IMF/World Bank 2007: Into Africa?
As the major credit markets find themselves pinched by the tightest credit squeeze for many years, investors are looking for points on the globe where the pressure is lower. Africa has one of the world's youngest populations, is rich in natural resources and needs to stoke economic growth. Could lending to African companies be an attractive source of returns? Ouida Taafe reports.
South Africa's economy dwarfs that of every other country in Africa, representing one quarter of the continent's GDP. However, apartheid shackled it, barring the majority of the population from productive jobs and it has taken South Africa nearly fifteen years to start to turn around. "The South African economy has pretty much transformed itself in recent years, with interest rates at their lowest for 30 years and growth close to 5%, with 6% feasible," says Razia Khan, regional head of economics, Africa at Standard Chartered.
This economic growth has meant a similar increase in credit. "In the past two years, non-government paper listed on the Bond Exchange of South Africa has risen from R166bn [US$23.8bn] to R328bn, and by end-2007 we project that figure to be near R400bn," said Kate Rushton a corporate analyst with ABSA. "Non-government debt will soon make up about half of all listed debt – from just 30% three years ago. Liquidity, however, remains problematic with less than 10%, and often less than 5%, of amounts in issue trading monthly."
The most liquid funding source for corporates in South Africa is the stock market. "One reason for this is that domestic pension funds are constrained from investing overseas," said Jeff Gable, head of research at ABSA Capital. "Further, strong growth in equities attracted R66bn of net foreign inflows last year. Through early September, net inflows have reached R64bn already in 2007.”
In comparison, corporate borrowing has not been particularly strong – partly as a function of the interest rate environment and partly thanks to sturdy corporate balance sheets – something that could change as investment grows in infrastructure and in manufacturing capacity.
But South Africa has seen significant securitisation issuance. Rushton pointed out that the removal of some regulatory constraints and changes in securitisation regulations have opened up this market.
But that is not the only reason for its relative blossoming. “South Africa has not seen the same kind of risky lending in mortgages, whether residential or commercial, or in corporate loans as much of the rest of the world has. This has – so far – helped its securitisation market escape the turmoil elsewhere in the global markets,” Gable said.
As a demonstration of this different dynamic, on 20 August there was a R3.3bn of home loan securitisations completed at a spread of about 50bp over Jibar.
Exchange controls have sheltered South Africa from the global credit crunch, as investors are able to take limited exposure to external markets. That should not suggest, however, that the shocks have not been felt. "Negative sentiment has impacted spreads on locally placed rand-denominated issues, the bulk of which have priced wide of expectations," said Rushton. "In addition, any euro or dollar offshore fundraising programmes are being postponed."
Analysts also believe that global inflationary pressures could dent growth in South Africa, particularly as developing countries are proportionately more exposed to rising food and fuel costs.
On the plus side, the South African government is making major infrastructure investments in the run-up to the World Cup in 2010. "The electricity and transport systems parastatals are slated to invest Rd150bn and Rd78bn over the next few years, respectively," says Gable.
Improvement in the country's infrastructure is expected not only to appeal to tourists keen on football, but to make South Africa's manufacturing and commodities industries much more competitive. So acute is the need for investment in productive capacity, as well as in roads and ports, that even mining for precious metals such as gold and platinum, where one would expect South Africa to prosper, has not profited from the current global boom in the way that it might have, Gable pointed out.
Whatever the current challenges, the analysts are upbeat on the future. "We are bullish on economic growth in Africa generally and believe that South African manufacturing has a major role to play in this. To date, the manufacturing sector has tended to focus on import substitution, but this is changing," said Khan.
If African growth continues and investment increases – and if South Africa fulfils its promise as a financing hub for the rest of the continent – the future could be very rosy.