Africa Finance Forum Blog
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Financial development indicators (IMF, AfDB, World Bank and OECD) indicate that African financial systems are generally less developed compared to other regions of the world. It should be recalled that, in the aftermath of independence, most African countries inherited rudimentary financial systems. This state persisted until the 1990s in a number of countries. The savings rate remained very low despite the start of the growth period from the early 2000s.
According to the African Economic Outlook report (AfDB, OECD and UNDP, 2014), external financing flows to Africa were in the order of USD$ 200 billion in 2014, 4 times the level in 2002. They accounted for 9% of GDP compared with only 6% in 2000. However, aid still accounts for close to 50% of these flows for the 27 poorest countries. Notably in all Sub-Saharan countries, the ratio of taxes collected as a percentage of GDP increased from 18% in 2000-2002 to 21% in 2011-2013, the increase mainly driven by commodity-exporting countries. This amount corresponds to about 50% of official development assistance in 2013 (Africa Progress Panel, 2013). The mobilization of domestic revenues through tax collection remains insufficient, as a result most African states are still dependent on the international donor community to finance country budgets.
There is evidence that development aid resources are used more to finance consumption needs and other types of spending that do not necessarily stimulate investment. More recently, Ndikumana et al. (2015) indicated that only domestic resources (savings and credit to the private sector) and, to a small extent, foreign direct investment, have a significant effect on domestic investment and economic growth in Africa. This is a major achievement that should appeal to the continent's policy makers. It is in line with the very abundant economic literature, which shows that domestic savings are the real driving force of investment.
In addition, historical evidence shows that countries that have modernized their financial systems have seen their economies grow faster while attracting foreign direct investment - Venice (as early as the Middle Ages), the Netherlands and Great Britain in the 17th century), Japan, France and Germany (19th century), etc. For their part, the United States underwent a transformation of their economy thanks to the reforms initiated by Alexander Hamilton. This drove the modernization of the American financial system between 1789 and 1795. It brought the United States from a bankrupt country (after the American War of Independence), with an embryonic financial system, to a credible country that repaid its debts and which, as a result of these reforms, was endowed with a more efficient financial system. Thus, the United States had all the elements of a modern financial system before the nineteenth century. These conditions allowed the US economy to start a good growth process in real terms over a long period. Throughout each period, it appears that the development of a modern financial system precedes the acceleration of growth, followed by progressive economic development over a long period.
On the whole, African countries need to realize a Kondratieff, i.e a long cycle of economic growth mainly supported by phases of innovation. Consequently, they should primarily promote the deepening of their financial systems. Otherwise, the vagaries of nature and the international state of affairs will always dictate the financing of the continent's economic agenda.
In spite of a dominant informal sector, total insurance industry assets are estimated at around US$ 300 billion, over US$ 400 billion for pension funds, over US$ 121 billion for Sovereign wealth funds, the asset management industry stands at US$ 634 billion, and so on. These figures certainly make people dizzy, but remember that enormous disparities exist between countries. Southern Africa, North Africa and Nigeria are the main financial reservoirs of the continent. It is therefore urgent to pursue the integration / economic and financial cooperation agenda. Progress margins are enormous for other countries in view of the low level of financial inclusion.
Domestic savings are the most reliable source of financing to support the investments needed to transform economies over the long term. As a result, deepening of local financial systems is crucial for economic development. This requires commitment and innovation.
The Financer l'Afrique: Densifier les systèmes financiers locaux book highlights that contrary to what is usually stated, Africa has, on the whole, the financial resources necessary to finance its economic transformation agenda. The continent is a net creditor vis-à-vis the rest of the world.
It provides a detailed analysis of the main actors of long-term domestic investors in Africa, the amount of resources currently available and most importantly recent reforms and policies to be implemented to increase institutional demand in Africa. As an economy develops, it is only natural that savings accumulate in various financial institutions, such as banks, insurance companies, pension funds, etc. The book draws attention to different approaches to deepening domestic financial systems and optimizing the use of local savings to stimulate the pre-conditions for sustainable endogenous growth.
African Financial Markets Initiative (AFMI) hosts Annual Local Currency Bonds and Financial Sector Development Workshop in Abidjan, Cote d’Ivoire13.12.2016,
The 5th Annual Local Currency Bonds and Financial Sector Development Workshop, hosted by AFMI and the African Development Bank (AfDB) will be held on 15-16 December 2016, at the AfDB's CCIA Building in Abidjan, Cote d'Ivoire. MFW4A spoke to Cédric Achille Mbeng Mezui, AFMI Coordinator, to find out more about their flagship event.
