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Financial Education: The Key to the Development of African Stock Markets

15.05.2018Emmanuel Zamblé, Expert-Consultant in Capital Markets

In recent decades, there has been a rapid increase in the number of stock exchanges on the African continent. In 1990, there were only eight stock exchanges (three in North Africa, and an additional five in the sub-Saharan region). That number grew to 18 by 2000, and finally to 29 today—including two regional stock exchanges in Abidjan and Libreville. Following these consistent developments, each region of the continent now has at least one stock market, and should expect a corresponding boost to their respective economies. Unfortunately, the growing number of stock exchanges in the African region has not yielded the expected results.

Indeed, with the exception of the Johannesburg Stock Exchange, Namibian Stock Exchange, Malawi Stock Exchange and Casablanca Stock Exchange—which, with a total market capitalization of USD 1,302 billion, 119.655 billion, 14.620 billion and 68.398 billion respectively individually represent more 50% of the GDP of their countries. The 25 other stock exchanges of the continent still continue to play a modest role in their economies.

Moreover, when analyzing the number of companies listed on the stock market, we realize that there is little enthusiasm on the part of African securities issuers. Of the 29 stock exchanges, only 3 are currently home to more than 100 companies. These include Johannesburg Stock Exchange Limited (377 listed companies), Egypt Stock Exchange (222 listed companies) and Nigerian Stock Exchange (172 listed companies).

At the regional level, the development of stock exchanges has yielded different results.

The Southern African region currently boasts nine stock exchanges: The Malawi Stock Exchange, Johannesburg Stock Exchange Limited, Dar es Salam Stock Exchange, Lusaka Stock Exchange, Namibian Stock Exchange, Stock Exchange of Mauritius, Botswana Stock Exchange, Swaziland Stock Exchange and Zimbabwe Stock Exchange. With a total market capitalization of USD 1,460.524 billion as of December 31, 2017, Southern Africa which accounts 86% of the continent’s market capitalization, leads the continent in terms of capital market development. Excluding South Africa, the region's market capitalization, while remaining the largest, would be reduced to only USD 158.52 billion.

Four stock exchanges currently operate in North Africa. These include the Casablanca Stock Exchange, Egypt Stock Exchange, Tunis Stock Exchange, Algiers Stock Exchange, and Libyan Stock Market. This region of Africa has a total market capitalization of USD 124.431 billion, which represents 7.35% of that of the continent.

West Africa has five stock exchanges: The Nigerian Stock Exchange, Ghana Stock Exchange, Regional Stock Exchange, Bolsa de Valores de Cabo Verde, and the Sierra Leone Stock Exchange. Its market capitalization is USD 69.90 billion (4.13%).

East Africa has the largest number of stock exchanges after Southern Africa. Its eight markets include the Nairobi Securities Exchange, Uganda Securities Exchange, Rwanda Stock Exchange, Bolsa de Valores of Mozambique, Seychelles Securities Exchange, Somalia Stock Exchange, Khartoum Stock Exchange, and the ALTX East Africa Exchange. It has a market capitalization of USD 37.745 billion (2.23%).

Central Africa has two stock exchanges; however, recent developments indicate that they will soon merge into a single market. These are the Securities Exchange of Central Africa and the Douala Stock Exchange. The stock market capitalization of this region amounts to USD 0.414 billion (0.02%).

Total market capitalization of African stock exchanges by Region

Sources: Stock Exchanges Websites; African Securities Exchange Association

Regarding the listed companies of the aforementioned stock exchanges, their number also varies from one sub-region to another.

Southern Africa possesses the largest number of listed companies, with 669 companies appearing across its nine stock exchanges—however, when we remove South Africa from our calculus, the number of listed companies in the sub-region drops to 292 and ranks second after North Africa, which has 392 listed companies. The West African sub-region has 265 listed companies, while East Africa and Central Africa have 190 and 4 listed companies, respectively.

