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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.

Pension provision in Africa remains low

26.09.2017Gerald Gondo, Business Development Executive, RisCura Africa

This post was originally published on the Financial Nigeria Website.

With 72% of sub-Saharan Africans employed in the informal sector, the traditional pension system is being called into question.

The traditional pension system of course works on the premise that members are formally employed, work for 40 years and contribute regularly during this period, resulting in suitable retirement savings. As more people enter the labour force and become formally employed, they are in essence able to contribute towards their future savings.

If we juxtapose the traditional model to the current African landscape, where most people are employed in the informal sector, consistent employment for one year - let alone 40 years - is a stretch. While permanent or continuous employment may not be a reality for many in Africa, these members of African society (where possible), remain economically active in the informal economy during periods of unemployment.

Pension coverage

The large numbers employed by the informal economy have historically limited the size of traditional pension funds and partially resulted in the continent’s low level of pension coverage. According to the International Labour Organisation, in sub Saharan Africa, only 8% of the labour force contributes to pension insurance and earns rights to a contributory pension, compared to 47% in North Africa.  As in most low-income countries, the low level of contributor coverage ratio can be explained by the small share of formally employed wage and salary earners, and the pervasiveness of informality, evasion, and inadequate law enforcement.

Despite higher levels of informality in labour markets, the provision of pension coverage and pay-out should remain an imperative if Africa is to make progress on its developmental agenda.

Providing pension access via African-based financial services and distribution channels such as M-Pesa, EcoCash, Leap Frog Investments and Equity Bank, which are innovative and disruptive, are natural and obvious choices.

Importantly, informing the thinking and messaging surrounding the provision of pension to potential members should be driven by simplicity.

Nigeria leads the way

Nigeria, Africa’s most populous nation, is leading the charge in making advances towards an alternative pension model for the informal sector. Its National Pension Commission (PenCom) has adapted their existing pension scheme for formally employed workers - the Contributory Pension Scheme - by making it the backbone for the rollout of the Micro Pension Plan of Nigeria.

The Micro Pension Plan is designed to cover small-to-medium enterprises, self-employed Nigerians and the broader informal sector. It is estimated that the informal sector constitutes 70% of Nigeria’s total workforce. In the absence of the Micro Pension Plan, these economically active citizens would not be covered by any form of structured pension scheme. Out of a total 59 million adults in Nigeria, there are 38 million potential contributors that will come from the informal sector by activating the micro pension scheme. As at the end of 2016, total pension scheme membership for the formal sector alone in Nigeria was almost eight million members.

Target-Dated Investing

At RisCura, we strongly advocate for pension fund fiduciaries to spend more time on objectives or goal setting. But, we are mindful that this must also take into account the nuances of Africa’s developing savings base and the differences between micro and traditional pension plans.

There may be merit for pensions and savings practitioners to look to Target-Dated Investing (TDI) for micro pension products. Under TDI, the member has a clear view of the investment strategy being undertaken on their contributions based on a set term to retirement that they have selected. TDI offers informal savers the benefit of a simplified savings programme and the goal is to ensure that the investment starts paying out at a pre-set date.

The combination of micro pension provision and TDI presents itself as an acceptable compromise for the possibility of an erratic contribution from some members. This dynamic may not offer the most elegant solution, but may serve as an important initiator of further improvements.

Echoing the sentiments of former Nigerian President Olusegun Obasanjo, “Emphasis must be placed on the urgent need for pension arrangement for the informal sector, given that it constitutes at least 61% of urban employment across the continent and will be on the rise due to population growth. We advocate for micro pensions, especially as the proportion of Sub-Saharan Africans in vulnerable employment has attained an alarming rate of 85% for women and 70% men”.

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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.

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.

Growth and financial inclusion: Where is Tanzania today?

29.06.2017Bella Bird, Country Director, The World Bank

This post was originally published on the World Bank blogs website.

Two Tanzanian entrepreneurs: Hadiya and Mzuzi. Hadiya has built a successful micro-business taking advantage of mobile money services, including money transfers and savings products that are low cost and safe, as well as short term micro-loans. But Mzuzi, the owner of a small, 10-person enterprise, is facing a financial crisis despite huge personal drive and inventiveness because of his inability to access credit to expand.

