Capital markets: Funding Africa’s future
Africa has long had a fraught relationship with the capital markets – can the continent put that difficult history behind it and, crucially, fund the next stage of its development?
Makhtar Diop has enjoyed a long and varied career, in politics as well as at international financial institutions. He was recently appointed vice-president for infrastructure at the World Bank, after six years as its vice-president for Africa.
Yet, when asked to name the greatest achievements of his career, he does not hesitate. He promptly cites Senegal’s first sovereign credit rating, for which he worked during his short tenure as that country’s finance minister at the turn of the century.
Seeking a rating was neither a simple nor an obvious ambition at the time. South Africa, rated by Moody’s since 1994, was then the exception rather than the rule on the continent. To gain the support of Senegal’s then president Abdoulaye Wade for this endeavour, Diop told Wade that he would shoulder the blame if the bid failed. If it went smoothly, however, Wade would take the credit.
Wade agreed and Diop’s effort succeeded: Standard & Poor’s rated Senegal.
Obtaining that recognition was a game changer for Senegal and the broader region.
“To people working in the City of London or on Wall Street who were looking to Africa, it was difficult for them to make a distinction between countries,” Diop says of the time before credit ratings reached the continent.
After Senegal, many other countries received ratings and investors finally started to acquire a more granular understanding of the opportunities and challenges of Africa’s markets.
The introduction of sovereign credit ratings was just one step in Africa’s developing and often fraught relationship with credit. Today, more African countries than ever have access to international debt, while local market infrastructure is also undergoing reform in an effort to promote equity and debt capital markets at home.
To people working in the City of London or on Wall Street who were looking to Africa, it was difficult for them to make a distinction between countries - Makhtar Diop, World Bank
Investors are eager to tap into the continent’s potential and African issuers have a pressing need for capital. An estimated $100 billion a year is required to fund infrastructure projects alone across the region.
Benedict Oramah, president of the African Export-Import Bank (Afreximbank), says Africa needs a decade of capital raising at that pace – for a total of $1 trillion – to bring its infrastructure up to an acceptable level.
“That is more than the combined budget of African countries over the period,” he says. To raise that much, he insists, “attracting private sector money is critical.”
But does the continent have access to sufficiently deep pools of funding to meet that objective? And can African investors contribute to this effort? As Euromoney celebrates 50 years of African coverage, bankers and policymakers look back on decades of capital raising and consider the challenges and opportunities ahead for the continent’s many hopeful issuers.
Euromoney’s first big story about African finance came in 1978, when the magazine devoted its cover to Nigeria’s second-ever jumbo loan. Six of the largest banks in the world had agreed to underwrite $500 million for the African borrower. Nigeria was then earning an impressive $12 billion a year in oil export revenues and banks were eyeing the newly rich developing state with great interest.
But the deal quickly ran into problems. For one, Nigeria’s economic situation was fast deteriorating as its imports were rising much faster than its oil exports. More damaging still, the country’s military government had failed to inform its lenders of other debt it had incurred, as well as of an ongoing legal dispute with wide-ranging implications for its creditors.
More generally, the deal was plagued with immense confusion among international banks over Nigeria’s projects. There were charges of misrepresentation on both sides, threats and counter-threats, and an overarching sense that neither side understood the other’s goals and sensitivities.
As the Nigeria loan neared signing, a lead manager asked: “Can we rely on their creditworthiness after this?”
|Makhtar Diop, World Bank|
Although particularly arduous, that early sovereign debt deal exemplifies the many struggles African countries have faced in raising capital. Issues of hidden debt, endless legal battles and confusing term sheets still sometimes affect the continent’s access to credit today, as does a sense that international investors fail to grasp the specificities of African markets.
Still, when Euromoney surveyed Africa’s credit risk in May 1980, there was much cause for enthusiasm. The African Development Bank, then Africa’s best risk for bankers, according to this magazine, was raising hundreds of millions of dollars at competitive rates and with heavy oversubscriptions. It had by then successfully raised money through government borrowings, commercial loans and even a bond issue.
Algeria, then one of the biggest borrowers on the continent, was managing to improve the terms it commanded. Kenya had just raised its first Eurocredit, for $200 million, through a general purpose loan – a great achievement at the time, as most banks preferred to lend for specific projects.
Nigeria had struggled with its jumbo loan not long before, but the country was still, in theory at least, one of the best risks in Africa thanks to its Opec status and its other natural resources.
