Monday, 20 November 2017

Sub-Saharan Capital Markets Roundtable 2007: Part 1

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IFR: Africa has moved on the radar screens of the banking, capital markets and investor communities. Why Africa, why now, and what are the prospects? To get us into the conversation, let’s start with the economic outlook. Stuart, could you give us some general perspectives on the African economy (to the extent you can generalise about a continent), focusing on some of the major themes and economies?

Stuart Culverhouse, Exotix: I think in headline terms, yes, Sub-Saharan Africa is not a homogenous set of countries, but in general terms the African economy – and I think this is the consensus – has performed enormously well over the last few years. In terms of what is driving that, you have average growth of around 6% this year and next year. A number of countries are growing over 7%. Only nine countries, I think, in the latest IMF regional outlook are growing less than 4%.

You have some real underperformers, but a lot of countries are growing at 4% or more. So that is a pretty wide basis for growth. You could argue that that’s still not enough, and for some countries it is not. It is not the 7% that you need to get to the Millennium Development Goals, for instance, and it is not quite the Asian standards, but certainly in the last couple of years that you have an improving trend and a number of countries stand out.

In terms of what is driving that, you have a very strong global economy. That has been the case for a few years, with reasonably well balanced growth in the global economy. As an external driver, you also have very favourable commodity prices, which have had an effect in terms of commodity volumes as well as production.

At the domestic level, debt relief has been a huge spur to those countries that have received it – 15 or 16 countries in the region. Massive debt relief has changed the external current account landscape for a number of these countries, in average terms bringing debt ratios down from 100% to 20% in terms of GDP.

The final factor I would highlight, which may not get enough attention, is sound policies at the domestic level. You have external factors which have obviously been supportive, but you also have sound policies. I guess in terms of the monetary aspect, you have a move towards inflation targeting -- if not explicit targets, then central banks setting inflation objectives, and clear methods of how you get there in terms of instrument dependence.

Fiscal policy is also improving, but I think more needs to be done there. That is something that we can come on to later in the discussion. You also have reforms: structural reforms, corporate governance reforms, and democracy as well; the institutional aspects. The combination of all those, I think, has improved the outlook.

In terms of why, why now, and why investors are interested, a lot of these reforms have been going on for three or four years in some countries, and a number in others. If you look at reforms in Ghana and Kenya, for instance, they date back many years. So maybe it is now that investors are looking at it – we come on to the drivers, the search for yield, but I think you need to give credit to those countries that have been doing these things for several years now.

IFR: Is politics still a constraint? Are there still fears about corruption, Francis?

Francis Beddington, Standard Bank: Great! He gets the easy one. I get corruption and politics in Africa.

IFR: One particular fear that some perhaps naïve people have is that after the debt relief packages, you are just going to create another debt bubble.

Francis Beddington: I think that is the concern. I think the international development agenda for Africa for the last 20 years has been debt relief. The first process of debt relief started with Kenneth Clarke back in the early 1990s. We had Lyons terms; we had Naples terms, gradually getting more and more generous. Every summit focused on: "Right, what are we going to do on debt relief?" Then you had HIPC (Heavily Indebted Poor Countries Initiative), followed by MDRI (Multilateral Debt Relief Initiative).

Debt has dropped to sub-20% of GDP. There is now a debate of what do you do going forward. What new resources will there be and what is the role of the market? That debate is ongoing in Africa.

I do not think the international community has a firm conclusion yet. I do not think it knows how Africa should be financed. We have seen transactions come unstuck in Cote d'Ivoire. We have seen questions about Ghana coming to the market and what size is appropriate. People – the IMF, the World Bank in particular – are still very much thinking about and looking at debt sustainability analysis type scenarios and have not moved the thinking on and are struggling with these issues. I think there are debates ongoing within these organisations. At the recent G8 meeting in Germany, there was a lot of debate on developing domestic capital markets; how do you do that, what do they do etc. Are you making that a priority for the G8?

So a lot of things are moving at the same time. On the issue of politics, almost my definition of an emerging market is one where political events can come out of nowhere and you can lose vast amounts of money. In some countries clearly governance in Africa is a huge problem. But across others, I do not think it is that much worse than any of the other emerging markets.

In Ecuador you have a president who comes out and says, "I'm not going to pay", or "I might pay". In Venezuela, "I am going to leave the IMF", which might trigger events of default. Politics is politics. It will lead to problems everywhere. But I think in these countries the political environment remains almost more stable than it has been for a while. There are places where it has been challenging. In Nigeria the election was not a great election. What will result from that in terms of policy environment changing? We care more about the policy environment in many ways than the political environment.

