Conference Presentation, Panel
Widening Access to Capital in Developing Markets
Milken InstituteStaci Warden, Afsaneh Beschloss, Ermias Eshetu, Claver Gatete, Hua Jingdong, Jingdong Hua, Ruben Brigadier, Miguel, Matthew Reese
- Three Pillars of Capital Access: The Center for Financial Markets at the Milken Institute defines widening access to capital through:
- Attracting foreign direct investment (FDI) to developing economies.
- Expanding financial inclusion for individuals outside the formal financial sector.
- Tapping into domestic sources of savings to finance corporate growth and provide investor vehicles.
- Pivotal Shift to Private Sector Financing: In 2015, the international community (via UN Sustainable Development Goals and COP 21) recognized that government debt is unsustainable; trillions in private sector investment are now deemed essential for development, necessitating robust capital markets.
- Rwanda's Regional Integration Strategy: Minister Klaver Getete emphasizes that small economies like Rwanda must integrate capital markets regionally rather than relying on national scale alone.
- Rwanda is harmonizing regulations, corporate governance, and payment systems across the East African Community (EAC) with Uganda, Kenya, and Tanzania.
- The goal is to create a unified trading platform where cross-border investment and liquidity can flow freely within the region.
- Local Currency Bond Issuance: Jingdong Hua (IFC Treasurer) highlights the critical need for local capital markets to mitigate currency risk for emerging market entrepreneurs.
- When the commodity super-cycle ended and local currencies depreciated, entrepreneurs expressed regret for not borrowing in local currency due to the lack of efficient local debt markets.
- Rwanda successfully established a regulatory framework allowing the IFC to issue the first-ever local currency bond by a foreign entity, serving as a replicable model.
- Ethiopian Commodities Exchange (ECX) Impact: Ermias Eshtu details the transformation of Ethiopia's agricultural sector through a state-mandated commodity exchange.
- The exchange now facilitates market access for approximately 3.3 million smallholder farmers who previously operated outside formal economic cycles.
- Mandatory trading of key commodities (coffee, sesame, oil seeds) has driven liquidity, with daily trade volumes reaching nearly $10 million.
- ECX introduced electronic trading in October, increasing transaction capacity by 5,000 times, though the transition from open outcry to e-trading remains a mindset challenge.
- Equity and Debt Market Scale Disparities: Jingdong Hua notes that sub-Saharan Africa's corporate bond market represents only 1-2% of GDP compared to over 100% in the US or 70% in South Korea.
- India Case Study: The IFC helped India create a domestic yield curve by issuing $3 billion in offshore rupee-denominated "Masala bonds" in London, which were then used to fund local infrastructure and climate projects.
- China Case Study: The IFC's issuance of the first "Panda Bond" in 2005 helped grow China's corporate bond market from ~$20 billion to ~$3 trillion.
- Structural Reforms vs. FDI: Afsaneh Beschless (Rock Creek Group) argues that capital markets are the necessary infrastructure for private investors to deploy capital efficiently.
- Unlike FDI, which requires active management, capital markets allow passive global capital to invest in local businesses denominated in local currency, aiding balance of payments stability.
- Emerging markets now hold ~10% of global equity value ($3.7 trillion) and ~18% of the global bond market ($40 trillion).
- Rwanda's Financial Inclusion and Savings Mobilization: Rwanda has reduced the amount of cash outside the banking system from 28% (2009) to 9% through digital payments and mobile banking.
- The government launched the Agaciro Development Fund (Sovereign Wealth Fund), which received immediate public contributions despite no detailed investment plan being shared.
- Rwanda aims to create a comprehensive pension and insurance framework that funns domestic savings into long-term capital market instruments.
- Pan-African Market Skepticism: Jingdong Hua expresses caution regarding a unified Pan-African capital market, noting that regional blocs (like CFA zones) have struggled to integrate due to sovereignty concerns and slower decision-making processes.
- He advocates for regional integration (e.g., EAC, SADC, ECOWAS) as a pragmatic first step before attempting a continent-wide unified market.
- Fintech as a Leapfrog Opportunity: Afsaneh Beschless identifies fintech as a critical lever for developing markets, allowing them to bypass legacy infrastructure.
- However, she stresses that fintech innovation requires parallel development of legal and regulatory frameworks to protect consumers and ensure stability.
- A potential gap exists between large pools of social impact capital seeking opportunities and local projects in developing nations; connectivity mechanisms are needed.
- Ethiopia's Prudent Approach: Ermias Eshtu explains Ethiopia's historically risk-averse stance, citing the need to protect the savings of poor populations and manage foreign exchange (FX) constraints.
- Ethiopia has successfully mobilized local savings to fund major infrastructure (e.g., the $5 billion Grand Renaissance Dam) without heavy reliance on foreign debt.
- The country is currently addressing regulatory hurdles, with even regulators needing to be educated on capital market concepts to facilitate exchange growth.
- Future Outlook and Challenges: Panelists agree that while macroeconomic stability (low inflation, strong banking systems) is a prerequisite, it is insufficient without deep capital markets.
- Rwanda is rated B+ by Fitch and S&P, with banking capital adequacy ratios averaging 24% and non-performing loans at 6%.
- Ethiopia remains lower in global "Doing Business" rankings for credit access, though its saving rate has grown from 5% to over 20% through local mobilization efforts.
- Upcoming Milken Institute Initiative: The moderator announced a partnership with the IFC and George Washington University to host a semester-long program for African capital market officials.
- The program includes coursework and internships in the US, designed to build a cohort of officials capable of implementing capital market reforms in their home countries.