Number of listed companies by region

Sources: Stock Exchanges Websites; African Securities Exchange Association

An analysis of this situation reveals that the majority of African stock exchanges are small, and therefore their contribution to the development of the state economy remains marginal; despite numerous legal, regulatory, and operational reforms made to revitalize and develop financial markets throughout Africa. In view of these circumstances, it should not be surprising to note that transaction volumes in these markets are also low.

One of the main causes of this sluggishness in the African financial sector is the inadequacy of stock culture in the region. This is reflected by, among other things, the reluctance of companies to use the stock market as a preferred route for financing their investments, the non-spontaneity of the dissemination of financial information, and the scarcity of growth capital transactions to be carried out through the stock market. The lack of a stock market culture is also expressed by the mistrust of many economic operators who still consider that the stock market is the ‘territory of specialists and especially rich.’ These actors therefore prefer to use their savings for other purposes, such as real estate and trade, rather than in stocks and bonds, which they are less familiar with.

The stock market problem can also sometimes arise in the form of an open competition between the banking sector and the financial market: Some banks consider long-term finance to be their sole purview, and perceive the stock market as a permanent competitor, despite having complementary roles in reality.

The remedy to these challenges is financial education.

There is a mounting, urgent need for regular educational campaigns with savers and company executives to help them deepen their understanding of how the stock market, financial products, and investment risks all interact. Similarly, money managers, advisers and, financial intermediaries should be included in any proposed financial market training programs. This would avoid any confusion with regards to the respective roles of commercial banks and the stock market in financial transactions such as public offerings. The training received by market players could spur adoption of good practices, build self-confidence in the investment decision process, and reinforce trust in their work, reassuring both domestic and foreign investors.

Our main objective is to make every African an informed speaker for the development of his country or even the continent. To do this, African stock market authorities should focus primarily on local investors. This has the advantage of protecting domestic markets against speculation from foreign capital flows. Of course, if investors are active enough in those stock markets, trading volumes and liquidity ratios will improve. In turn, this would attract foreign investors and encourage other companies to get listed on the stock exchange.

It should also be noted that no reform will lead to concrete, permanent developments of African stock markets without involving the majority of Africans. We can only achieve that by voluntarily accepting the daunting task of educating the public about money and financial market. Education must therefore be a cornerstone in any financial development strategies if African stock market leaders are to succeed in their goals.

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About the Author

Emmanuel Zamblé has been a consultant in the capital markets industry for more than fifteen years. He has conducted studies on initiatives for bond markets development in ECOWAS, CEMAC and AMU (Arab Maghreb Union) regions, on behalf of international financial institutions. He began his career in 1992 at the Abidjan Stock Exchange (BVA) as a Senior Account Manager, Head of Public Offering and Quotation; in 1998, after having contributed to setting up the WAEMU Regional Stock Exchange (BRVM), he held the position of Director of Operations and Financial Information until 2011. Additionally, to presenting and delivering a number of international seminars and conferences, Mr. Zamblé also contributes to the training of African financial executives.

SMEs provide opportunity for Africa to grow its debt market

13.02.2018Kelsey Tanner, Senior Private Equity Analyst, RisCura

Investments into private firms in Africa are funded by a relatively low proportion of debt compared to equity, especially in contrast to developed markets, where debt is more readily available and affordable. This is according to RisCura’s latest private equity update of its Bright Africa report, released in October 2017.

With a relatively small value of assets under management, there is capacity for the development of the private debt market in Africa. The undercapitalisation of traditional lenders, such as banks, and the current uncertain economic environment have led to the development of alternative sources of capital. One such alternative is the private debt market where fund managers provide finance to private businesses seeking credit. These businesses, such as small and medium-sized enterprises (SMEs), which do not fit into the traditional financing paradigm, provide a pool for private debt funds to tap into. A funding supply gap exists because SMEs are not able to access finance through traditional channels and private debt fund managers have limited investment opportunities.