Q1: What is the rationale behind this Annual workshop, and its importance?
The African Development Bank (AfDB) launched the African Financial Markets Initiative (AFMI) in 2008. AFMI contributes to the development of domestic bond markets in Africa through its two complementary pillars: i) the African Financial Markets Database (AFMD); and ii) the African Domestic Bond Fund (ADBF).
AFMD is a comprehensive database on African domestic bond markets, with a focus on treasury bills and bonds. AFMD includes data on the bond markets of 41 countries provided by AFMI's network of Liaison Officers, who are officials of their respective central banks. The data provided allows for a comparison across countries for both investors and issuers. The annual workshop provides AFMI's liaison officers the opportunity to get together and discuss developments in their various markets, exchange ideas as well as discuss how to improve the AFMD. The workshop will also be an opportunity for for the officers to further hone in their data collection skills, and to improve the quality whilst also increasing the amount of data collected in all of AfDB's Regional Member Countries.
This year we will also present the African Domestic Bond Fund (ADBF), the multi-jurisdictional first fixed income exchange-traded fund (ETF) in Africa. The AfDB Board approved a seed investment of USD 25 million in the ADBF on 7th December 2016. We will be presenting ADBF with a view to identifying potential investors.
Q2: Give us a brief overview of the workshop
The event will bring together more than 300 delegates including Central Bank Governors, Ministries of Finances, bank CEOs, pension funds, as well as over 60 liaison officers covering the debt market, pension, insurance, banks, and Senior Management of the AfDB. This year, we are expecting the workshop to spur interest and commitments from potential investors for the African Domestic Bond Fund (ADBF).
As a brief background, the ADBF was conceived as an integral part of AFMI, with the objective of contributing to the development of local debt markets in Africa, through investing in local currency-denominated debt. The ADBF coincidentally will be topic in the first session of Day 1, and this is where we are working to create awareness around the Fund. We are very excited about the ADBF, given its recent approval by the Board of Governors of the AfDB on 7th December 2016.
The second session will be a panel discussion with senior officials including, Honourable Minister Mr. Thierry Tanoh, CEO of the Mauritius Stock Exchange, Mr. Sunil Benimadhu, AfDB Finance Vice President, Mr. Charles Boamah, Representative of BCEAO, Governor M. Antoine Traore and the representative of the CEO of AfricaRe, Mr Kone Seydou. The aim of the session is to highlight the importance of local currency bond markets development, and how the Bond Fund could impact the development of the Bond Markets in Africa.
The third session aims to identify how investors can invest in the ADBF, and to address different issues related to the Fund, including access, transaction costs, risk/return asymmetry, liquidity and regulation. This session will comprise of a mix of panelists from the private sector, potential investors, including AfDB's Financial Sector Development Department Director, Mr Stefan Nalletamby, CEO of MCB Capital, Mr. Rony Lam, CEO Africa Re Representative - Director of Finance and Accounts, Mr Kone Seydou, Chair of the Nigerian Pension Funds Association, Mr David Uduanu, and Managing Director, Head of Africa- Public Sector - Citibank London, Mr Peter Sullivan.
Day two will comprise of two closed thematic workshops. In the first session, there will be a presentation on AFMI as well as a presentation on the African Markets Database (AFMD). In the second thematic workshop of the day, the AfDB's Statistics Department, ESTA, will present the Open Data Platform, followed by a presentation of AFMI's Data portal and website.
CNBC Africa and Vox Africa will cover the event.
For more information and to register, please visit the AFMI website.
How should Rwanda develop its capital markets? This was the subject of a three-day roundtable discussion held last October in Rubavu, Rwanda. The roundtable was organized by the Rwanda Capital Market Authority (CMA) and the Milken Institute's Center for Financial Markets (CFM), with support from FSD Africa. Highlights from that discussion, including points of consensus and debate, are captured in the Milken Institute's new publication, "Framing the Issues: Developing Capital Markets in Rwanda."
Over the past decade, Rwanda has made considerable progress in achieving rapid economic growth and reducing poverty, supported by sound macroeconomic policies. Its business-friendly environment is now among the best in Africa. The government and its international development partners view deepening and diversifying the domestic financial system as essential to Rwanda's goal of transitioning to middle-income status.
Last year, the Rwanda Ministry of Finance and Economic Planning gave the CMA a mandate to produce a 10-year Capital-Market Master Plan (CMMP) to guide reforms to develop Rwanda's capital markets. An overarching goal will be to deepen capital markets so that they intermediate long-term finance for private-sector-led growth and meet the country's infrastructure and other socioeconomic needs.