In the aftermath of the Soweto riots of 1976, South Africa lost access to foreign credit for two years; by the turn of the decade, international banks were willing to do business with the state once again.
Following these early advances came harder times for the continent’s sovereign issuers, however. European and US interest rates were rising, world trade was contracting and commodity prices were in free fall, making developing countries increasingly unlikely to repay the debt they had taken on.
In the late 1970s only two African states needed IMF help. By 1981, 21 African countries drew loans from the IMF – with all the pain the fund’s structural adjustment programmes bring. Senegal, Liberia, Togo, Sudan, Central African Republic, Uganda, Zaire (now the Democratic Republic of Congo) and Madagascar were in recession.
Some African borrowers were still attractive to international finance in the very early 1980s, including Angola, Kenya, Tunisia, Algeria, Zimbabwe, Botswana, Gabon, Cameroon and Zambia.
“Africa may be in recession, but it’s still an exciting continent,” one American banker told Euromoney at the time. “There are so many under-borrowed countries.”
First among the borrowers was Nigeria, which in 1981 took 60% of syndicated credits to sub-Saharan Africa. Seventy-three banks led or co-led loans to Nigeria that year, against 25 in 1980.
But by June 1983, Euromoney was writing ‘The loan drought hits Africa’. It had become clear that the global contraction of the syndicated loan market had halted Africa’s progress.
|Benedict Oramah, Afreximbank
The Latin American debt crisis, which began with Mexico’s default in 1982, had wide-ranging consequences for commercial banks’ risk appetite, compounding Africa’s credit problems.
Oramah thinks back on that time as “a lost decade for the continent”.
Before the 1980s, Africa’s growth had been faster than Asia’s, he recalls.
“After that debt crisis happened, Africa went into a massive decline,” he says.
Per capita growth in gross national product was negative for most of the decade.
“Africa lost access to the trade- and project-finance funds it had been getting,” Oramah adds. “Africa lost a great [deal of] momentum.”
Speaking to Euromoney in 1990, Babacar Ndiaye, president of the African Development Bank, said the continent had learned the lessons of the previous decade.
“It is true that today, all over the continent, there is a strong will from government to see the private sector play a major role in development activities,” Ndiaye said. “They know there are problems with [inefficient] bureaucracies, but here again many countries are trying to correct the situation.”
The decade certainly got off to a promising start, with the repeal of apartheid legislation in South Africa bringing about a lifting of sanctions for that country. Planeloads of bankers and investors were arriving, Euromoney’s August 1991 cover story recorded, and capital was flowing in to the country.
But South Africa was then – as now – something of an outlier. Outside the Johannesburg Stock Exchange, Africa’s equity capital markets were thin and illiquid, as they still largely are today.
By mid 1994, the four largest Africa funds – Alliance Capital’s Southern Africa fund, Morgan Stanley’s Africa fund, Fleming’s New South Africa fund and Emerging Markets Management’s Africa fund – had between them raised over $400 million. But there was still little for them to invest in.
Excluding Johannesburg, sub-Saharan Africa’s 12 stock markets had a combined market capitalization of just $12 billion.
Beyond equity, much of the continent had still not recovered from the debt woes of the 1980s. By 1996 the situation had become so bad that the IMF and World Bank put in place an initiative to provide special assistance to heavily indebted poor countries (HIPC).
Although global in scope, the programme identified 30 sub-Saharan African countries as highly indebted, out of a total of 36. In 2000 alone, 17 sub-Saharan states were admitted to the programme, including Benin, Ghana, Senegal and Zambia. The initiative has so far provided $76 billion in debt-service relief, most of it to Africa.
The situation since then has changed markedly. After Senegal received its first sovereign credit rating under Diop, a dozen other African countries swiftly followed suit, finally giving sub-Saharan African borrowers an avenue for credit beyond bank loans and development agencies.
Among these was Ghana, which emerged from the HIPC programme in 2006. The following year it entered the bond market, with a B+ rating from Standard & Poor’s and Fitch under its belt. Having just discovered oil and gas, the country needed funding to build the required infrastructure.
Peter Sullivan, head of public sector Africa at Citi, worked on that deal. He tells Euromoney that it took a year to bring the country to market because of investors’ unfamiliarity with the issuer and the issuer’s unfamiliarity with the market.
“Some people mixed Ghana with Guyana,” he says of the bond’s roadshow. “It was scary at times. Initially there was a lot of education to be done, on both sides.”