This gap is fast being closed by private debt funds that have taken on the role to provide the necessary capital to SMEs. African funds that are already targeting SMEs with this type of finance include Vantage Capital’s third mezzanine fund with a $280m commitment from investors in 2017, and the Investec Africa Credit Opportunity Fund 1 with a 2015 investor commitment of $226.5m. 

SME owners are largely unaware of private debt as a funding option, how to access it, and its benefits and risks. This problem is compounded as fund managers cannot easily identify businesses that require funding, and therefore rely on potential borrowers to approach them.

Private debt can be accessed through a number of strategies. Private debt funds such as mezzanine and credit opportunity funds are frontrunners in meeting demand from SMEs seeking growth capital and debt refinancing. Advantageous to SMEs is that private debt funds may offer them finance and management support, but often do not pursue a direct ownership interest. Credit opportunity funds have a broad mandate and may involve a range of debt instruments, allowing fund managers to provide solutions that are suited to each individual company. This is critical when deploying capital effectively in diverse business environments.

Research has shown that mezzanine and credit opportunity funds perform well during the contraction and early expansion phases of the business cycle. After two consecutive quarters of GDP contraction, South Africa emerged from recession in the second quarter of 2017. Renewed business confidence, albeit amidst low forecast growth of around 1% in 2018, could make this the opportune time for investment. South Africa’s over two million SMEs could thrive with an improvement to cash flow, working capital and management, thereby helping to realise the National Development Plan’s forecast that the sector will create 90% of jobs by 2030. Funds with dry powder – cash available for investment – can therefore provide liquidity in the early stages of economic recovery when traditional lenders are unprepared and uninterested. This market also offers investors the opportunity to diversify their fixed income exposure away from government bonds and listed credit, to high-yield investments. Mezzanine and credit opportunity funds typically have positively skewed returns, with more unexpected gains than losses.

Due to the broad range of strategies that mezzanine and credit opportunity funds may follow, investors can earn interest income and equity-like returns through convertible debt strategies.  Funds can gain exposure to assets that should predictably recoup principal and generate alpha (excess return relative to a benchmark). Another advantage is that private debt funds can incorporate diversification of investments by country, sector, or rating. Thus, lowering volatility of returns.

The pursuit of high returns, however, is not without risk, as these private debt strategies take a bet that returns exceed losses in the case of SMEs defaulting on payments. Mezzanine and credit opportunity funds often carry a higher premium to compensate for this.

As can be seen from developed markets, a flood of funding into the debt market could lead to private debt funds hastily pursuing even riskier options, such as “distressed debt” (lending to companies on the verge of bankruptcy), resulting in eroding industry returns. This has sparked fears of a “private debt bubble”.

In Africa, however, the debt market is a long way from reaching capacity. Private debt in Africa is expected to have potential over the long-term as an established part of investors’ portfolios. Investors into Africa willing to accept the risk could create real value for SMEs, the key drivers of economic growth. The development of the private debt market is essential to unlocking this potential.

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About the Author

Kelsey Tanner completes independent valuations of private companies across Africa. In her role as senior private equity analyst, she prepares investment valuation reports for private equity industry clients. Kelsey also conducts industry research and compiles reports such as the Bright Africa (Private Equity) and the RisCura SAVCA Private Equity Performance reports, which provide insight into industry returns. Kelsey qualified as a Chartered Accountant (SA) in 2017 after completing her articles in KPMG’s financial services division, where she gained experience in valuation modelling and unlisted instrument valuation. She joined RisCura in February 2017.

Are African leaders serious about using savings versus debt to better our African economies?