IFR: That’s an interesting point. François, what are the drivers of policy reform? Are policy reforms taking place within the context of

international requirements or are these pretty much home-grown reforms? Is there any co-ordination around policy reforms or are they country specific?

François Ekam-Dick, Iroko Securities: I think one has to give credit to local government. There is a recognition that you need to structure your reforms. Of course the multilaterals (the IMF, the World Bank) are helping in that thinking. But you do have co-ordinated domestic policy reform though what people do not talk about too much: regional integration. You have more and more organised policy; in East Africa, in francophone Africa, in SADC (Southern African Development Community). So yes, there is a deliberate political commitment by heads of state to really change, to move forward.

Everybody recognises how governments used to run their public finances, their overall economies 20 years ago. They have changed. There is better accountability – I think Francis referred to that – through the political process. The political process is not perfect, but you do have changes of government. There may be problems here and there of a technical nature, but there is a growing element of accountability.

So politicians are under heavy pressure to make significant change, and to meet poverty reduction expectations as well just running the economies. It was interesting listening to the President of Ghana about the oil discovery. You see the same message, which is: “listen, we have to be in a position to manage this resource properly because we have an ultimate goal”. So there is a strong desire by African politicians to take whatever steps are necessary, on institutional reform, political reform and economic reform, to get out of their present situations.

Francis Beddington: I would add that the media is much more vibrant now than it has been any time I have been working on Africa. You have independent newspapers and radio stations, and that is adding an element of accountability and aiding the growth of civil society, which I think cannot be underestimated. I was listening to a radio station in Ghana and it was a phone-in show. This DJ, who seemed to have great access to mobile phone numbers, phoned the Ministry of Water and said: "This water main has been burst for three days. What are you going to do?" It was live on air. The international media continues to report Africa terribly. But you have good papers in Nigeria, in Ghana, in East Africa. These are strong media institutions.

IFR: You’re right about international media coverage, which continues to focus on . . .

Francis Beddington: War, death and famine.

IFR: So Alex, how do you square the very negative international media coverage with the surge in international investor interest? Presumably international investors are looking at international media, but are not swayed by it. But does this make it more difficult for you to do your job?

Alex von Sponeck, Merrill Lynch: No, I do not think so. Certainly in the last three or four deals we have done (admittedly they have all been out of Nigeria), most of the investors who bought paper were people who had been investing in Nigeria for the two or three years already. Two or three years ago, there was very little international media coverage on Nigeria. In the last year, surrounding the elections, there was a lot more, and I think I would agree that it was fairly single faceted coverage, always the same issues again and again in the international media.

Locally, whenever I have been in Nigeria and picked up a paper, I glean so much more about what is happening, so much so that sometimes I have thought: "This guy must be going to jail. He would not be allowed normally to say something like this". In most countries I do business in, there’s a very open and very healthy democratic debate. Many of the investors we sell to often pick up questions for us on local websites and have long since gone past the days of educating themselves on a new country or a new type of deal based purely on the international media coverage that is available for that country.

On the Nigerian deals we did, the good thing and I guess the bad thing for an investment bank in the environment we have at the moment is that on the positive side we did not have to do much investor education. On the negative side, like we all know, I think, hedge funds had been going to Lagos two years ago when we as a firm were still deciding whether we should strongly push the African card or not. The education issue has not been a hurdle for us.

We closed a big deal in Nigeria right during the election period. The election issue came up, and prompted questions from investors, but really more to see whether the response from the issuer tied in with their own views, which were already fully formed, on the impact that the election was likely to have. So strangely enough, in the case of the three or four Africa deals we have done, I found investors across the board much better prepared in a way, perhaps because they, through their own internal credit processes etc are scared of seeming ignorant about the country they are about to invest in. They are almost over-prepared. So I have not had an information issue be a block to any single transaction.

Francis Beddington: In the case of Nigeria, and to a degree in Cote d'Ivoire, the fact that there have been Brady bonds has helped; people have been trading Nigerian external obligations for years and the same in Cote d'Ivoire. So there was legacy knowledge; people have been understanding things, and it is probably easier to get through a credit department something you have already traded than starting from scratch.

Alex von Sponeck: I agree.

IFR: Francis, you mentioned a little earlier Ghana coming to the market and what size is appropriate. What are the criteria, would you say, for coming up with the correct amount? They do not want too much – there is so much they can invest in infrastructure etc. Also what is the state of play with Nigeria? Because it did appear that the sovereign delayed the Eurobond because of political considerations and the fact that they almost had to educate their own people. They do not want to issue more debt because of what happened last time. But on Ghana and the right amount . . .