The October strategic planning roundtable kick-started the process of mapping out capital-market reforms. The event gathered policymakers, regulators, issuers, investors, and capital-market experts from around the world, including senior officials from the government of Rwanda. The roundtable provided an off-the-record forum for frank and in-depth discussion about the opportunities and challenges Rwanda's capital-market stakeholders face, as well as how they can prioritize and sequence reforms. Participants also heard firsthand how other developing countries mapped out and launched their own capital-market reforms.
The roundtable covered core questions that will inform the drafting of Rwanda's Capital-Market Master Plan, including:
- How should Rwanda develop its investor base, both domestically and regionally? What are innovative ways to mobilize household savings?
- Can other nonbank financing sources-such as private equity, financial leasing, and even crowdfunding-help "incubate" firms for future listings?
- How can Rwanda strike the right balance in accessing needed foreign-portfolio investment while guarding against risks of overreliance on this investment?
- How can capital markets in Rwanda and its East African Community partners take a regional approach to attracting new listings?
- Should the stock exchange target small and medium-sized enterprises (SMEs) in its outreach for new listings-and, if so, how?
- What can Rwanda learn from other countries about the process of planning and implementing capital-market reforms?
Roundtable participants strongly agreed that an immediate and ongoing priority is for Rwanda to develop a pipeline of prospective listings. Targeted outreach -including education and technical assistance - is critical to increasing the number of firms willing to list. Cultivating a high-growth-potential corporate base could also serve as an incubator for future listings, as would developing the local venture capital and private equity markets.
Lessons shared by participants from other emerging markets underscored the importance of sequencing and developing capital markets to complement the banking sector, not compete with it. As an economy grows and becomes more complex, firms and households require a wider range of financial services - from banks as well as other financial intermediaries. Once larger firms begin to rely more on capital markets for longer-term financing, banks may increase lending further down the credit spectrum, to SMEs and households.
Well-functioning, appropriately regulated local and intraregional institutional investors are vital to developing a stable investor base. Several participants flagged the need to mobilize small savers across EAC markets, perhaps through a regional fund, which also would advance financial inclusion. The role of non-EAC foreign investors was more heavily debated, however - particularly the degree to which bond issuers should rely on foreign capital.
Regionalization emerged as a key cross-cutting issue. More cross-border listings and cross-border investment across the EAC's securities exchanges could help overcome local capital markets' impediments such as illiquidity, low market capitalization, and few listings. Greater cooperation across EAC capital markets in developing and sharing market infrastructure and intermediation services could unlock significant economies of scale. Throughout the roundtable, participants returned to the point that capital-market development should not be done for its own sake, but to spur growth of a diversified, inclusive economy that creates decent jobs and improves living standards. And, while best practices exist, there is no one-size-fits-all approach to developing capital markets.
This blog post was originally published on the Milken Institute's blog website.
About the Authors
Jacqueline Irving is a Director in the Center for Financial Markets at the Milken Institute. Previously, she was a senior economist at US Treasury, responsible for the migrant remittances and financial inclusion portfolio and a U.S. government delegate to the G20's technical working group on remittances.
Jim Woodsome is a Senior Associate, Program Research Analyst at the Milken Institute's Center for Financial Markets. In this role, he conducts research, organizes events and helps manage initiatives related to the Center's Capital Markets for Development (CM4D) program.
Starting in 2007, a number of African countries have been issuing sovereign bonds in the international capital markets. Sub-Saharan African countries issued a total of $35.9 billion between 2005 and 2015. Ghana issued $3.45 billion, followed by Gabon ($ 3 bn) and Zambia ($ 2.9 bn).
This sudden rush to tap into the international markets was encouraged by a range of factors, including rapid growth and better economic policies in the region, high commodity prices, and low interest rates in developed countries, particularly in the US, Europe and Japan. Since 2009, as enthusiasm for risk assets improved and global interest rates further dropped, international investors carried on their search for yield in a low-interest rate environment, while African countries took advantage of the low international interest rates to fund themselves in global markets.
For African countries, the main reasons for issuing Eurobonds can be summarized as follows: flexibility in the use of resources compared to other types of financing (mainly from Development Financial Institutions); the larger size of funds raised compared to allocations from development partners in the context of the current declining trend of aid flows; sovereign's presence in the international capital markets.
Eurobond prospectuses often indicated that the proceeds will be used to fund infrastructure projects (mainly transport and energy); repayment of the external or domestic debt; easing budget financing pressures; etc.