Still, Ghana was somewhat more fortunate than other would-be African issuers.
“Most people had a sense of where Ghana was on the map,” says Sullivan.
Ghana raised $750 million with a maturity of 10 years, making it the only sub-Saharan sovereign bond issuer other than South Africa at the time. Investors were eager for African exposure as countries emerged from the HIPC programme.
Ghana’s debut was four times oversubscribed and in the years that followed, countries as varied as Côte d’Ivoire, Kenya, Nigeria, Senegal, Rwanda, Zambia, Namibia, Ethiopia, Morocco, Tunisia and Cameroon all came to market.
“There’s still a lack of supply from the region,” says Sullivan, but the situation has improved. “Investors have certainly come up the curve in their knowledge and appreciation and differentiation of African issuers.”
Bolaji Balogun, head of investment bank Chapel Hill Denham, agrees.
“These markets are now substantially more open than they were,” he says. “I remember doing the first foreign investor trades in Nigeria back in 1996. That was a lifetime ago.”
Compared with what one sees today, he adds: “Those were very, very small trades.”
Following the financial crisis of 2008, quantitative easing by the world’s largest central banks has generated increased capital flows to emerging markets in general and to Africa in particular, as investors hunt for yield.
This has helped establish Africa’s place in the international debt markets, generating large books and more affordable rates for many of the continent’s issuers.
In March this year, Ghana gathered a book of $17 billion for a tripartite bond issue of $3 billion, including a tranche due to mature in 31 years. A month earlier, Egypt issued a $4 billion bond, including a 30-year tranche, which was also heavily oversubscribed.
Nigeria was the first African sovereign to test investor appetite for such long paper in 2017, issuing $1.5 billion of 2047 funding to strong demand. Such distant maturities now look set to become commonplace.
On the back of the sovereigns, you have large businesses also being able to now start tapping the international market” - Hasnen Varawalla, Absa
Yvonne Ike, head of sub-Saharan Africa excluding South Africa at Bank of America, worked on the latest Ghana bond issue.
“An increasing amount of foreign currency liquidity is being made available for the right quality names out of Africa,” she says. “The maturity profiles are increasing and the frequency of the issuers is also increasing.”
Twenty-one countries on the continent now have outstanding sovereign Eurobonds, from just 10 nine years ago. Issuance reached a record of $28.4 billion in 2018.
“Across the last 10 years, one thing you’ve of course seen is more and more countries having access to the sovereign bond market and issuing sovereign bonds,” says Hasnen Varawalla, co-head of banking at South Africa’s Absa. This has had a positive collateral effect across the continent.
“On the back of the sovereigns, you have large businesses also being able to now start tapping the international market,” he says.
Among these newcomers is Nigeria’s Access Bank.
“We are regular issuers in the Eurobond market,” says its chief executive, Herbert Wigwe. “Go back 25 years, how many Nigerian banks could do that? But now, because of best practice, people are beginning to see the levels of governance and transparency are there for people to access money more and more in the international markets.”
Nor is the continent resting on its laurels. Ghana, for one, is considering even longer-dated paper, with a debut century bond said to be in the offing. While some find the prospect unlikely, Miguel Azevedo, Citi’s head of investment banking for the Middle East and Africa excluding South Africa, believes it may happen.
“If Argentina can do it, why not?” Azevedo tells Euromoney. “People believe that the probability of things worsening in the very long future is very low. They can only improve; hence time is probably a good idea. And it comes with a pick-up in yield, of course.”
Beyond century debt, other innovations are also reaching the continent. Nigeria pioneered the first-ever SEC-registered diaspora bond in 2017, raising $300 million from Nigerian expatriates, and last year it issued Africa’s first sovereign sukuk. In 2017, Nigeria also became the first African country to issue a green bond. Kenya may soon follow. It has innovated in another area already, raising its first retail bond, purchasable via mobile phone, in 2017. While that deal attracted less demand than many had hoped, such debt could become more common in coming years.
Saif Malik, co-head of banking for Africa and the Middle East at Standard Chartered, says that Islamic finance is one area likely to gain traction following Nigeria’s sukuk issue. StanChart plans to tour Johannesburg, Nairobi and Lagos in June this year with partner Islamic Finance News, to discuss this form of lending with government officials and private-sector players.
“There’s a need for more education,” says Malik.
“We see our role in these markets as finding different pools of capital,” he adds.
Options for capital raising are certainly growing.
