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Unlocking infrastructure potential in Africa: The role of sovereign wealth funds

29.06.2017Seedwell Hove, Senior Macroeconomist, Quantum Global Research Lab

This post was originally published on the Quantum Global Group website.

Sovereign wealth funds (SWFs) are increasingly becoming major sources of finance in many countries. Commonly established from balance of payments surpluses, foreign currency reserves and fiscal surpluses, global SWF assets under management have grown rapidly in recent years, topping US$7.2 trillion in 2015, more than double the asset base in 2008. African countries have joined the international trend in establishing SWF in recent years, with assets under management now over US$159 billion (6.4 percent of Africa's GDP). The rapid growth of SWFs in Africa has been catalysed by high commodity prices from the early 2000s till 2014, coupled with the recent discoveries of oil, gas and solid minerals in countries like Ghana, Kenya and Tanzania. Despite the plunge in commodity prices since 2014, SWFs continue to increase both in number and in assets under management.

At the same time, Africa has huge infrastructure gaps which are constraining growth. The World Bank estimates that about US$93 billion is required annually to meet the continent's infrastructure needs, but only half of that amount is currently being met. Booming population growth and increasing life expectancy across the continent is pushing up demand for utilities such as water, power, roads and telecommunications, which few countries are providing in sufficient quantities. About 19 percent of roads in Sub-Saharan Africa are paved, compared with 27 percent in Latin America and 43 percent in South Asia. Some 57 percent of the population in Africa lack access to electricity and about 30 countries face regular baseload power shortages, resulting in the payment of high premiums for emergency power. The proportion of people with access to improved water sources is 68 percent in SSA compared with 94 percent in East Asia and 95 percent in Latin America. Inadequate infrastructure is raising the cost of doing business, hindering trade integration and constraining growth. The poor state of infrastructure is estimated to reduce growth by two percentage points every year and cut business productivity by as much as 40 percent. Africa's firms lose five percent of their sales due to power outages and this figure rises to 20 percent for firms in the informal sector.

Accelerating Africa's growth hinges on closing the infrastructure gap, yet mobilizing finance for infrastructure development remains a daunting challenge.

The scope for financing infrastructure from traditional sources such as public revenues, banks and debt markets is limited, especially after the global financial crisis. Thus Africa needs new sources of finance for infrastructure, and sovereign wealth funds can contribute significantly in financing infrastructure.

SWFs are well positioned to finance infrastructure, for several reasons. First, they have a long-term investment horizon, and can provide long-term capital which is necessary for infrastructure financing. Second, they usually have limited or sometimes no explicit liabilities (since they are usually drawn from the fiscus), in contrast to other institutional investors such as pension funds. Third, infrastructure provides reasonably higher and inflation-protected yields, coupled with lower correlation to other financial assets, which implies lower risk. Fourth, once constructed, infrastructure assets are less vulnerable to economic downturns compared with other assets which are pro cyclical. Given Africa's demographics and infrastructure financing gaps, channeling SWF resources towards infrastructure is a positive step towards building above-ground assets for future generations.

Asset allocation of African SWFs is largely determined by their mandates, which include economic stabilization, intergenerational savings accumulation, buffers against economic shocks, wealth diversification and economic development (e.g. infrastructure and industrial development). In addition, economic outlook, fiscal situation, market trends, investment beliefs, regulations, risk appetite and liability considerations also influence investment decisions of SWFs. Our analysis suggests that allocating about 20 percent of the current African sovereign wealth funds could cover Africa's annual infrastructure financing gap atleast for a year, assuming no inefficiencies. Allocating about 15 percent of African SWFs could close the energy financing gap while the water and sanitation financing gap could be covered by an allocation of 8.4 percent of Africa sovereign wealth funds. For a sample of countries which have established SWF, there is positive correlation between SWF assets and access to electricity, suggesting that SWF can make a difference in infrastructure development.

