Sub-Saharan Africa, with the exception of South Africa, is usually not at the forefront of fixed income investors’ minds when thinking about where to look for investment opportunities. All too often negative news outweighs any potential positives, and it is always easier to say ‘no’, as opposed to ‘yes’ when it comes to questions about investments. However, that is not the way we, at Quantum Global Investment Management, look at Africa.
The press has been very active regarding Africa’s, and especially sub-Saharan Africa’s, political and economic developments, as well as the famous demographic dividend that the continent will enjoy in the future. The IMF’s January 2013 update on the World Economic Outlook forecasts sub-Saharan Africa to have a GDP growth of 5.8% for 2013 and 5.7% for 2014. Nevertheless, we see fewer articles about the financial developments that are happening in sub-Saharan Africa.
Under the IMF and World Bank heavily indebted poor countries (HIPC) initiative that started in 1996, not only have many countries had their debt forgiven, but they also had to implement specific policies in order to be eligible for the assistance. One of the key consequences is that we are currently looking at countries that have debt levels that are for the majority below the 50% debt/GDP mark and falling.
Of the whole sub-Saharan Africa region there are only 10 countries that have issued Eurobonds, the latest addition to the select group being Tanzania which was issued via a private placement. Kenya and Rwanda both stated that they are considering issuing inaugural Eurobonds towards the later part of 2013. Countries such as Nigeria, Ghana, Angola are looking to issue their second Eurobonds later this year. The IMF estimates sub-Saharan Africa’s total GDP to be US$1.36 trillion, while the current total amount of outstanding sovereign Eurobond debt is $8 billion.
However, one should not omit the local debt markets. True that some of the markets can be illiquid, which could make it difficult to get access to the bonds. Nigeria, being the biggest sub-Saharan Africa market, has had its local bonds included in the GBI-EM Index, where the five local Nigerian naira denominated bonds account for approximately 1.84% of the overall weighting. This will improve the local bonds liquidity.
Looking at the different countries across Africa, one cannot stress enough about how they differ from one another and how inappropriate the one block approach is. In sub-Saharan Africa alone, oil/gas exporting countries such as Nigeria or Angola, and the importers of oil/gas such as Kenya or Senegal foster very different economic and financial establishments.
Having just touched on the commodities and sub-Saharan Africa, another issue is the consistent belief that the region is a pure commodity play. Yes, commodities are a key component to the region but to stop there is to miss the point of the current developments.
The increase in political stability over the past years, together with consistent collaboration and application of the policies advised by the likes of IMF and World Bank, have removed certain hurdles that kept sub-Saharan Africa in a state of limbo. The application of more prudent fiscal and monetary policies combined with the political stability have given way for key reforms to take place that started to strengthen key institutions and promote a better application of the law, giving the countries the possibility to develop upon a more consistent growth path. And the region is reaping the benefits now from these applications. This does not mean that issues such as corruption, some dubious applications of laws and weakness of certain institutions does not exist, but we need to consider the progress sub-Saharan Africa has made over the past 15 years.
As business started to liven up again in the region, so did the local financial markets as a consequence. True, the local financial markets rightfully deserve to be labelled frontier markets but also here we can see the progress. Local yield curves are being extended; markets are getting deeper and better understood by foreign investors. It is this progress that has enabled sub-Saharan Africa to make a viable comeback into the international investment arena and justifies why it can no longer be ignored by emerging market and frontier investors.
In an environment where both developed market bond and emerging market bond yields are at historic lows, sub-Saharan Africa offers an attractive alternative. At Quantum Global Investment Management we have been investing in sub-Saharan Africa local debt and hard currency as well as sovereign, corporate and supranationals since July 2012.
We believe that the growth and development in the African financial markets will continue to offer attractive investment possibilities, while also helping the economic growth of the various countries.
Joe Delvaux is head of African & Middle East investment at Quantum Global Investment Management