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First the good news: African sovereigns have tapped the international debt market with aplomb in the past 12 months. Repeat issuers such as Nigeria and Ghana as well as debut borrowers like Zambia and Rwanda wowed with their well executed and heavily over-subscribed international bonds, enabling them to squeeze on price and leaving investors hungry for public bonds in the pipeline for the likes Kenya, Senegal, Angola and others.
Investors have been seduced by Africa’s natural resource story, its heady growth rates, monetary and fiscal transparency and conservatism, energy exploration successes, improving infrastructure, and better governance.
The potentially not-so-good news? When it comes to international capital markets – and recent price movements have borne this out – Africa is likely to continue to suffer from a problem it has suffered ever since its re-connection with global capital following the era of debt forgiveness: volatility of portfolio flows.
A lack of dependability and reliance on the ebb and flow of extrinsic factors (both technical and macro) such as the level of global bond yields, where we are in the commodity demand cycle, and the global growth story are by no means unique to Africa, but the dramatic impact these elements have is a big problem for the region.
Africa’s issue is that while the quantum of specialist foreign money that is committed to investing in the region through the cycles is growing, it continues to be small relative to the needs of the continent. As bond yields and credit spreads in developed markets ground ever lower as a direct corollary of massive central bank stimulus programmes, the weight of non-specialist money saw no alternative but to seek yield pick-up in high-beta markets, including emerging and frontier markets. Africa benefited from this technical phenomenon.
But money that is purely yield-seeking is by definition speculative. It has no emotional attachment. The lack of committed foreign capital – and a time when pools of African domestic institutional capital and home-grown sovereign wealth funds are still modest relative to need and where intra-continent capital mobility is a work-in-progress – makes it notoriously difficult for African governments to have the certainty of funds to complete capital expenditure programmes, be it in infrastructure or in the social sphere.
The biggest victims of the Fed tapering story have been emerging markets, which have fallen heavily as bond and equity funds suffer heavy redemptions and banks and investors short or unwind positions in EM currencies. African sovereign bonds have been heavily marked down and liquidity has evaporated.
Is Africa destined to be the perennial final frontier from a capital markets perspective? Unfortunately for the region, that potential will always be there but then again Africa is a continent of 55 countries so the answer will always be: it depends. The region has its strong performers and there is every likelihood that these will continue to receive attention as investors seek out diversification/rarity value and focus squarely on underlying fundamentals.
Countries with good growth rates; which have transparent and sustainable borrowing programmes (where funds are earmarked for specific projects that will boost future output but won’t overwhelm debt-service capabilities); which have the institutional capacity to absorb capital efficiently; have sound governance metrics; where domestic capital markets are evolving; and which engage with multilateral sources in areas like infrastructure financing to provide levels of comfort to third-party investors, should be able to ride out the storm of volatility and come out the other side with their prospects intact.