): 6.8; 6,856.9; 464.2
  - Sources: BCEAO and Staff estimates
- Average share of securities in banking assets: about 7 percent in 2005 (note in source: this figure slightly overestimates as it includes both government and non-government securities).
- Cross-border transactions:
  - High intra-WAEMU cross-border purchases of T-Bills, especially for countries with smaller banking systems.
  - In 2004–05, nonresident banks within the WAEMU (including BOAD) purchased, on average, half of T-Bills issuance.
  - Cross-border investments are lowest for countries with larger investor bases (Côte d’Ivoire, Benin, Senegal) and highest for shallower systems (Guinea-Bissau, Niger).
  - Cross-border participation is also notable in the government bond market (illustrated by the Togolese issuance in January 2006 raising CFAF 36.3 billion).

### V. Determinants of yields and market limitations
- Common regional institutions (regional central bank BCEAO and securities exchange BRVM) and uniform issuance/distribution procedures have fostered high cross-border transactions.
- Market frictions and limitations:
  - Excess liquidity in the regional banking system and quasi-nonexistence of money markets.
  - Limited secondary markets for government securities leading to limited credit differentiation among issuers.
  - The key determinant of the government yield curve is overall supply and demand conditions rather than issuer-specific credit differentiation.

### VI. Policy challenges and recommended actions (as discussed)
- Improve cash and liquidity forecasting methods to support market-based financing and better cash management.
- Regularly assess the sustainability of new debt and implement a medium-term debt strategy.
- Develop and ensure proper functioning of money markets as excess liquidity diminishes to support deeper and more liquid government securities markets.
- Use regional development bank benchmark issuance and international technical assistance to:
  - Increase the role of BOAD as a benchmark issuer.
  - Raise medium-to long-term funding for public infrastructure projects.
  - Develop risk mitigation instruments to attract private funding for infrastructure.
  - Provide technical assistance in regulation, training, public education, and tax harmonization.
- Promote market practices and instruments from international examples (e.g., IFC issuance objectives: introduce international best practices in bond documentation, syndication, and selling techniques; reinforce credit differentiation and rationalize market regulations).

### VII. Key numerical facts and aggregates (preserved exactly)
- Total gross issuance of publicly traded debt: CFAF 382.8 billion (2006).
- Total outstanding debt: CFAF 905 billion (about US$2 billion) as of July 2007; equals 3.5 percent of GDP.
- T-Bills issuance: about CFAF 200 billion (2006).
- Government bond issuance: CFAF 5 billion (2000) to CFAF 120 billion (2006) and CFAF 265 billion (as of July 2007).
- IFC bond: CFAF 22 billion, five-year, AAA rated, 4.75 percent coupon, issued at 100 percent of face value; more than 30 percent from non-WAEMU investors.
- Figure 1 data points (1999–July 2007): 142.9; 31.7; 78.8; 154.2; 238.8; 225.2; 465.6; 382.8; 298.6.

*Source: _wp07256 - References (extracted content from the supplied PDF).*

### 6.5 percent was oversubscribed as the initial objective was CFAF 30 billion. Nonresident

### 6.5 percent was oversubscribed as the initial objective was CFAF 30 billion. Nonresident

### Nonresident participation and investor access
- Nonresident investors within the WAEMU accounted for more than half (54 percent) of the issue; Togolese residents absorbed the rest of the issue.
- If the Banque Ouest Africaine de Developpement (BOAD) is included, the share of non-Togolese investors amounts to about 70 percent.
- There are no restrictions for foreign investment in government securities.
- Nonresident entities cannot participate directly in T-Bills auctions but can purchase T-Bills indirectly through resident banks, nonbank financial institutions, and accredited financial intermediaries.
- Nonresident investors can purchase government bonds listed at the regional securities exchange (BRVM).
- A Banque de France informal survey of French financial firms notes international investor interest driven by debt cancellation, improved fiscal discipline, very high returns, and a sound macroeconomic framework; but for EU-based investors:
  - the CFA peg to the Euro precludes short-term bets on currency appreciation;
  - relatively tight spreads between yields in the WAEMU and those in Europe do not appear attractive.

### Debt management strategy directives (WAEMU and CEMAC)
- Directives established in 2007 mandate that member countries:
  - elaborate a public debt strategy and a public debt financing plan;
  - implement international best practices in debt management.
- The directive calls on countries to elaborate external and domestic borrowing strategies to ensure debt sustainability, meet obligations when due, and realize governments’ cost and risk objectives.
- Once public debt policy is established, a strategy is expected to be attached annually to budget laws, including:
  - portfolio structure of new borrowing;
  - financing terms;
  - borrowing and guarantee ceilings;
  - justification for borrowing;
  - a forecast of the debt profile over 15 years.
- Transparency and accountability mechanisms mandated:
  - annual debt reports presenting debt strategy objectives and debt profiles, debt sustainability analyses, and results achieved with respect to debt objectives and use of debt proceeds;
  - debt management units to have clear operating procedures and be audited.
- A debt coordinating structure chaired by the Ministry of Finance is to be set up to monitor implementation and coordinate relevant institutions; it will act as a middle office and be consulted on all debt issuances for conformity with guidelines.

