By Allan Gray
Investing in Africa: Is there a positive story to tell, or is it a forgotten story amid talks of rising global inflation, high food prices, supply shortages, the war in Ukraine and climate change goals? Where does Africa – a rich continent driven by agricultural exports and commodities – fit in and is there is still opportunity?
According to Londa Nxumalo, fund manager of the Allan Gray Africa Bond Fund, rising global interest rates, food and oil prices pose a multiple whammy for African credits.
“Like many risk assets, African bonds benefited from loose developed country monetary policy over the past decade, which resulted in inflows; however, these have now begun to reverse,” explains Nxumalo.
She says that higher food and oil prices have implications for current accounts, inflation and (in some cases) fiscal accounts.
“While higher oil prices are a boon for oil exporters, they are a curse for oil importers. And higher global food prices affect all,” explains Nxumalo, adding that this scenario is playing out very differently in key African countries.
She explains that in Egypt the banking system’s net foreign assets have been declining since early 2021, pointing to foreign investor outflows. Egypt is the largest wheat importer in the world, and bread is heavily subsidised. Therefore, higher wheat prices will put pressure on both the fiscus and the current account. So far, the Central Bank has responded by devaluing the Egyptian pound and hiking interest rates by 300 basis points.
Meanwhile, Nigeria, an oil exporter, has been struggling to meet its OPEC quota due to pipeline vandalism and a chronic lack of investment in oil infrastructure, resulting in the country partly missing out on higher prices.
“Whatever revenue benefit there is from higher oil prices will largely be eroded by fuel price subsidies. These were supposed to be scrapped in June, but the government has balked at doing this in a pre-election year,” says Nxumalo.
She says that in Ghana, assets remain under pressure, with the Eurobonds trading at distressed levels.
“Market jitters over fiscal sustainability led to the Eurobonds and the cedi selling off sharply from January. Moody’s downgrade to Caa1 made matters worse. The authorities are adamant they can stabilise the ship without an IMF programme, which is the very thing that may be needed to restore investor confidence.”