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Saturday, 18 November 2017

Sub-Saharan Capital Markets Roundtable 2007: Part 2

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IFR: So it will be the banks first as opposed to the corporations?

Alex von Sponeck: Yes. Four banks have already come to the market in public and private format.

Francis Beddington: There are two more that I know of that are in the process of coming probably in the next three or four weeks.

François Ekam-Dick: But the Nigerian market is specific. It is not necessarily a reflection of other countries.

Alex von Sponeck: Because of the size of the country.

François Ekam-Dick: So I look at Nigeria as Nigeria specific.

Francis Beddington: Agreed. Nigeria will probably be, in five years' time, as important to most of our businesses as Argentina. You know, it is going to be big level, top tier. It is going to probably be more important than Ukraine. It is of those orders of magnitude. It is not Russia, it is not Brazil, but it is going to be up there, particularly in the capital markets more so, in a way that Russian corporates dominate corporate issuance, I think Nigerian corporates will be a very, very large market. Do I think other African corporates? Yes, I would not be surprised, once Ghana borrows, to see a couple of the Ghanaians, banks particularly. I think in East Africa, if the Kenyans do what they’ve said they are going to do in their budget, I would imagine there will be a number of Kenyan corporates that will come.

François Ekam-Dick: I see an opportunity from an origination point of view. We don’t happen to cover Nigeria but we do not believe that by not covering Nigeria we will be out of business. For me there is a basic funding need in all Sub-Saharan African countries. That is not going to change. The question here from my point of view is execution, an implementation of the various debt capital markets business models. That is what is at stake. But I still think that, one way or the other, governments will end up borrowing.

Just to finish on this IMF issue, the IMF is not saying that countries cannot borrow locally. I think there is going to be scope for more local currency issuance. There is no question about it. One other thing that we have seen in Sub-Saharan African countries is that issuance has been done by governments more for monetary policy purposes; in the case of Kenya for the central bank to mop up liquidity. Alex was talking about Zambia. I heard the president. I think at some point Zambia will end up issuing. The talk that he made at the Merrill Lynch presentation was nice, but I did not really buy into it.

You cannot address, for example, housing. What are you going to do? The private sector is going to say the government is going to have to take some risk. There are so many infrastructure project requirements. The government will – on or off balance sheet – have to participate in those elements of risk. There is no way around it.

I see a lot of scope for local currency issuance, in CFA – the CFA zone is for me a single bloc. You take the whole East Africa region: Kenya, Tanzania, and Uganda. That is for me one single market. Of course you have got the whole SADC region. That is another region. There is plenty to do. There is plenty to do in terms of debt issuance. I think at some point even the IMF – the question is whether African politicians are going to wake up and say: "Listen, enough is enough. We are going to manage our own affairs. We are accountable to ourselves".

African government officials have not come to realise that the debt market is effectively an alternative source of funding. One of the things that I am seeing is that there is a big gap between capital market investors and what I call Africa & Co, the sovereigns. Africans are not aware of the change in the way the international market is looking at Africa. Just look at all these conferences. How many African organisations do you see present at all these emerging market conferences? None.

Alex von Sponeck: No, we have started seeing quite a few. It is starting, although at this point mainly Nigerians.

François Ekam-Dick: Even there, we have not reached a situation where policy managers or the private sector really believe that the capital markets are a sustainable source of funding.

Ade Adebajo: Part of this is also reflected in the fact that when we established the African debt capital markets platform, it was essentially rolling out from experiences in Asia and, to a lesser extent, the Middle East. Look at what really stimulated the development of the local currency bond markets in Asia. It was through the crisis in the 1990s, where there was recognition by policy makers that you need to reduce foreign exchange risks, you need to try and manage maturity mismatches. That ultimately led to the development of individual markets. I think to a large extent a lot of the markets across Africa are kind of where Asia was maybe about eight to 10 years ago.

I think also the role of governments is key. What I actually think is more critical, perhaps, are the ongoing reforms that government are putting in place. When you take something like housing finance, I think it is far more critical in fact that you ensure that you have the relevant legislative framework, with issues regarding enforceability, security, and foreclosure. Those are critical.

The financing itself will follow. So, for example, again, look at Asia. The role of the likes of Asian Development Bank is changing quite significantly from previously being the lender to less developed countries; now they are looking around for a redefined role. You are equally going to start to find that a lot of the supranationals, multilateral development banks, a lot of the dialogue that we are having with them, it is about changing the nature of their role and how they can play a bigger role in this regard.