Francis Beddington: I hear the deal has been delayed, but it is not up to me to say what is the appropriate amount Ghana should borrow. There was an interesting IMF report which says that Ghana can sustain a lot of commercial borrowing – US$200m-$300m a year –but I think an important issue to look at is use of proceeds.

Alex von Sponeck: But then the next question has to be, right after that, back to the IMF: what are you going to do then to help a country like Ghana which has such big investment needs in the infrastructure space? Not long ago, we had a joint meeting with the President of Zambia where a question was put to him: “Are you prepared to borrow internationally?" “No way", he said, "No way. Either I will get the Chinese to come, and they will invest and build my roads, my railroads, and the factories I need, in exchange for commodity deals, and in addition they will not just take the commodity out of the country; they will build next to the mine or the refinery an actual production entity, a factory that will produce at least the intermediate goods as opposed to maybe not the final end product. So I will do that, but I am not going to borrow internationally".

We said: "Okay, what about infrastructure? The Chinese cannot do everything. Would you provide government guarantees then for road building, for power plants?" "No way," he said. So if the IMF is going to block international borrowings, or if certain governments in certain countries believe that they do not need to borrow internationally and that the private sector will do it all without any government guarantee, there is going to have to be a reality check at some point because I just do not see that that is going to happen.

Francis Beddington: There is this legacy of debt and a fear of debt within the public sector.

Alex von Sponeck: Yes, definitely.

Francis Beddington: In Nigeria, debt bad. There is just this mindset by the public, and I think you can see that in a number of other countries. You saw it in North Africa for years after the balance of payments crises. They were very reluctant to borrow internationally and their whole target was to pay off debt. The Algerians went through and built up a reserve mountain that is pushing US$80bn.

Alex von Sponeck: Yes.

Francis Beddington: So having gone a balance of payments crisis and a debt restructuring, they seem very, very reluctant to go down that route again, which is understandable, but does require probably an education.

Ade Adebajo, Standard Chartered Bank: I think a lot of this is really just striking the right balance. On the one hand, you have got the advent of sovereign ratings in the last 12 to 18 months in a lot of the countries, and that automatically signals some possible intention to go and access international markets. You know, one school of thought would be it is not a bad idea to borrow when you do not need the money. Go out, establish your benchmark, establish your name, and get some recognition, as opposed to actually going into the markets when you are desperate for it.

I think the real debate is increasingly now more about liability management, which is not necessarily saying concessional financing is a thing the past, switch totally to raising finance via the bond markets. But just as we would approach any corporate issuer and say: "Diversify your funding base, look at some bank loans, look at going to the bond markets, look at different forms of financing", in the same sort of way we should be engaging in debate with the policy makers in these countries and saying, "Yes, okay, maybe we should be looking at a fair bit of ongoing donor financing, concessional financing, look to go and access the private sector, look to tap the international markets, what are you doing to develop the local domestic yield curve, maybe extend the tenors there". Those are the sorts of things that I think need to happen a lot more in these countries, as opposed to necessarily just looking at it as is it good or not good to go and access the markets.

Stuart Culverhouse: I think diversity of funding resources is the key. Neither the donors nor the market is going to provide all the infrastructure financing that is needed. If you look at the case of Ghana, it is estimated at US$2.5bn per year. You are not going to get that from the donors that have plainly said: "We have other priorities".

So you have to find the balance. In terms of what Ghana should borrow, to answer your question, it is what is required that still fits in with debt sustainability, however you define it. Now, the IMF report said that a certain amount per year is going to be sustainable, based on its baseline scenario, and that was reasonably sensitive to shocks. But you have to be careful about it. You do not want to over-borrow, and also you have the institutional capacity of how to spend the money raised.

We have had debt relief and that has been very positive for a number of the countries, but improvements in debt management have lagged debt relief, and I think that is where a lot of people round the table would say that is where the emphasis needs to switch to, so that you are more savvy borrowers in terms of managing the money. Borrowing is not bad per se, and borrowing to finance infrastructure projects is economically a good idea, but it has to be done with the right sort of approach. I think the technical capacity has been lacking.

François Ekam-Dick: I think this is the key debate. Even the IMF does not say to African countries: "Do not borrow". Let us be honest here. As far as I am concerned, looking at it bluntly, the multilaterals, the IMF etc have a vested interest. They need to justify their raisons d'être. They themselves keep providing funding to those countries, as far as I see. It is a stupid thing to take the view that Africa does not need to borrow. They need to borrow. There have been some assumptions by the IMF in terms of the use of proceeds of HIPC – take the example of Cameroon.