“You see railroads in Tanzania being done through a Turkish ECA [export credit agency] partner and a Turkish company,” says Malik. “You see hospitals built in Angola through the UKEF [UK Export Finance] guaranteeing it, and similar projects in Zambia with power.”
Bpifrance, the French public investment bank, is among the foreign institutions providing new pools of capital on the continent. The organization has launched a direct investment fund of €77 million to invest in African companies, as well as in French companies looking to grow in Africa, and is looking at other means of supporting economic growth on the continent.
Pedro Novo, head of export finance and export promotion at Bpifrance, says: “The idea is to provide the necessary capital on a continent where liquidity is scarce to accelerate and structure the growth of companies that have the requisite technical, industrial and human capacities and deserve to be supported, when banks provide limited financial support to industrial development in the medium and long term.”
Although his role is global in scope, Novo spends more than half of his time on projects related to Africa.
People believe that the probability of things worsening in the very long future is very low - Miguel Azevedo, Citi
Meanwhile, projects of public importance but with limited commercial value can still benefit from support from institutions such as Afreximbank. The bank just recently lent $15 million to fund an upgrade of Juba airport in South Sudan.
“It would be naïve to expect to see other commercial banks rushing to South Sudan today,” says Oramah at Afrexim.
But perhaps the most transformative new actor in African debt has been China, which lent more than $10 billion a year to sub-Saharan countries between 2012 and 2017, and last year pledged a further $60 billion to the continent.
Among the largest recipients of Chinese investment have been Angola, Ethiopia and Kenya, where Chinese lending has funded large infrastructure projects.
“China provides Africa with a valid option,” says Ike at BofA.
These loans typically target areas of great importance to Africa’s development, she says, with transport, power, mining and communications the top priorities.
“The other good thing about the Chinese loans is they’re done very quickly,” she adds.
Similar bilateral loans from the west take up to nine years to be negotiated, she says, whereas Chinese debt can take just a few months.
The development of local markets has also started to bear fruit. Most sub-Saharan African capital markets regulators are now members of the International Organization of Securities Commissions, meaning that they meet certain global standards. As a result, capital markets policies and practices are being updated across the continent.
Last year alone, Malawi launched a depository; Nigeria, Kenya and Ghana upgraded their depository platforms; Ghana started to operate its single depository for government securities, equities and bonds; Namibia launched a depository development project; Nigeria launched a securities lending capability; and South Africa completed the upgrade of its bond settlement platform.
There is more to come. Nigeria is expected to introduce a new derivatives market; Kenya to launch a derivatives exchange; South Africa to upgrade its equities’ settlement platform; Angola to open its equity market to global investors; and Ethiopia to open a stock exchange.
South Africa is introducing the ‘twin peaks’ model of financial regulation pioneered in Australia, while Tanzania and Zimbabwe are both reviewing their capital markets acts. The stock exchanges of Johannesburg, Casablanca, Nigeria, Nairobi, Mauritius and francophone west Africa are working together to share information and address liquidity constraints.
Hari Chaitanya, head of investor services product management for transactional products and services at Standard Bank, says of these changes: “Improving liquidity, driving new listings and increasing intra-Africa investment rates will also improve access to African opportunity.”
Challenges do remain. The tightening of monetary policy in the US and Europe may lessen the appeal of African borrowers to international investors, leading to higher rates and shorter maturities.
Moreover, while some indicators show debt levels to be low – sovereign borrowers’ outstanding Eurobonds represent well under 20% of their respective GDPs – once all borrowing is factored in, especially that from China, over-indebtedness is becoming an issue for some. And while Chinese lending has its advantages, some bankers warn that the terms attached can be opaque and overly favourable to the creditor.
Djibouti is one country where warnings are being sounded over the level of Chinese debt. The east African state incurred heavy debt for Belt and Road projects and could struggle to pay it back.
And issues of governance still plague certain borrowers. Mozambique has been embroiled in a scandal surrounding its sovereign borrowing for the last six years. Debt raised to fund a fishing fleet was redirected to other uses instead, without investors’ consent.
While international debt and equity markets are technically open to African corporates, only a few take advantage of that opportunity. Last year saw just two noteworthy IPOs connected to Africa – petroleum company Vivo Energy and microfinancer ASA International on the London Stock Exchange – and corporate bond issues are also rare.
“Very few companies have access to the bond market,” says Arnold Ekpe, the former chief executive of Ecobank, “because the requirements are so stringent. You have to ask yourself whether it’s worth your while.”