There are many opportunities for investing in Africa's infrastructure. Africa has abundant natural resources (10 percent of world reserves of oil, 40 percent of gold, 80-90 percent of chromium and the platinum group of minerals and agriculture resources which provide opportunities for infrastructure investments in resources and industrial beneficiation sectors. The continent is also undergoing rapid urbanization, with relatively young labour force and growing middle class which provide opportunities in real estate, telecommunications, energy and water and sanitation sectors. Africa's population will more than double to about 2.4 billion by 2050, representing growing future demand for infrastructure. Estimates suggest that demand for energy in Africa will grow at 6 percent per year to 3 100 terawatt hours (TWh), while transport volumes will increase by 6-8 times the current amount by 2040. Returns on investments in Africa have been considered to be higher than in other developing regions, which could be the case for infrastructure investments, considering existing infrastructure funding gaps, especially in energy, transport and water and sanitation. While opportunities for infrastructure investments in Africa are immense, there are also some risks to consider. For instance, political risks (e.g. arising from change of governments), currency fluctuations, commodity price fluctuations, financing risks and lack of high quality data to measure and manage risks.

SWF can certainly play an important role in financing infrastructure development in Africa. For this to be possible, African SWFs need to have clear objectives and ensure that their investment strategies are consistent with their set mandates. SWF can make efforts to allocate a sizeable portion of assets towards infrastructure investments or create a sub-entity with a specified mandate towards infrastructure investment, as exemplified by Ghana, Nigeria and Angola. African governments can also promote infrastructure investment by demonstrating commitment to investor protection in terms of property rights, stable legal systems, zero tolerance on corruption and upholding of legitimate projects after political transitions. This is important specially to attract other SWFs outside Africa or private investors. Institutional investors often raise concerns of liquidity and risks in infrastructure investments. As such, there is need to design financial instruments which are liquid and credit enhanced, with investment grade ratings to incentivise SWF to invest their huge resources in infrastructure. Improving infrastructure project preparation and packaging could also be helpful in attracting SWF into infrastructure investments. It is also important to address data gaps to help improve the measurement and management of risks in infrastructure investments and unlock more funding into infrastructure in Africa.

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About the Author

Seedwell Hove  is currently Senior Economist at Quantum Global Research Lab, a research center specialized in the delivery of bottom-up econometric models of African economies and macro-economic policy analysis  that support the development of innovative economic policy and sustainable investments. Seedwell and the Research Lab's global office are based in Zurich, Switzerland. Prior to joining this position, he worked at the World Bank between 2012 and 2015, and before this assignment, he taught Economics for nearly 2 years at the University of Capetown. Early in his career, Seedwell worked as treasury dealer at Infrastructure Development Bank (formerly Zimbabwe Development Bank) and then at Reserve Bank of Zimbabwe. Relatively to his academic background, Seedwell Hove holds a Ph.D. in Economics from Cape Town University and a Master's degree from the University of Zimbabwe.

Pension funds can play a pivotal role in African aspirations for 2063

19.06.2017Gerald Gondo, Business Development Executive, RisCura Africa

African equities have recently faced strong headwinds, despite the positive fundamental growth prospects presented by the continent, writes RisCura Africa's Business Development Executive, Gerald Gondo.

If one considers the negative return profiles of a number of the African equity indices over the last two years, it would not be surprising if investors questioned the much-vaunted tag-lines of "Africa rising" and "demographic dividend". Should they retain their confidence that Africa will master its short-term challenges and look to the long-term prospects?

An important element of the African investment case is the oft-cited demographic dividend - referring to a period where a country's workforce is young, willing and able to be integrated into the economy and thus continue its economic growth. But, other elements such as rising disposable income, urbanisation, untapped resources and agriculture also reinforce the need to look beyond short-term challenges and rather to calibrate one's expectations towards the long-term. These drivers are set to continue to develop and arguably present the prospect of compelling organic growth waiting to be unlocked.

The questions investors should be asking are who and how will Africa unlock this growth?

African governments and policy-makers appear quite clear and resolute in their outlook. Evidence of this is the 28th African Union (AU) Summit held in Addis Ababa, Ethiopia in January 2017 whose theme was, "Harnessing the Demographic Dividend through Investments in Youth".

This was perhaps a clarion call by Africa's leadership to revisit its investment case by focussing on possibly its most durable and resilient growth proponent - its youth.