07.11.2017Nthabiseng Moleko, Economics & Statistics Lecturer, Stellenbosch Business School

According to the Nigerian, South African and Kenyan pension regulators we have seen significant growth of pension assets in the last decade. Kenyan assets have increased from 105 billion (Kshs) shillings in 2002 to 700 billion in 2013, the year on year growth remains buoyant with 0.8 percent growth to Kshs 807 billion (2015). The Nigerian economy has seen a similar rise from $7 billion (2008) to $19 billion in 2016, and South Africa's meteoric growth to $207 billion (2016) from $160 billion during the same period. South Africa's Financial Services Board (FSB), Kenyan Retirement Benefits Authority (RBA) and Nigeria's Pension Commission (PC) have established a strong regulatory framework, and asset consultants and managers continue to manage fast growing pension assets in relation to GDP. The Kenyan and Nigerian growth is similar to economies such as Mexico, Spain, France, Italy, China, Brazil and India who have asset to GDP ratios lower than 20%. In the last decade Towers Watson Global Pension Study has identified South Africa as the 11th biggest pension market globally and it has grown considerably over the last decade by 15% to significantly high level of assets at 74% in relation to GDP. The question is - - how is Africa using these funds more strategically to tackle inequality, underdevelopment and joblessness?

             
Source: Authors compilations from World Development Indicators (online), Financial Services Board Annual Reports, 1960-2013

                      
                           Source: Retirements Benefits Authority, 2017

                     
Source: Authors own work (Towers Watson, 2016 and OECD Pension Fund Indicators, 2016)

The increased size of pension assets has fared well for capital market development, showing both increased depth and liquidity of securities markets. The modernisation of infrastructure increased assets for bond and equities, particularly in the long run. Improved regulatory framework is also a consequence of pension asset growth with even some empirical studies attributing it to lowering of transaction costs. When the South African and Kenyan investment allocation by asset class are compared we see signs of large exposure to domestic equities (17.6% and 23%) and bonds (8.5% and 36%), including government securities. It is only in Eastern Africa a sizeable allocation in immovable property at 19% versus South Africa's lower 1.2%. Kenya has allocated an impressive Kshs 150 billion as at December 2015. Alternative investments, which include investments in infrastructure, are an asset class that require significant development for increased allocation in our capital markets. The African Equity Fund and Isibaya Fund, managed by the continent's largest pension fund manager (Public Investment Corporation), allocate a total 2% of the total assets of R37.1 billion into such investment products. Particular emphasis on the development of instrument, bonds and equities (listed and unlisted), project planning and packaging of such facilities is a key requirement in furthering such. The worsening condition of our West, East and Southern African economies must make use of all possible means to transform it, such as using capital markets in particular as an enabler to propelling economic development in greater proportions.

This is all against a backdrop of a slowed economy in the continent's two largest economies, both facing recession with Nigeria -1.5% growth and SA's lacklustre 0.29% growth in 2016. In the same period Kenya has experienced 5.8% growth, however, has the highest jobs crisis amongst the countries. The governments need to make deliberate efforts to put all these economies on higher growth paths. For instance, South Africa's growth has averaged 3% post democracy and at its peak, growth hasn't exceeded 5.6%. Kenya's growth and Nigerian economic growth has grown but neither of these economies have grown sufficiently to absorb unemployed labour, decrease widening inequalities and reduce significant poverty and infrastructure backlogs needed to boost sectorial development. The number of unemployed continue to worsen with the hardest hit being women and youth, ranging from 14.2% an estimated of 28 million people. South Africa's 26.6% with Kenya's staggering 39.1% unemployment levels signal a serious structural crisis. Despite significant growth, all these economies have been unable to match increased growth by absorbing new entrants into the labour market.

The total infrastructure backlog estimations made by the African Development Bank were projected at $93 billion per annum. With investment in productive investment and absorbing local labour we can begin to make a positive dent in poverty and unemployment. Public investment is inadequate to meet the financing requirements estimated at 10% of our economic output per annum. Labour intensive growth is what is required for our economies. However, we cannot be further indebted to Bretton Woods institutions in the process. Already soaring debt to GDP ratio's and heavily priced servicing costs places high levels of opportunity costs on the option of borrowing and servicing debt. The question is, where will the finance required to promote productive growth be drawn from? Increased investment must be in capital formation, making investment in machinery, equipment, and industrial infrastructure, logistics support through the construction of railways, ports, roads, and investment in other such infrastructure that will unlock the economy in regions that could be developed as economic hubs.