### Issuance mechanism for T-Bills and government bonds
- Current system: issuance of T-Bills through auctions at the BCEAO; harmonized issuance and distribution across WAEMU; securities are negotiable in all countries and kept in dematerialized form at the BCEAO; secondary market transactions allowed.
- Prior to regional T-Bills market, national treasuries issued non-negotiable securities mainly for cash management.
- WAEMU member governments sell T-Bills and bonds through the BCEAO; resident institutional investors alone can participate in T-Bill auctions; other investors purchase T-Bills through them.
- No formal coordination of issuance between countries but issuance procedures are uniform.
- Typical auction timing: quarterly or semester.
- Auction mechanism includes:
  - Announcement: BCEAO national agency announces auction in a major newspaper in each of the eight member countries, seven days before bidding date; includes amount, auction date, maturity date, terms and conditions, macroeconomic data, and auction mechanism description.
  - Auction: multiple rate single allotment (American) auction; competitive bidding alone allowed and limited to 60 percent of the issue amount for each bidder; bidders specify amounts and rates acceptable; bidding committee accepts competitive bids in ascending order of rates until offering amount reached; BCEAO publishes over- or under-subscription, total amount accepted, and weighted average of accepted rates.
  - Participants: institutional investors alone (resident banks, nonbank financial institutions, regional financial institutions such as BCEAO and BOAD, and accredited financial intermediaries (Société de Gestion et d’Intermédiation, SGI)) can participate; participants required to have an account at the BCEAO; foreign and retail investors can purchase through institutional investors.
  - Issuance: on issue day, BCEAO delivers securities to successful bidders and charges their accounts; T-Bills issued at a discount and paid par at maturity.
- Government bonds: issuance has been in the regional securities exchange (BRVM) rather than via BCEAO auctions; differences in bidding conventions (T-Bills: specify rates; Bonds: specify prices) have caused market preference for BRVM issuance.
- Secondary markets are thin; T-Bills are dematerialized and BCEAO willing to settle trades among participants with accounts, but buy-and-hold investor behavior yields little trading.