Francis Beddington: I am loath to be nice about any of the multilateral development agencies, but I actually have to take my hat off to the African Development Bank. It has changed. It does local currency lending. It is the first of those to go through quite aggressively to lending local currency. It makes loans to countries in their own currencies, it has a funding programme. It has issued a number of bonds in currencies that have been more attractive and they have been Euroclearable. I think that has helped. They actually do deserve reasonably good marks for pushing this process, much more than some of the others, and I think they will continue down that route.

Alex von Sponeck: They have a big role to play.

Francis Beddington: And they are actually doing it.

François Ekam-Dick: It took them 10 years, though.

Francis Beddington: But the Inter-American American Development Bank still has not done it. The World Bank still will not lend out any currency other than dollars. The fact that the AfDB will lend Namibia rand rather than dollars is a very good thing. The process of building this up is – they have gone through the board approvals, they have got the rule changes in place, and they have been the ones that have been driving the fact that these currencies are now tradable in Euroclear or settle in Euroclear, which again eases our business.

Stuart Culverhouse: There is another aspect. We are talking about the primary issuance and which countries might come to market, and I agree it is not that many when you think about it, there are probably five or six that you can envisage. Add to the list maybe Angola, which has been considering a bond rating; Mauritius has also been considering it and are more likely to be able to get away with it. So you have a few more, but that is the primary market.

What does not get looked at is the secondary market. One of the reasons it is still difficult to get in there, and investor interest is growing but is still relatively limited, is because the bonds just do not trade on the secondary market in any of these countries. Kenya is considered to be one of the most developed, and in broad terms it is, in terms of the 15-year curve, but even there turnover is only about 2% of the debt. Until you get that increase in the secondary market as well, and I do not have a magic bullet to how you do that, you have to tackle the fact that the banks are the main holders and you have to bring in the non banks – pension fund reforms – and that is happening to an extent in Nigeria, Ghana and Kenya. But you need that as well to improve secondary market conditions, the market microstructure as well.

Francis Beddington: I think also you are moving from the governments’ monetary policy framework. I think a lot of debt issuance was for monetary policy and it was based around quantitative monetary targets, IMF etc. As these countries move beyond IMF programmes or move to policy support instruments, these non-lending programmes, most of them are looking at the process of adopting inflation targeting, which leads to a completely different process of monetary management, and then you are seeing debt management officers come over.

A number of countries now have specialist debt management offices. Central banks aren’t the issuers and funders of the government any more. So you are seeing this gradual professionalisation. You have pension reform in a number of places. You have a net buyer.

Stuart Culverhouse: That monetary reform, the fact that you can target inflation and have the transmission mechanism to do that, clearly depends on having fiscal reforms. To a large extent it has been the fiscal dominance that has held back monetary reform. So it’s lagging, but in some countries – Ghana, Kenya – it is pushing ahead,.

François Ekam-Dick: I just want to come back to this point of new issuance. From my own experience, I think one key aspect of stimulating new issuance is both the public sector and private sector have to believe that the capital market is a stable source of funding, and I am not too sure that that culture is strongly entrenched. You see big transactions, for example, still being done in Kenya through the loan market. The domestic loan market is a big competitor of ours.

IFR: The international loan market presumably as well.

François Ekam-Dick: But I am talking about local bank liquidity. There is a big cultural issue that drives people's attitudes and that should not be underestimated. First, the multilaterals are messing things up. The second is also the cultural thinking. People still believe, including some of the major financial institutions, that the capital market is this group of intellectual guys. They are doing things here and there. How could you really rely on that? How could you take that funding risk? It is a key concern.

I have been in Africa for 25 years. I am very pleased with the change of the market, but one thing people do not realise out of London is that Africa has not changed too much. Everybody is willing to lend, to take African risk, but when I speak to Africans, you are not seeing that change.

IFR: The capital markets are not necessarily a stable source of funding, if you look at the cycle over the last 15 years.

François Ekam-Dick: That is also a major concern for quite a number of people, why they are holding out.

IFR: But with some justification. We have been a huge bull run in the credit market for six or seven years, but it is quite anomalous if you look at the last 30 years of history, and perhaps that is the thinking that is driving a lot of reticence.

François Ekam-Dick: Not for the same reason because capital market funding has never been a source of funding in Sub-Saharan Africa.

Francis Beddington: They have never been treated badly. It’s just that they understand banks, talking to banks, listening to banks.

François Ekam-Dick: That is an important factor.

Francis Beddington: They were borrowers in the 1980s, some of them, to a degree. So again there is that legacy of "If I want to go international. I will talk to a bank. Maybe I will do a loan, but I do not understand these hedge funds. What is this portfolio flow?" They do not understand it because they have not been that exposed to it and it is a gradual process.

