Sub-Saharan Capital Markets 2007: Participants

IFR hosted a roundtable at its offices on June 25 to discuss developments in Sub-Saharan Capital Markets. Participating were Stuart Culverhouse of Exotix, François Ekam-Dick of Iroko Securities, Alex von Sponeck of Merrill Lynch, Francis Beddington of Standard Bank, and Ade Adebajo of Standard Chartered Bank. Sub-Saharan Africa has been firmly thrust into the capital markets spotlight for the first time. As perhaps the final frontier for global markets, the past couple of years have seen an ever more urgent build-out of Africa desks among investment banks and institutional investment houses. The banks have added specialist fixed-income and foreign exchange sales and trading resources, as well as economists, origination and underwriting professionals and corporate financiers. Investors are establishing an increasing number of Africa funds, and they are actively engaged in learning about the region, the local markets and the local players. Deal flow from Africa has been light to-date, but it is accelerating. So far, the focus has been on Nigeria, but other countries such as Ghana and Kenya are on the radar screens of the international banking community, and market professionals expect capital markets business to flow from those countries and others before long. So why Africa and why now? There is a combination of internal and external factors at play: a generally benign global economic backdrop, high commodity prices, stable economic growth in the key African economies along with relative currency stability, the move towards more durable democracies, important domestic policy reforms, and the desperate need for yield among international investors. These have all contributed to make a compelling case for Africa. The international media focus of poverty, famine and corruption paints a one-dimensional picture of Africa. It certainly fails to tell the whole story. To suggest that the region has solved these intractable problems is clearly naïve. But there is progress in corporate governance and in regulation and supervision, while structural and administrative reforms are either in place or under discussion along with poverty reduction measures. Debt relief initiatives have been a huge boost to the region, helping reduce debt burdens from 100% of GDP to in many cases below 20%. Within the public sector, there is a generalised reluctance to raise too much new debt, for fear of creating a debt bubble and repeating the errors of the past. But with an increased emphasis on professional debt management and responsible use of proceeds alongside debt raising, there is every hope that history will not be repeated. Whether or not the sovereigns are there to set pricing benchmarks for the private sector, the latter is likely to step into the capital markets with gusto. Four Nigerian banks have already made the jump into the international debt arena, while another half dozen are in the process of preparing their debuts. Away from the international capital markets, there is a lot of excitement around the development of domestic markets. With increased levels of buyside due diligence, and the emergence of lay-off or hedging mechanisms, international involvement in domestic markets is picking up. And as African governments undertake reforms to monetise the pools of domestic savings through the creation of institutional investment vehicles, the local bid is strengthening, which will help liquidity and price discovery. Market participants believe that interest in Africa is not just an opportunistic manifestation of an overbought global market; they believe that even in the event of an emerging market sell-off, Africa will continue to play a part in the international capital markets scene. Click here for Participants.

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

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-

IFR: The US pension funds have been going outside of the US over the last two years or so, and that is going to keep going. Francis Beddington: I think in Europe there has been a legacy of trading in multiple currencies anyway. So there are a lot of spare Italian swaps traders around. Alex von Sponeck: I think one very interesting thing we have seen – slightly off the subject but very relevant – is a large number of US investors, regardless of the fact that it is maybe a Reg S only deal (which is relevant from an African perspective because of the disclosure and timing is not always going to allow you to get to a 144a disclosure standard), have no issue looking at a Reg S only deal and booking it in one of their offshore booking centres. The fear of "if we cannot do 144a we are limited to a US$200m deal size", it is not there at the moment. The search for yield and the search by US investors and pension funds for diversification and getting into these deals has meant that the traditional Reg S/144a barrier is much less important. They will buy their Reg S only deal and just book it offshore. Francis Beddington: Because they are doing their own due diligence. Alex von Sponeck: Exactly. Francis Beddington: This product is not going to people where that distinction is so crucial. Alex von Sponeck: I agree. Francis Beddington: They have done their own credit work. If you’ve been buying Reg S deals in Russia, Kazakhstan, second-tier Brazilian banks, you do quite a lot of due diligence. You buy on your own due diligence, not the fact that it is 144a or Reg S. Some are restricted to 144a and they just get annoyed. Stuart Culverhouse: Just on the point of who are the investors, certainly from our side, just to reiterate what Francis said, a lot of the investors are dedicated emerging market specialists. We have seen new African funds set up in the last year, which previously we would never have heard of, but some African funds have been going for 10 years, five years, seven years. So it is not a new area. It is just that it has been very small and niche. Hedge funds, the label, hides a multitude of sins (but that is probably the wrong word), and there are very different strategies. They are providing liquidity, which is obviously helping issuers raise the finance in the first place, which is what you need. The other aspect of hedge funds is that it is not just portfolio that we are seeing. There are the private equity houses. A lot of that investment is akin to FDI. Textbooks are not saying that that is bad. It can be volatile, but a lot of companies are taking reasonable strategic stakes in these companies and bringing the technological know-how that that gives to IPOs. So that is going to be a positive. The label is not always helpful. Francis Beddington: I think the private equity thing is interesting. We have seen a number of transactions in South Africa. So we are starting to see an offshore high yield market developing on the back of private equity involvement in South Africa. It is not that different to look beyond that. Alex von Sponeck: And many of those same private equity houses are now buying convertibles, they are buying all sorts of non-traditional equity instruments or equity-linked instruments in Nigeria. There have been a number of them. François Ekam-Dick: Most of the deals we’ve from the private sector involving debt and convertibles have been sold to private equity. You know, private equity money has been in sub-Saharan Africa well before capital markets. The number of private equity institutions is just growing all the time. Ade Adebajo: Another issue is that a lot of countries, particularly in West Africa, have traditionally been real equities markets. There are 300-odd companies quoted on the Nigerian stock exchange. The other phenomenon that we are seeing on the global investor front, in addition to diversification out of Europe and starting to get interest from offshore accounts in paper coming o