The stories of these two entrepreneurs embody the experiences of real-life Tanzanians seeking opportunities for themselves and their families. Their need for financial products and services opens the second section of the 9th Edition of the Tanzania Economic Update series which, in addition to providing the World Bank's regular overview of the economy, puts a special focus on an issue of strategic significance to the country.

The broad story of Tanzania's growth and poverty reduction over the past decade is now well known: With strong and consistent growth rates of 6%-7%, Tanzania has performed very well by regional standards. But while the poverty level in Tanzania has declined significantly, roughly 12 million Tanzanians still live on less than Sh1,300 (58 US cents) per day, with many others living just above the poverty line and at risk of falling back into extreme poverty in the event of an economic shock.

A key challenge for Tanzania's economy is the estimated 800,000 young women and men who enter the job market annually with only limited opportunities to find a productive job.

Maintaining and accelerating growth requires the right policies. Tanzania's impressive growth to date has been driven by the decisions of the past. Future growth will be driven by the decisions of today's leaders. The Government of Tanzania is clear that it is focused on achieving an annual 10% rate of growth by 2020 but, to build on the current momentum, it needs to pay attention to three key areas. These are the subject of this latest economic update.

Firstly, the government should maintain its prudent macroeconomic policy management. Secondly, there should be effective management of public investment. Thirdly, Tanzania needs to unlock the growth potential of the private sector. There is no alternative to private sector-led growth to reach the levels of investment, employment and poverty reduction that will fulfil the aspirations of the Tanzanian people.

As Tanzania enjoyed a decade of stable growth, the country also made very impressive progress towards creating an efficient, low-cost mobile money infrastructure. This helped to extend financial inclusion for the benefit of many. However, the much larger formal financial system, which is critical for the growth of the business sector, continues to lag behind. Additional steps are therefore needed to further improve the mobilization of savings, whilst providing access to affordable credit to the real economy. Interest rates remain high and access to credit very restricted, resulting in a lower ratio of credit to the private sector relative to Tanzania's GDP, compared to regional and global comparators.

Three directions are suggested to secure the prospects of citizens like Hadiya and Mzuzi and many more like them.

Firstly, undertake measures to expand access to those still not participating in financial services: almost one out of three adults lacks access to financial services, with women and citizens in rural areas still strongly disadvantaged. A complete and swift roll out of an efficient and inclusive National ID system, coupled with the shift towards electronic payments for government-related transactions, including for social transfers such as TASAF, could facilitate the expansion and deepening of financial inclusion.

Secondly, deepening inclusion by broadening the use of more advanced financial products and services could help Tanzania move towards a more formalized, transparent, and dynamic economy. This can be achieved through measures that foster competition between banks and other financial service providers.

Last but not least, Tanzanians' access to affordable long-term credit needs to be improved. Reducing the pressure of public borrowing would reduce the disincentives for lending to the private sector, which would in turn improve the availability of long-term credit.

Tanzania holds great potential for accelerating its growth for the benefit of all citizens. Taking measures to bring money within reach of enterprising citizens will help to harness their latent talent, energy and drive. This will not only contribute to growth of the economy, but widen opportunities for men and women, the Hadiyas and Mzuzi's, to benefit and play their part.

With these needs in mind, Tanzania is among the 25 priority countries within the World Bank Group's Universal Financial Access 2020 initiative, whose goal is to enable access to transaction accounts as a first step toward broader financial inclusion.

We hope that this Ninth Edition of the Tanzania Economic Update will contribute to the debate.

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About the Author

Bella Bird became the Country Director for Tanzania, Burundi, Malawi and Somalia in July 2015. She is based in Dar es Salaam, Tanzania. Prior to taking up this role, Bella was the World Bank Country Director for Sudan, South Sudan and Somalia, based in Nairobi, Kenya from 2011 to 2015. Before joining the Bank in 2011, Bella served in various leadership positions in the UK Department for International Development (DFID). From 2009 - 2011, she was Head of Governance Policy in DFID. She provided leadership to a number of international policy processes at the OECD, as well as leading policy development on governance and fragile states policy within DFID. Bella also previously served in the roles of Head of DFID Nepal and of DFID Vietnam. Prior to these positions, she spent seven years with DFID as an adviser on poverty and social issues in Kenya, Tanzania and Uganda. She played a leadership role for the UK government and internationally on policies to promote state-building and peace building, championing aid effectiveness and south-south collaboration.

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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