Is it true that investment in infrastructure is a risky investment?

The sole purpose of pension regulators is to ensure that there is a conducive environment to investments but limiting risky and reckless investments of pensioners. Curtailing the ability to act as a watchdog from looting and enforcing limitations on asset classes for optimal returns is crucial. This is to protect the pensioners' interest. However, is has been shown in countries such as Canada, the USA and Australia that have invested up to 15% of total public pension assets in infrastructure investments. These investments using non-traditional financing mechanisms have shown significant returns in other countries, whilst developing the economy has yielded positive returns. In a global pension assets study by Harith & Preqin, more than three quarters of infrastructure portfolio performance of infrastructure assets has met expectations. It exceeds 90% when including portfolios that have exceeded performance. The argument that targeted investment do not hold returns equivalent to other asset classes is unjustified as they do not perform differently from non-targeted investments.

The fears of weak state capacity, poor planning and weak governance of institutions and political meddling are seen as hindrances to securing not only foreign but even curtailing attempts to increase domestic savings as investment for domestic infrastructure. It must be stated though that infrastructure projects such as toll roads, power distribution and transmission facilities are able to generate operating cash flows. In order to ensure changes in investment behaviour and patterns, contract law and methods for recourse coupled with a strong regulatory capacity in infrastructure are required. The regulatory capacity in East African economies (including Kenya) and South Africa do not restrict investment, however in other countries pension fund regulation must reduce fragmentation and not be a constraint in diversifying assets. Secondly, governance concerns over agencies and their ability to collect payments for infrastructure services can only be quelled by building strong institutions and developing a track record of success. It has to be the state that quells the notion that there lack investable products, thus restricting investments. We have seen in South Africa how investment in institutional capacity from as far back as 1959 with the FSB's establishment has led to the development of a strong regulator, and one of the biggest pension market globally. It shows the state has to deliberately channel resources into development of project planning, project packaging and in the development of investable products using its institutions.

The task of improving the marginal productivity of capital requires innovation in our capital markets. Pension funds are a long term supply of funds to capital markets and offer the opportunity of diversifying risk and also heeding against investment risk as an asset class.

Economic estimations show that the size of the informal economy ranges from 10-50% of our African economies with a sizeable portion of our economy not contributing to formal pension schemes. Economic growth that is underpinned by increased labour productivity and employment will see the size of pension funds surely increase. But the strength of the relationship between pension funds and growth is strengthened if capital markets are developed with the intention of further driving growth.

Capital markets can also offer solutions that respond to the constraints of jobless growth, particularly in our emerging markets or developing economies. Life insurance companies, pension fund managers and the wider financial services sector should be encouraged to play a greater role in the provision of capital to drive continental growth. In time, the increased savings effect from pension funds will trickle in greater proportions through capital markets and grow the entire economy.

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About The Author

Nthabiseng Moleko is a Faculty member at the University of Stellenbosch Business School and teaches Economics and Statistics to postgraduate and Masters students. As a former Chief Executive Officer at JoGEDA, Project Manager and Researcher at ECSECC she has worked extensively in the economic development landscape.  At ECSECC she contributed to the development of various policies that contributed to the policy aspects of economic development in South Africa working with regulators, policy makers, national and regional government. The transition from a policy research think tank at ECSECC to a development agency in JoGEDA enabled her to be involved in several regional projects in South Africa. She started her career in the credit team at a highly rated specialist institutional fixed income boutique asset management firm, Futuregrowth Asset Management. Nthabiseng obtained her Bachelor of Business Science (Honours) degree in Economics at the University of Cape Town. Thereafter she obtained a Masters in Development Finance from the University of Stellenbosch Business School (USB). She is currently completing her PhD in Development Finance from the USB with the topic centred around pension funds, savings, capital market development, the Public Investment Corporation and growth.   Her research encompasses several time series analysis using econometrics to understand financial services, namely pension funds and capital markets contribution to economic growth.  She seeks to understand how financial development in Africa can be better used to aid economic development.

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.

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