There are few better examples of the global markets’ ability to forgive and forget than Côte d’Ivoire. The West African country, which three years ago defaulted on $2.3 billion-worth of eurobonds, in July raised $750 million in an auction that was several times oversubscribed.
Investors were encouraged by Côte d’Ivoire’s economic reforms since the violently disputed election that brought President Alassane Outtara to power and by its position as the largest exporter of cocoa in the world. Oil and gas finds off the coast added to the potential upsides for a country that has experienced gross domestic product growth of more than 8 per cent for the past three years.
On aggregate, sub-Saharan Africa’s GDP growth has outpaced the world average since 2001 – often considerably. That aggregate disguises enormous differences between the region’s 49 countries, which include relatively developed markets, such as South Africa, to those still embroiled in conflict, such as the Central African Republic. However, there are several almost universal trends, including population growth, urbanisation and high commodity prices, which have driven economic expansion.
In some cases, improving political stability has attracted foreign direct investment in mining, minerals, energy and agriculture into countries that would, a decade ago, have been seen as too dangerous, while state-led investment from China and Brazil has also brought both capital and infrastructure development.
However, many African countries remain difficult to invest in, and lack advanced financial infrastructure and capital markets, making it complex and risky to access their growth.
Some investors may have been spooked by the ongoing tragedy of the Ebola outbreak in West Africa, which has killed at least 4,000 people in Sierra Leone, Liberia and Guinea. Nigeria, Senegal and Côte d’Ivoire, the region’s larger economies, are free of the disease.
While the economic consequences for the affected nations could be significant, the impact on the wider continent will probably be limited. Combined, the three nations have a GDP of $13 billion. The World Bank’s worst case scenario, which included contagion into Côte d’Ivoire and Nigeria, put the total cost to the continent at $33 billion, although several analysts, including Ecobank’s head of economic research Angus Downie, say this figure is based on some fairly catastrophic assumptions about how far the disease could spread.
Sub-Saharan Africa’s GDP growth has outpaced the world average since 2001 – often considerably
Over the past two years, investors have snapped up eurobonds issued by sub-Saharan African sovereigns. The rush began in September 2012, when Zambia raised $750 million in a ten-year bond. This was followed in 2013 with a record $16.6 billion in issuance from sovereigns, including Rwanda and Ghana. The total in 2014 could be larger still, after a summer rush that included a second Zambian issue and a $2-billion eurobond from Kenya, the largest ever issued by a sovereign in Africa.
For the past decade, debt relief from public and private creditors has reduced African governments’ servicing costs and given them new fiscal space. However, the financing needs across sub-Saharan Africa remain high. The World Bank believes there is an annual financing gap of $35 billion, and that African governments turned to global and local capital markets for funding.
They were enabled by a willing market. There have been compelling demand drivers for African sovereign debt. The global economic slowdown precipitated by the 2008-9 financial crisis depressed yields in some developed market debt. Faced with the need to match their growing liabilities with higher returns, institutional investors found themselves looking to emerging and frontier markets to find higher yielding assets. Sub-Saharan African debt fit the bill.
Demand was also buoyed by the US Federal Reserve’s quantitative easing (QE), which flooded global markets with liquidity and pushed investors into emerging market assets. The relative scarcity of sub-Saharan African debt meant that investors were willing to pay a premium for it.
Some of those drivers have slowed. The end of QE in the United States could reduce the amount of liquidity in the system, while a high-profile fiscal meltdown in one-time poster child Ghana has also served as a warning to investors and issuers. The country’s budget deficit is likely to pass 10 per cent for the third year running in 2014; export prices fell while government spending on public sector wages rose. The currency, the cedi, has lost around 40 per cent of its value over the last two years
“It’s cooled down a bit,” says Antoon de Klerk, portfolio manager at Investec Asset Management. “I don’t think it’s going to be the same magnitude [as the last 18 months], but I think that now most of these African sovereigns have issued, they might come to the market for a second or third tap over the next 12 to18 months.
“I think Ghana might have done everybody a favour by showing what is the outcome of too expansionist fiscal policy.”
Alongside the boom in dollar-denominated sovereign debt is a significant opportunity to participate in local currency fixed-income markets, says Mr de Klerk.
“Eurobond issuance for sovereigns can be a great tactical opportunity to get some offshore funding in at a reasonable interest rate, but clearly it’s not a structural solution for government funding; the structural solution lies in developing your local bond markets,” he says.
The International Monetary Fund has warned African sovereigns against building up large stocks of hard currency debt and, as Mr de Klerk says, the Asian and Latin American financial crises were partly due to large mismatches between sovereign debt in dollars and the countries’ revenues in local currency.
The Kenyan government in particular has issued local debt to fund infrastructure investment, using tax incentives to bring investors into its instruments. There are few African companies outside South Africa with the scale to raise money internationally, but many are turning to local bond markets. Those markets can be difficult to access, and Nigeria and South Africa are currently the only sub-Saharan markets on the key JPMorgan Government Bond Index – Emerging Markets.
Joining an index has a material impact on how international investors view a market and Kenya could be next to do so, according to Mr de Klerk. Currently market infrastructure issues are holding the country back.
The relative volatility of African currencies can add to the risk of investing in these markets and it could be a long time before they become more mainstream investments.
“Clearly something like the currency forward market is massively liquid,” says Mr de Klerk. “It’s the most liquid market on the continent. There are at least six countries outside South Africa where you can do very material amounts in daily liquidity. What does that give you access to? It gives you access to the very high carry in those markets.”
International investors looking at public equity markets face some of the same challenges. Market infrastructure can be underdeveloped, liquidity can be thin, while movements in the currency can spook investors. There are a relatively small number of liquid stocks and these tend to be concentrated in the financial services sector, along with cement companies and breweries.
“We think there are about 270 stocks listed on the continent that are investable,” says Paul Clark, Africa equities specialist at Ashburton Investments. “There’s been an increasing use of the equity markets to raise risk capital and for growing businesses, which is of course why stock markets exist, but they’d been used in the past somewhat more for privatisation or for banks especially to show a local listing.”
The Kenyan stock market is currently among the top performers in the world for 2014, up more than 17 per cent for the year. However, investors have been burned before. In 2008, the Ghana Stock Exchange was on some measures the best performing index in the world. In 2009, it was among the worst, collapsing as international investors fled emerging markets.