Monday, 10 December 2018

Fortune favours the brave

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Africa has long fascinated specialist emerging market investors, but recently has started to open up to a broader spectrum of investors. But the continent remains off limits to many, due to the lack of clear and reliable information, illiquidity and fears over corruption. Globally, risk appetite is already low. Yet for precisely these reasons, those willing to take on the risk could unlock significant returns. Savita Iyer-Ahrestani reports.

The “two Gs,” Ghana and Gabon, both of which brought highly successful sovereign bond deals to the international capital markets in 2007, were not spared by the 2008 market downturn. Like other emerging market credits, prices on Gabonese and Ghanaian bonds were also dragged down. Yet experts still believe that these issues did a great deal to open investors’ minds to Africa – a place that has always been viewed as the preserve of the truly daring. Since those issues came to market there been increased interest in African exposure, which in turn set the ball rolling for further issues from the sub-Saharan region.

“African issuance in the hard currency markets has been sparse with the exception of South African credits, but there is an eagerness in general for African issuers to consider the bond market as a financing alternative,” said Tim Hall, global head of DCM origination at Calyon in London. “When the Ghanaian sovereign bond issue came, everyone was holding their breath, but it just blew out. Emerging market investors in general have a lot of interest in Africa as a region.”

Of course, Africa was an attractive region for many investors even before Ghana and Gabon came on the scene. The region is and always has been a commodity play, and in their search for yield, hedge funds and others have been willing to seek out opportunities in “the final frontier,” said Stephen Bailey-Smith, head of research for Africa at Standard Bank in London, who has been covering Africa for 20 years. The Ghanaian and Gabonese issues, which became a part of JP Morgan’s benchmark EMBI index, have made the region more accessible to a broader base of investors. This whetted their appetites for other African names, encouraging them to take a closer look at countries like Kenya, Mauritius, Nigeria, and Tanzania.

Back to business as usual

Now that financial markets are once again more stable and the search for yield has resumed, it is likely that a few more sub-Saharan issuers will look to borrow on the bond market, Bailey-Smith said. “We’re now in a structural period where there will be a reversal of flows from OECD countries and back into emerging markets, and Africa will benefit from this,” he said. “There is potentially a window of opportunity for issuance in this scenario, and it could well be that countries like Uganda, Cameroon, Rwanda, Kenya and Tanzania look to take advantage of it. Their plans were scuppered when yields blew out, but they certainly have funding needs, and we’re getting to the level where they would be willing to issue.”

Investors like Kevin Daly, portfolio manager on the emerging markets fixed income team at Aberdeen Asset Management in London, believe that countries like Ivory Coast – which will have elections at the end of the year and has a new IMF program in place – and Kenya could come to the international bond markets with benchmark issues. These have the potential to be large enough for investors to take up substantial positions.

Any sovereign issue out of Africa is likely to be lapped up immediately since there are so few of them on the market, said Nigel Rendell, emerging markets strategist at RBC Capital Markets in London. While most investors are more concerned with the broader picture – a double-dip in the US economy or a fall in Chinese equities – sovereign issues from Africa would be interesting. Over the longer-term they certainly offer good growth potential and prospects for convergence with other emerging markets.

Baring all

However, if African sovereigns wish to issue successfully, Daly and others believe they must pay extra attention to transparency, particularly on fiscal accounts. “Africa still has a long way to go to make investors feel comfortable, because transparency is just not on par with other regions,” Daly said. “Ensuring that governments remain transparent, that they make investors aware of their ability and willingness to pay back debt and give good guidance, will be a big step in the right direction for these countries.”

Indeed, comfort is a key factor with respect to investing in Africa. Investors are all too aware of its checkered and flamboyant reputation – both in politics and economics. This explains why Ghana was a natural trail-blazer in this area. Investors have been more comfortable with it because it has been more transparent than many of its peers, including Gabon, Daly said. But earlier this year, Gabonese ministry of finance officials made a very strong case for investing in the country, being very forthcoming with information and presenting good figures at an investor presentation Daly attended. This led to a strong bounce in the country’s Eurobonds, he said.

And even though Ghana is more transparent, its communication with the market still leaves much to be desired.

Clearly, all African nations need private sector funding. Their ability to access it will depend on both macro and micro level progress on the political, economic and social fronts. Multilateral agencies and official creditors such as the Paris Club continue to provide debt relief to sub-Saharan nations. Recently the International Finance Corporation committed US$1.8bn worth of new investments across 30 countries in Africa – its largest volume in any single year since its founding in 1956 – as it rapidly increased activities to alleviate the impact of the global financial crisis on Africa’s poorest regions. The agency also delivered US$26.1m worth of advisory services, up from US$18.6m a year ago, as it expanded activities to increase the impact in countries affected by conflict, or where the private sector is at the very early stages of development.

The local option

In sub-Saharan countries, where there has been some progress in market reform, foreign investors can take positions in local currency debt. The Nigerian banking sector, for instance, had been of some interest. Mobile telephony has been another big success story in Africa, not just in the debt markets but in equity too. Standard Bank has raised money for a Kenyan corporate. However, given that markets are only just recovering and Africa is still the Wild West for many investors, generally speaking “risk appetite would have to progress a long way for people to take on new names in the local space,” said Bailey-Smith.

In 2006, Ghana opened up its local bond market to foreign investment, but it only allows investors to buy three-year or longer-term paper. This is not a very enticing proposition for many, said Daly. “We would be more comfortable investing in six-month or one-year paper, as we’d get paid a higher rate of return for the risk,” he said. “Three years is too long for us.”

Many foreign investors would be more attracted to local markets in the sub-Saharan region if governments did away with capital controls, Daly said. “But from a country’s point of view, it’s kind of a Catch-22 situation: if they remove the controls, they’d have all this money coming in and that would lead to inflation, yet if they did fully liberalise, they’d have more access to global investors.”

Commodities are the bottom line when it comes to Africa. The oil in places like Nigeria and Gabon render those countries more attractive to investment. Over the years, banks have been keen to cash in on the upside of financing project finance initiatives – in the energy sector especially, Calyon’s Hall said. But with most banks now focused on liquidity management, the financing of these deals could shift towards the bond market instead, thereby offering foreign investors yet another investment opportunity.

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