### Cost of debt and risk assessment
- Key determinants of risk for WAEMU investors: ability and willingness of national governments to repay; common currency implies no foreign exchange risk for WAEMU investors; risk weights for capital adequacy calculation are nil for all government securities; tax convention appears same for all countries.
- Indicators used to assess market perceptions of default risk:
  - sovereign credit ratings (proxy for default risk);
  - differences in rates between WAEMU governments and the EU (CFAF pegged to euro);
  - whether higher Debt-to-GDP correlates with higher risk premium;
  - technical factors such as liquidity conditions proxied by excess reserves in the banking sector.
- T-Bill rates by issuer and changes:
  - 2005 T-Bill rates ranged from 3.490 percent (Benin) to 5.06 percent (Guinea-Bissau).
  - 2006 T-Bill rates ranged from 3.900 percent (Burkina Faso) to 5.450 percent (Guinea-Bissau).
- Differentiation among issuers:
  - 2005: difference between highest (Guinea-Bissau, 5.060 percent) and lowest (Benin, 3.490 percent) averaged 157 basis point (bp); excluding Guinea-Bissau, difference decreased to 38.5 bp.
  - 2006: difference between highest (Guinea-Bissau, 5.450 percent) and lowest (Burkina Faso, 3.900 percent) was 155 basis point (bp); excluding Guinea-Bissau, difference increased to 110 bp.
- Sovereign ratings and spreads (selected from Table 4, preserved terms as in source):
  - Benin: Standard and Poor's Rating B, Bond Yield 4.34 (In percent), Bond Spread -56 (In basis points)1, Bond Maturity -15 (In years), Treasury Bill Rate [table formatting irregularities preserved].
  - Burkina Faso: Standard and Poor's Rating B, Bond Yield 4.48 (In percent), Bond Spread -4 (In basis points)10, ...
  - Côte d'Ivoire: Not Rated, Bond Yield 7.00 (In percent), Bond Spread 100 (In basis points)3, ...
  - Guinée Bissau: Not Rated, Bond Yield 5.45 (In percent), Bond Spread 569 (In basis points)7, ...
  - Mali: B, Bond Yield 3.90 (In percent), Bond Spread -99 (In basis points) -58 ...
  - Niger: Not Rated, Bond Yield 5.01 (In percent), Bond Spread 125 (In basis points)3 ...
  - Senegal: B+, Bond Yield 5.50 (In percent), Bond Spread 0 (In basis points)54.89 041 ...
  - Togo: Not Rated, Bond Yield 6.50 (In percent), Bond Spread 100 (In basis points)5 ...
  - Notes in Table 4: 1/ Spread over Senegalese securities; 2/ Spread over Burkinabé securities.
- Observations on ratings and spreads:
  - Four member countries have been rated by S&P (Senegal B+, Benin B, Burkina Faso B, Mali B); ratings unchanged since inception.
  - Interest rates paid do not consistently increase with deterioration in rating; Senegalese T-Bill spreads range from -99 bp to 56 bp and are 100 bp for Government bonds.
  - B+ rated 5-year Senegalese bonds are 75 bps higher than AAA-rated CFA-franc IFC bonds with similar maturity.
- Comparison with EU T-Bill rates (Table 5, January 19, 2007):
  - France (A-1+): 1 Month 3.50, 3 Month 3.60, 6 Month 3.70, 1 Year 3.91 (In percent).
  - Germany (A-1+): 1 Month 3.49, 3 Month 3.59, 6 Month 3.69, 1 Year 3.89 (In percent).
  - Italy (A-1+): 1 Month 3.53, 3 Month 3.63, 6 Month 3.72, 1 Year 3.93 (In percent).
  - Belgium (A-1+): 1 Month 3.52, 3 Month 3.62, 6 Month 3.72, 1 Year 3.92 (In percent).
  - Spain (A-1+): 1 Month 3.50, 3 Month 3.59, 6 Month 3.68, 1 Year 3.91 (In percent).
- Relative pricing: average Senegalese T-bills rates (B+ rating) are about 130 bps higher than French 6-months T-Bill rates (A-1+ rating).
- Indebtedness:
  - Guinea-Bissau has total Debt-to-GDP in excess of 300 percent (convergence criterion is 70 percent) and history of payment delays; Guinea-Bissau pays the highest T-Bill rate in the WAEMU.
  - Overall, T-Bill rates are not increasing consistently with levels of indebtedness across countries; supply and demand conditions often dominate.
- Liquidity conditions:
  - Over 2005–06, T-Bill rates broadly higher for countries with lower excess liquidity.
  - Banks’ deposits with central bank are unremunerated; demand for government securities depends on credit growth pace and availability/returns of government securities.

### Policy issues and conclusions
- Benefits of rapid government securities market growth:
  - Governments able to finance deficits in local currency.
  - Excess liquidity has fallen as banks reduced unremunerated reserves at the central bank to invest in T-Bills.
  - Market accelerates financial integration via increased intra-WAEMU cross-border transactions.
- Key conclusions:
  - In nascent market, supply and demand conditions matter more than rating or indebtedness in explaining rate differences.
  - From governments’ perspective, cost considerations may be subordinated to raising required financing timely and flexibly.
  - As local debt markets develop, execution considerations must not dominate the objective of minimizing funding cost subject to reasonable risk.
  - Important to improve market efficiency through timely and relevant information to market participants.
  - Risks to financial stability must be managed through adequate debt sustainability analysis and development of debt management strategies.
  - HIPC and MDRI initiatives reduced debt burden; share of external debt is falling while domestic debt issuance is rising; maintaining debt sustainability is a key priority, especially given fiscal indicator deterioration in 2006.
  - Improving budgetary planning and projections can help avoid arrears buildup and delays in repaying investors; need to minimize idle balances and manage delayed aid payments.
- Country-level policy measures recommended:
  - Ensure cost of debt is minimized while managing risks.
  - Good debt management practices: issue and respect issuance calendars and disclose timely and adequate information to investors.
  - Coordinate issuance policies in the regional market to help reduce national governments’ cost of funding.
  - Implement sound debt strategies to manage rollover risk in T-Bills markets.
- Market development actions:
  - Develop efficient money markets as excess liquidity abates.
  - Address obstacles to interbank market development: absence of legal framework, appropriate collateral, network to match supply and demand, and counterparty risk assessment framework.
  - Continue improving payment systems (noted progress in WAEMU).
- Monetary policy implications:
  - Conduct of monetary policy must adapt as financial markets integrate.
  - Differentiated reserve requirements have been used extensively; as liquidity tightens, BCEAO has conducted reverse repo operations, including T-Bills as collateral.
- Financial stability issues to monitor with increased foreign investor involvement:
  - Manage rollover risk;
  - Monitor possible adverse pressure on the exchange rate.

*Source: IMF staff analysis as presented in the supplied content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07256.pdf_