However, the funds were often not used efficiently. Some of the targeted infrastructure projects were at the early stage (wish list of projects), and were not able to absorb the resources. Sometimes the funds were used to fund routine public expenditures. Currently, some countries that have issued Eurobonds find themselves paying high carrying costs pending the maturation of projects for funding.
Furthermore, the international market situation has changed with the rise of the Fed interest rates, continued sluggish growth in Europe, slowdown in Chinese growth, falling commodity prices, the apprehension of investors, etc. These factors have resulted in lower export revenues for African countries, depreciation African currencies and reduction in their GDP growth.
In such a context, will the repayment of Eurobonds lead to "eurobombs" that can affect the macroeconomic sustainability of these economies?
What needs to be done to prevent the build-up of a debt crisis on the continent?
Different countries, different situations
African countries issuing Eurobonds could be grouped into 3 categories: (i) "investment grade" countries, such as Morocco, South Africa and Namibia; (ii) countries with GDP growth rate higher than interest rate on the debt; and (iii) countries with GDP growth rate lower than the interest rate on the debt.
The cost of Eurobonds for "investment grade" African countries is typically lower compared to the cost for other issuing countries. Credit ratings is particularly important as it allows issuers to diversify the range of funding sources and at the same time, optimize the choices according to their priorities and opportunities. Getting a rating of "Investment Grade" requires implementing sound management of public finances, efficient public debt management and low political risk.
Countries in category 2, with GDP growth rate higher than interest rate on the debt, can still support their debt service as they create enough wealth to meet their obligations. The ratio debt/GDP could be sustainable. However these countries are still at risk if their economic growth rates slow. Countries in category 3 are in relatively vulnerable positions. They are currently under pressure to meet their debt service and the situation may become worse with the anticipated increases in the interest rates in the US. The combination of expensive debt and slow growth will lead to a deterioration of their external and fiscal positions, and then reduce the possibility of new borrowings. They will pay a high premium to gain access to the international capital markets again.
What needs to be done?
To prevent a new debt crisis on the continent, the urgency in 2016 is for International Financial Institutions (IFIs) to team up and provide a credit enhancement mechanism (CEM) and liquidity facilities (LF) subject to the implementation of structural reforms.
CEM should make it easier to secure better pricing and would contribute to reducing the risk perception of African credit through the provision of guarantee products. In exchange, the beneficiary countries would need to agree to implement reforms to reduce the perceived risk, increase macroeconomic discipline and target the achievement of "investment grade" rating on the medium to long term. LF should help to reduce the current pressure on the repayment of accrued interest and the principal of the Eurobonds already issued. The LF should have a longer maturity tenor, a grace period, a fast track processing and competitive pricing to provide headroom for macroeconomic sustainability. In exchange, the beneficiaries should explain the use of the proceeds of the issued Eurobonds and present a credible list of projects that may absorb the resources. Particular attention should be paid to projects that could generate high returns such as power, agribusiness and some transactions in the transport sector.
At the country level, a strategic agenda to unlock domestic financial systems should be implemented. We cannot build prosperous economies in the long term without efficient domestic financial systems. "I did a lot of infrastructure development in my life, to fund them with foreign currency is madness. OK? Madness" said Mr. Tidjane Thiam in October, 2015.
About the Author
Cédric Mbeng Mezui has extensive experience in the African financial sector and is also an accomplished researcher and author in the sector. He was appointed Coordinator of the African Financial Markets Initiative (AFMI) in December 2013, and leads the implementation of the African Development Bank's (AfDB) local currency bond markets development programme. Cedric previously led innovative finance work for regional mega projects having worked on more than 30 investment transactions across Africa. Cedric has a Master's degree in Banking and Financial Engineering from Toulouse Business School (France) and Master's degree in Money, Economy and International Finance from Claude Bernard University of Lyon (France).
At the annual African Union for Housing Finance conference in Durban, Making Finance Work for Africa spoke with Professor Jeremy Gorelick following his talk, "Positioning Cities for Housing-Related Capital Flows". Based on his professional and academic experiences in supporting sub-sovereign entities to access funds for capital-intensive projects, Prof. Gorelick has been invited to write a series of blog posts about municipal finance across Africa. The series will discuss substantive current events in the field and feature interviews with politicians, practitioners and other stakeholders.
