Emerging markets: Weak oil prices, stronger Africa
The falling oil price has hit oil exporters hard, especially in Africa. But the region has three strengths that should protect its capital markets from the current crisis.
Unless you have been hiding under a rock for the last six months, it would be pretty difficult to not know the effect that the tumbling oil price has had on markets across the globe.
Despite the fact that sub-Saharan African credits are working their way into the emerging market mainstream, the region has been hit hard by the oil crisis – perhaps harder than others. A crisis such as this often leads to an emerging-market selloff. Given that many of these economies are transitioning from frontier to emerging-market status, sub-Saharan African credits might feel the punch more than elsewhere.
Since oil prices have fallen, African sovereign Eurobonds have seen interest rates soar, between 50 and 150 basis points. Some investors predict that corporate debt issuance in 2015 will be subdued. Last year, African debt was coming into its own. This year, investors are turned off and debt markets are closing up, say some market participants.
In the past, Africa has found it difficult to claw itself back after a crisis has hit.
Transparency and sophistication
This time, however, things are different. Firstly, African capital markets are more robust than they have ever been. A growing interest in the region has increased transparency and sophistication in capital markets throughout Africa. Many African sovereigns have the structures in place to act as a buffer to falling demand offshore. Dynamic domestic markets in Nigeria, Ghana, Kenya and elsewhere can offset any lack in international demand for debt and serve sovereign and corporate needs, especially as dollar-denominated debt becomes harder to service.
Secondly, the crisis has brought African diversification further to the fore for investors and fund managers. Africa’s 54 countries have reacted differently to volatile commodities prices. Nigeria’s naira and Angola’s kwanza have been spiralling out of control, despite efforts by central banks and ministers to stem the fall.
Non-oil exporters such as Kenya and Rwanda, however, have less pressure on their respective currencies. As oil imports become cheaper, non-oil exporters will be able to balance their books a little better and may even see increased FDI flows as the cost of doing business becomes cheaper.
And thirdly, investors are becoming savvier to the fact that a long-term outlook works better in Africa. Private equity and venture capital are gateways into the African growth story. Hot money might have flowed out of Africa, but investors with a long-term view are not worried about the short-term effects that the oil price is having on the region. It will eventually recover. And African capital markets will be all the stronger.