Turning to the AU's "African Aspirations for 2063" - six aspirations aimed at realising the continent's potential by 2063 - Aspiration 1 reads as follows:"A prosperous Africa based on inclusive growth and sustainable development. We are determined to eradicate poverty in one generation and build shared prosperity through social and economic transformation of the continent."

Critical to making in-roads in achieving this aspiration requires African governments, policy-makers, and regulators to undertake a critical review of inhibitors to effective inclusive growth and sustainable development. Deepening, integrating and developing African capital markets is an obvious and immediate area to target.

According to a Milken Institute - Centre for Financial Markets study, "Capital Markets in the East African Community - Developing the Buyside", these markets are fundamental to economic growth because they help to channel domestic savings in a more productive way. Thereby enabling the private sector to invest, produce and create jobs. African pension funds have been cited as a growing pool of assets that can and should be channelled towards deepening capital markets.

At RisCura, we continue to observe and record the growing asset bases of African pension funds due to rising incomes, with emphasis on the need for these funds to look to diversify their investments away from traditional investments. Particular focus is given to the continued elevated levels of exposure that many African pension funds still have to government fixed income securities, which could largely be attributed to static regulation.

A separate Milken institute study in East African pension funds found that "preferential treatment generally given to government securities through regulatory approaches - specifically, relatively high portfolio ceilings - may induce funds to over allocate to this asset class at the expense of others."

If Africa is to progress towards achieving Aspiration 1, alongside the remaining six and equally important Aspirations, the pace of capital market reforms needs to be accelerated. RisCura has previously noted several major African countries have revised pension regulations in recent years, with many either considering or actually revising rules around investments such as allowing investments into private equity and non-traditional asset classes. However, the pace of revision remains slow.

Deepening of capital markets may take time, but the channelling of savings towards productive sectors of the economy is not limited only to listed capital markets. Allocations to private equity and infrastructure as alternative assets classes through the burgeoning African private equity and infrastructure funds, will serve as critical interventions to accelerating economic development in Africa.

Regulatory reform will serve as a powerful driver for increased investment that deepen and develop African capital markets. African pension funds and institutional investors have an important and critical role to play in assisting Africa (through prudent channelling of savings) with projects and initiatives that can accelerate the fulfilment of Aspiration 1.

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About the Author

Gerald Gondo serves as an Executive within RisCura Africa and is responsible for Business Development. Prior to joining RisCura, Gerald was also a founding partner of a specialist investment advisory and investment management business (Atria Africa) based in Mauritius. Gerald's passion to have first-hand experience in investing in Africa led him to join a leading pan-African asset manager (Imara Asset Management) where he had dual responsibility of being lead analyst on listed equities in Egypt, Morocco, Zambia and Mauritius whilst also building the fixed income capability of Imara Asset Management in Zimbabwe. He started his career in private equity investment in Sub-Saharan Africa (Business Partners) and has also worked as a credit analyst for a highly-rated specialist institutional fixed income boutique (Futuregrowth Asset Management), where he was responsible for credit analysis for corporate credit and securitisation issuances within South Africa.

Understanding investment and financial flows in Africa

19.06.2017Kudzai Goremusandu, Financial Consultant, Africa Leadership Insights Institute

This post was originally posted on the NewsDay website.

According to the African Economic report 2016, Africa attracted an estimated $208,3 billion of external finance - foreign investment, trade, aid, remittances and other sources in 2015, the figure was 1,8% lower than the previous year. Falling commodity prices, particularly for oil and metals, were one of the key causes for the 2015 fall.

The total sum was projected to rise again to $226,5 billion in 2016. Portfolio equity and commercial bank credit flows dried up, reflecting tightening global liquidity and a market sentiment wary of risks. Rising remittances and increased official development assistance largely kept the figure up. African governments have to stabilise financial inflows in the short term and use them for sustained economic diversification for the longer term.

Flows of finance into Africa - foreign direct investment, portfolio equity and bonds, commercial bank, bilateral and multilateral bank credit, official development assistance and public domestic revenues - have remained broadly stable despite weak conditions in other parts of the world. Foreign Direct Investment (FDI) into Africa grew steadily from 2007 to 2013. In 2014, however, FDI fell back to $49,4 billion, but increased to $57,5 billion in 2015, according to International Monetary Fund (IMF) report 2015 estimates. Africa has attracted investment from industrialised countries such as France, the United Kingdom and the United States and emerging economies such as China, India, South Africa, and United Arab Emirates. Investment is still mainly directed at resource-rich countries, but non-resource-rich countries are becoming more attractive. The extractive sector, infrastructure and consumer-oriented industries are the main draws for investment.