In an era of increasing decentralization, sovereign governments across Africa are constitutionally shifting more responsibilities to cities than ever before. Along with these new mandates, though, municipal leaders are forced to be more creative in finding money to cover rapidly rising costs associated with such traditionally-central government programs as social housing, underground infrastructure, and solid waste management. Most cities continue to rely on transfers from central governments, while some have additionally opened dialogues with multilateral development finance institutions, like the African Development Bank, or bilateral development finance institutions, like the French Development Agency or the United States Agency for International Development. Still more have looked for assistance from grant-making bodies like the Rockefeller Foundation or the Bill & Melinda Gates Foundation. Other cities, like Dakar, have turned to the debt capital markets for assistance through the issuance of municipal bonds.
The municipal finance gap in Africa is over USD 25 billion per year, in contrast to the current investment capacity of African local governments-approximately USD 10 billion over ten years (according to a 2012 report, Financing Africa's Cities: The Imperative of Local Investment). Despite this pressing need, most African local governments have limited access to capital markets and private sector finance for their infrastructure projects. Essential and impartial supporting capacity - such as rating agencies - are in short supply. In addition to Dakar's attempt, only cities in South Africa (including Johannesburg, Cape Town, Tshwane and Ekurhuleni) have issued municipal bonds not backed by the central government. This can be attributed, in part, to the enabling environment created by South African government's Municipal Finance Management Act.
Contrast this with the realization that one-third of the world's urban population resides in developing countries, and this portion is growing rapidly. While only about one-tenth of the world's largest urban areas are in least developed countries, thirty of the thirty-five most rapidly growing large cities worldwide are located there. In other words, the world's fastest-expanding urban agglomerations are now in the Global South. The magnitude of the urban demographic shift is staggering. Rural-to-urban migration, combined with the effects of urban population growth, could add another 2.5 billion to the world's urban population by 2050.
The growth of cities and towns from urbanization makes functional and fiscal decentralization more viable and more necessary, and in many countries local autonomy is growing. Increasing the capacity of local officials can not only improve urban resilience and quality of life, it empowers cities and towns to contribute in important ways to national, social and economic development goals.
While the responsibilities delegated to local governments by law vary considerably from one country to the next, cities often have constitutional mandates to provide: (i) local basic services and infrastructure, including water, sanitation, public transportation, public lighting, and solid waste management, among others; (ii) resilience building, and climate mitigation and adaptation, including energy efficiency, flood management, and public building retrofitting, among others; and (iii) local social services and infrastructure, including health, education, and childcare facilities, among others.
In the past, most cities would not have had the autonomy, information technology, or knowledge of trends in the urban sector worldwide to embark on significant development projects or to prepare multi-year investment plans. But with the increasing interconnectedness of cities around the world and the growing competition among them, this has changed.
Even so, while needs and aspirations may grow, the financial options available to cities across Africa have not kept pace with the growth and increasing complexity of the cities themselves. Cities are stuck in a vicious cycle of limited resources leading to a constrained response, while the population of the city and the demand for services continue to grow.
Ironically, many local government capital investments have high economic and social returns, and therefore should be prioritized. For instance, transportation signals that reduce congestion free people's time for more productive purposes. Investments in drainage that reduce flooding in commercial areas reduce trading days lost to post-flood recovery. In these cases, domestic private capital should be available to finance municipal investments that cannot be financed through grants.
Mobilizing resources to finance investments and improve services at the municipal level is one of the most challenging aspects of local development, especially if the goal is to provide resources on market-like conditions in a sustainable manner, for instance from loans or bonds. Even when government transfers are predictable and generous (which is the exception), they are rarely adequate to finance major infrastructure improvements in growing cities. The capital investment financing that is available to local governments is often provided by national agencies whose own access to capital is highly constrained. Winning funding allocations from national budgets requires local governments to compete with line ministries and other priorities of the government in power.
As a result of these conditions, cities are realizing the importance of diversifying their resource base to meet tremendous population growth coupled with an increased list of constitutional responsibilities. Along with providing a crystallization of the current state of municipal finance across Africa, a critical purpose of this blog series will be to highlight best practices and provide a roadmap for municipal leaders eager to leave a positive legacy on their respective cities.
About the Author
Since 2011, Professor Jeremy Gorelick has served as the Lead Technical and Financial Advisor for the City of Dakar's Dakar Municipal Finance Program. He has previously worked in structuring public debt obligations at BNP Paribas and Dresdner Kleinwort Wasserstein, and has taught classes on finance, international development and business analytics at the Johns Hopkins University since 2010. For more information on Professor Gorelick, contact him at LinkedIn.
African Municipal Bond Forum - Dakar, Senegal