The whole thinking behind HIPC is that you do not need to borrow that much because the money from HIPC [from debt relief] will be used for poverty reduction, which is good. But how are you going to stimulate growth, to build hospitals, if you cannot have electricity for a week or two weeks? So there has to be a right balance.

Two months ago, Burundi was looking at Stabex funding. I think Stabex funding [the European Commission’s compensatory finance scheme to stabilise export earnings of African, Caribbean and Pacific countries] is the most ridiculous form of funding. If a country is seeing a drop in commodity revenue, why give more money? If you’re losing blood, do not give more blood unless you can stop the bleeding. The multilaterals are going to make the same mistakes as before. They have not changed.

You are giving Stabex to Burundi because coffee prices or cocoa prices are not behaving properly. Help them to address commodity prices differently. Don’t give them funding because you’re just going to make the situation worse. So the issue at this stage is to get the right balance and insist on liability management.

The Chinese have made a point of saying: "I don’t worry about short-term financial sustainability; I worry about development sustainability". I think they have a point. So don’t say to a country: "Ghana or Cote d’Ivoire, do not borrow because you can get concessional terms"; that is ridiculous. The IMF comes up with this nice, nice story that borrowing on concessional terms for 20 years is better than borrowing in local currency.

Well, as far as I can see, when you had a devaluation of the CFA franc in 1994, the stock of those so-called concessional terms jumped by two or three times. When the World Bank provides 20 or 30-year funding in dollars, do they know what will happen to the Kenyan shilling? They don’t. So you need to put an emphasis on liability management, give the countries the same means as Latin America to manage the debt, but not try to get them stuck into some kind of philosophical debate about whether they should borrow or not borrow on concessional terms.

I was in Senegal when the President said, "If it takes the Chinese a month for me to fix up my road, by the time I speak to the World Bank or the European Union and they think about whether they’re going to give me funding, that is two years gone".

Alex von Sponeck: I agree. I think some real out-of-the-box – if you want to use a cliché – thinking by the IMF, the World Bank and also the European Union and the United States, as a counterbalance to what is happening in Africa with financing from the Chinese, has to happen.

You see one-off discussion pieces or editorials, but there is not really a concerted effort to address some of these issues. I think that at the end of the day what you are going to see happen in a number of these countries is the private sector lead the way.

In Nigeria at the moment, you have had GT Bank, you have had First Bank of Nigeria issue a subordinated debt deal, you have had other banks do bilateral loan type long-term financings, and you’ve had the first mortgage bond get arranged domestically by UBA. You know, there is a lot happening, and I do not think that the issues, for example, with Nigeria around the Policy Support Agreement that they have in place with the IMF and whether they need a waiver or not to be able to borrow internationally when they have US$44bn in reserves, is going to hold back the private sector.

I think the private sector, as has been the case in Africa for as long as I can remember, will always find a way to finance what it needs. That is why a number of us do what we do for a living. Governments will follow, and in Nigeria, I think the Nigerian government saw very clearly the positive impact that a sovereign bond would have had on some of the issues that have been done by the banks because they would have been able to say to an investor: "This should price at, say, 100bp over the sovereign", as opposed to, "Let’s dig out Kazakh bank A and Ukrainian bank B as a benchmark for the maturity for this Nigerian issue".

That, I think, was very evident to the Nigerians and the real reason the Nigerians will do a sovereign bond, in my view, is because they know that they need some paper out there to give a benchmark to the huge number of private sector issuers that will come to the market whether the Nigerian sovereign comes to the market or not.

François Ekam-Dick: Alex, there is no question – of course we will be focusing on private sector borrowing, but I still believe that there are still areas where the government needs to assume the financial risk. For example, let us say housing. You need to develop the land. You need to build the roads. The private sector is not going to take that risk. There is a difference between where we are in Africa. There are basic fundamental needs that governments have to take care of. Whether they fund it from the private market or the capital market or the public, it does not matter. The government still has to do it in all African countries.

The issue of borrowing, concessional or not concessional, does not appear for the private sector. That is not the issue. But one has to bear in mind that the government is still a key driver for growth in African countries. So the view that, well, the private sector will handle everything is naïve. These are things the government has to do.

Alex von Sponeck: Absolutely.

Francis Beddington: I think sovereign issuance in Africa will be limited over the next five years. I think in five years' time we might have six or seven countries max. On the other hand we will probably have six to 10 Nigerian banks that are borrowing.

Alex von Sponeck: Absolutely. I think by the end of this year.

Francis Beddington: You know, you get a daily run out of Brazil on the beef sector. You get your beef run from Brazil. You are going to a Nigerian bank run.

Alex von Sponeck: Absolutely, definitely.


Click here for Part Two.

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