Africa's pattern in foreign direct investment (FDI) inflows

While the European Union countries and the United States remain the largest investors in Africa, the emerging economies are a vital source too. Foreign investment into Africa increased by 16% from to $57,5 billion in 2015, according to IMF figures. Flows to North Africa reversed a downward trend, as investment increased by 20% from $17,2 billion in 2014 to $20,7 billion in 2015. East Africa has seen higher FDI since 2010. In 2015, the figure rose 16% to $8,9 billion in 2015 from $7,7 billion the previous year. For West Africa investment rose from $9,3 billion to $9,7 billion.

Central Africa saw a decline from $6,6 billion in 2014 to $5,4 billion. Southern Africa received $12,9 billion of FDI in 2015 against $8,7 billion in 2014, and $11,4 billion in 2013.

The leading African investment destinations in 2015 were: Egypt ($10,2 billion), Mozambique ($4,7 billion), Morocco ($4,2 billion), South Africa ($3,6 billion), Ghana ($2,5 billion), the Democratic Republic of the Congo ($2,5 billion), Zambia ($2,4 billion), Tanzania ($2,3 billion), Ethiopia ($2,1 billion), Guinea ($1,9 billion), and Kenya ($1,9 billion).

Without Egypt, investment to North Africa would have dropped. FDI to Egypt increased from $5,5 billion in 2014 to $10,2 billion in 2015. United Arab Emirates investors have played an important role in Egypt's recovery. Flows into Morocco fell to $4,2 billion in 2015 from $4,7 billion in 2014. But Morocco became the third largest recipient of foreign investment in Africa in 2015.

Potential growth areas of foreign direct investment (FDI) in africa

Consumer-oriented sectors in Africa attract growing foreign investment

Resource-rich countries still get the most foreign investment, but countries with no major commodities to rely on are taking a larger share of FDI. Countries that are not resource-rich received an estimated 37% of Africa's FDI in 2015, compared to 30% in 2010. Several countries without significant resources are attracting investors, including Kenya, Tanzania and Uganda, reflecting the shift towards consumer goods. Kenya is becoming an East African business hub for manufacturing, transport, services and information and communications technology (ICT). Investment is starting to diversify into consumer-market oriented industries, including ICT, retail, food and financial services.

African cities are future hubs of investment

With urbanisation, African cities are growing consumer markets increasingly targeted by foreign investors.

Disposable income and spending power in Africa's major cities will grow according to Oxford Economics, 2015, Future Trends and Market Opportunities in the World's Largest 750 Cities. Forecasts show that the gross domestic product of major cities is increasing. The most important ones will be Cairo, Cape Town, Johannesburg, Lagos and Luanda. This ranking reflects the quality of the business climate, infrastructure and logistics, and availability of skilled workers.

A recent surge in infrastructure investment indicates that states are investing in transport corridors to connect urban agglomerations and transform them into urban clusters. Examples include the Greater Ibadan-Lagos-Accra urban corridor, the Maputo Development Corridor, and the Northern Corridor between East and Central Africa. These investments will surge with deeper market integration through reduced transport and trade costs. They will also foster competition and productivity, which will make African hubs more attractive for foreign investors.

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About the Author

Kudzai Goremusandu is a strategic, innovative, dynamic, goal getter, enterprising management and financial consultant. He is the founder of Africa Leadership Insights Institute. Kudzai holds an award for effective media communication from the University of Zimbabwe. Kudzai is based in Harare, Zimbabwe. He can be contacted at kgoremusandu[at]gmail.com.

Financing Africa: Deepening local financial systems

23.04.2017Excerpt from Financer l’Afrique Densifier les systèmes financiers locaux

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’Ivoire

13.12.2016Cédric Mbeng Mezui, Coordinator, African Financial Markets Initiative (AFMI)

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

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