Africa debate: Africa’s future is within reach

Elliot Wilson
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For investors, the continent is not the high-debt, high-distress place it was a decade ago. It has come a long way in a short time. Now it is 54 countries that are generally fast growing and with single-digit inflation.

SC, Exotix We think there are big opportunities in financials. Regional banks are relatively underleveraged compared with their emerging market peers, and now there is a wider range of sovereign Eurobonds and a greater effort to tap into private capital internationally. It’s possible that the banks can start raising the capital to expand their balance sheets to start lending, which is what they need to do. There are only a handful of outstanding corporate bonds in sub-Saharan Africa, most of them issued by Nigerian banks, but we expect that market will grow.

VK, Nedbank The emergence of pan-African banks will help in terms of raising money on the capital markets because they are bigger. A Ugandan bank would be too small to be able to issue debt on the international capital markets.

PHA, Ecobank The reality is that banks in Africa today are in dire need of capital. That is a constraint. If you want to see increased capability in terms of lending, we need to see a significant push in terms of raising capital and structured finance. Most banks in Africa don’t have an originate-to-distribute business model. They tend to lend and keep it on the balance sheet until maturity, which is a model that no longer exists in any banking system anywhere in the developed world.

Euromoney How can we get closer to the ideal situation?

PHA, Ecobank I don’t think the main focus should be looking outside Africa to raise money. There are substantial local pools of financing that banks can tap. One thing that needs to be done is working out how to allow pension funds in Nigeria, say, to invest in a bank in Ghana or Côte d’Ivoire. Today, it’s not possible. South Africa recently took a bold decision to allow its pension funds to invest outside the country. Doing that, they can deploy a huge amount of capital, something like $15 billion to $20 billion, that they can invest in middle Africa over the next few years. Such countries as Nigeria should follow suit. That’s how you build pan-African champions and create intra-African trade.

BB, Chapel Hill Denham Nigerian pension funds have grown from a standing start in 2006 to $28 billion in assets under management now. Nigerian pension funds can deploy up to 10% of their assets outside the country.

PHA, Ecobank
But we’re not there yet. Even now, if you advise Nigerian pension funds to invest in equities, you get a negative reaction.

BB, Chapel Hill Denham
I beg to differ and I’ll tell you why. In the last two Eurobond issuances involving Nigerian institutions, in one deal around 30% of the book was sold to Nigerian pension funds. Around 80% of Nigerian pension funds’ money is invested in Nigerian government bonds, treasury bills or money markets. So when they go outside Nigeria, they aren’t going to take massive risks and that is the issue. If there is a good-quality Eurobond being issued by GT Bank or First Bank, you’ll see very substantial participation by Nigerian pension funds.

PHA, Ecobank We don’t believe that Eurobonds should be the solution, either from an issuer’s or an investor’s perspective. Investors don’t make great returns from Eurobonds. We need to promote local-currency financing and to enable governments to make large-scale issuances more effectively and efficiently in local currencies. You’ll see huge growth there in the future.

BB, Chapel Hill Denham I agree, and I see domestic issuance in local currencies becoming an important Nigerian theme. We raised $1.7 billion for the Lagos state government over a four-year period. In December 2013 we priced a $550 million local-currency bond in Lagos, sold 100% to Nigerian investors with a three-day roadshow. So depth is possible in the domestic markets, but it’s probably only Nigeria and South Africa that have that capacity on the continent.

AD, Ecobank There are two issues I see here. First, local-currency financing has to increase as capital markets are constrained on the supply and demand sides. Demand for local-currency bonds is strong – bonds can be oversubscribed by 150% or more. Second, the sometimes limited pools of capital available to African governments. Former colonial partners are pulling back due to fiscal constraints at home, so bilateral funding is likely to diminish. What is interesting is the expansion of Eurobond issuance, and once you build a track record – as with Ghana, which is coming back for a third Eurobond – it’s easier to raise money as investors have greater comfort. And then there’s the diaspora: African governments aren’t tapping into these remittance flows as successfully as they should be. Kenya and Nigeria have had varying success with diaspora bonds, and that’s an area we expect will continue to grow.