François Ekam-Dick: That is a key aspect. Also, it’s interesting that in places like Kenya, the government didn’t develop the local capital market by default. In 1997, when [former president Daniel] Arap-Moi had his problem with the IMF, he said: "Okay, fine, I’ll do it myself", and he went in and reformed the pension scheme and so on and so forth. That is how they did it. They did it by necessity. It was never an issue of "develop a curve". That was fine, but that was not the key driver.

Kenya, in my mind, has also been more advanced in thinking about its pool of savings. That is a second issue, which is how much saving is really there and can those savings sustain funding to the economies?

You also have the problem of the attitude of local banks. In English speaking countries, for example, the foreign banks (Standard Chartered Bank, Barclays, Standard Bank) have been comfortable lending to government because of the prudential framework which has meant that it was good to lend to the government because the asset counted as a liquid asset, zero risk weighting etc.

But in the francophone countries, for example, there is an entirely different thinking. The major established banks are not very keen on lending to the government because of past default. So you have this aberration like we saw in Cameroon where the government is desperate for cash, but banks are sitting on a huge amount of cash which they are not lending.

Ade Adebajo: The point is valid in that you have to look at demand for capital and supply of capital. The demand of capital has started to increase, as Stuart was saying much earlier on with the levels of GDP growth we are seeing in Africa. But in terms of supply of capital, traditionally the banks like Barclays and Standard Chartered are there to meet the needs of clients, but the non-bank institutional market has been non-existent, or to the extent it existed it has been public sector dominated.

So if you take markets like Kenya and across East Africa, the largest investors are state owned pension funds and they themselves have either explicit directives or subtle motivations to stick the money into government securities.

Alex von Sponeck: If we had had this exact same discussion, all seven of us, a year ago, what would we have really had to talk about? You would have been able to talk about some of your CFA deals, okay. You said a minute ago that not a large amount has actually changed in Africa.

François Ekam-Dick: From the African perspective.

Alex von Sponeck: I understand. I’m sorry to keep coming back to Nigeria but it is where we have seen most of the activity, but I think people are now slowly – the Nigerian banks at least and it is starting to filter down to the corporates – starting to believe when people show up from a large US investment bank or a European investment bank or an African investment house and say, "Yes, I can raise US$300m for you, and here are four different structures".

Those four different structures were not being shown to them necessarily all the time by a variety of houses before using equity, using commodity-linked products, using local currency products, using subordinated debt, bank capital, saying: "Let us jump on a plane to Abuja and explain to the central bank how we are going to structure this lower Tier 2 issuance", and there has been a huge push in the last year, again because of individuals wanting to find a way to make money and finance banks locally that has led to a big development in a year.

Francis Beddington: Three years ago if you had said that the first corporate Eurobond out of Africa ex South Africa – and that includes North Africa – was going to be a Nigerian bank, they would have called the men in white coats. That is what happened, and then the second deal is bank capital, subordinated debt, 10-year final maturity from a Nigerian bank?

François Ekam-Dick: I think, Alex, I still stick with my view. I am not saying there is no change, but there is a big gap between the rate of change and therefore the supply of debt versus international market demand. That is what I am talking about. There is no question of course. We went to Cote d'Ivoire, we went to Cameroon. But still there is such a big gap in terms of international investors looking for assets immediately and the response of Africa & Co, and yet you have big fundamental funding need in the region.

IFR: Can we talk about the international investors who are buying African paper? Media coverage will tell you that it is all hedge funds and currency speculators and not real money investors.

Alex von Sponeck: I think in some of the more illiquid private financings, where you are maybe lending and looking to buy protection on the name, there is by definition a more limited type of investor who can engage in that type of transaction, an unfunded CDS where they are selling protection on a Nigerian bank name or whatever it might be.

But certainly I think in the Standard Bank-led GT bank deal or the Merrill Lynch First Bank of Nigeria deal, I had a very comparable list of investors that I would have seen if I had done a Ukraine sub debt or Russian sub debt. No difference at all.

Francis Beddington: On the external debt side, it is exactly the same people we have been talking to for 15 years. They have just added a new area. I think on the local currency, it’s slightly different. But there’s an interesting trend in the US investor base. Given where spreads are in emerging markets, so many of the big real institutional US funds are now doing local currencies for the first time. If you are starting local currency for the first time, the jump from dollars to Colombian peso, the jump from dollars to Egyptian pound to Naira ain't that different. You know, once you have gone out of the dollar, you have broken your duck, so mandates are much broader for the (mainly the Boston based) US funds looking at a local currency.

IFR: How big a market is that?

Francis Beddington: Huge.

IFR: Is it a huge proportion?

Francis Beddington: Yes.

François Ekam-Dick: Relative to what? To supply?

 

Click here for Part Three.

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