Corporates need credit ratings to enter the market, so as Malik says: “To issue a bond is not a cheap exercise.”
He adds: “Investors find it a lot easier to wrap their heads around a sovereign than a corporate in Nigeria, for example. It’s an education process: we’re talking to a number of corporates at the moment in South Africa and just a couple of other markets in Africa that are looking at this. But it takes time.”
Meanwhile, despite capital markets reform, local markets remain deficient. Many stock exchanges are little more liquid than they were in the mid 1990s, in part because African capital is restricted in its movement. African pension funds hold an estimated $700 billion, but little of it is being deployed to support business growth.
“Historically, it’s been very much focused on government securities and real estate,” says Sullivan at Citi. “If you’ve looked in the last 10 years, you drive from the airport in Lusaka, you see a new mall that goes up, and who’s financing that mall? It’s the pension fund.
“It’s a good thing, but too much of a good thing,” he adds. “What you’re not seeing as much as you would like to, is the broadening of the investment options or opportunities. Part of that is the local capital markets, which are not as liquid as they need to be. They don’t have the scale.”
Often, this money is also restricted from travelling abroad, where markets might be more appealing. Kenyan pension funds, for example, can really only invest in the Nairobi Stock Exchange, Sullivan says, meaning promising markets such as Rwanda or Uganda are out of reach.
“It can’t get that natural geographical diversification, so it’s restricted,” he explains. “So where is it going to put its money? Government securities.”
IPOs of African stock are rare and often take place outside Africa because of the lack of liquidity in the home markets. And promised privatizations, which would bolster exchanges’ appeal to investors, are slow to happen.
Azevedo, for one, does not see any great improvement among the smaller stock markets. The exchanges in Johannesburg and Lagos – and to a lesser extent, those in Nairobi, Casablanca and Cairo – will remain the only active equity markets on the continent for the foreseeable future, he argues.
But many are hopeful that these issues are being addressed. African capital – savings, pensions and central bank reserves – have grown substantially and may be put to work as markets harmonize across borders. Regional economic collaborations such as Ecowas in West Africa and the African Continental Free Trade Agreement are furthering this effort.
Once investors are convinced that their investment in the one African market is in fact an investment in the broader region, more capital is expected to pour in, not just for sovereign bonds but also for corporate bonds and equity deals.
“We think that private investment will come when people are confident that the market exists,” Oramah says.
Meanwhile, bankers say that investors have developed a far greater understanding of African markets than they once had. When the ‘tuna bond’ scandal emerged, it did not affect perception of governance risk beyond Mozambique. And Africa’s borrowers are also becoming increasingly savvy in their dealings with China, as the risks and constraints of that relationship have become more obvious.
Local markets are beginning to show potential. One example was the 2017 listing, on the Dar es Salaam Stock Exchange, of Vodacom’s operations in Tanzania. That deal was worth more than $200 million – equivalent to all of the Tanzanian IPOs over the previous decade. Not only was it very large by that market’s standards, but it also received heavy retail support.
The continent still needs support from the development partners, the DFIs, the Europeans, the Chinese. But more importantly, we have to take our destiny in our own hands” - Benedict Oramah, African Export-Import Bank
“This is the kind of thing we very much want to be part of because it’s important for the development of Africa,” says Absa’s Varawalla. “We had 40,000 retail investors participate. That’s important, because one of the things you do want to see in Africa is a broader participation in the equity capital markets.”
To further develop the market, Novo at Bpifrance argues, the solution is likely to be greater cooperation between all of the different players now providing capital to Africa.
“The future is a logic of increasingly blended finance,” he says, “with a far greater cooperation between public and private actors, in operations with DFIs [development finance institutions], development banks, private banks, private and public insurers. We’ll see co-funded and co-insured operations with the public and private sectors working together, in particular in the priority sectors that are education, power, sustainable development and the agro-industry.”
One example of this is a €100 million contract between Dakar and the French company Fonroche to provide solar streetlights to the city. Co-funded by the French state and Bpifrance, the sale is “the deal of the century” for Fonroche and helps bridge Senegal’s infrastructure gap.
“We have built the foundations,” Oramah concludes. “The cotinent still needs support from the development partners, the DFIs, the Europeans, the Chinese. But more importantly, we have to take our destiny in our own hands. Africa has a pool of resources to be able to challenge itself. We need to be more imaginative in finding ways to move those resources towards what would make things better for all of us.”