The viability of capital markets in African countries is looking more promising, underlined by a successful bond issue denominated in naira by the African Development Bank. Edward Russell-Walling reports.
There was a time when an invitation to invest in the Nigerian naira would have sent shivers down the spine of even the most adventurous emerging markets fund manager. But not today. In January, investors on both sides of the Atlantic were more than happy to snap up N12.78bn ($100m) in one-year bonds issued by the African Development Bank (AfDB).
Most African countries have never had their own capital markets, but there are reasons why that could, and should, change. An ability to tap domestic markets in local currencies would benefit a growing African private sector as well as public funding on the continent. Insulation from foreign exchange movements could bring considerable advantages at both macro and micro levels.
Viable markets
At the same time, several African economies are improving to the point where creating and sustaining viable markets seems within the bounds of possibility. Debt relief and pay-down programmes have helped to clean up national balance sheets. Budget deficits are falling, and the quality of spending is improving. The commodity boom has brought more prosperity, and better tax collection has enhanced government revenues. As borrowing requirements fall, so do interest rates.
If things are looking up for the continent, they have been looking up for the AfDB, too, under the new management of president Donald Kaberuka, one-time Rwandan finance minister. The bank seems determined to play a much bigger role than before in African development financing. It also wants to do what it can to help individual governments to develop their domestic capital markets.
The naira issue, and others like it, may prove to have been an important step in that process. The AfDB has used its own triple-A rating to spotlight individual currencies with a high degree of success. Its first transaction of this kind, in December 2005, was denominated in Botswanian pula, for the equivalent of about $40m. That was followed early last year by a smaller deal in Tanzanian shillings and, last October, by a third in Ghanaian cedi. Such was the demand for the cedi issue that it was increased from the equivalent of $30m to $45m.
“It’s part of a strategy of diversification, and of bringing some visibility to African markets that have not been in the forefront of investors’ minds,” explains AfDB group treasurer Stefan Nalletamby. “And there is appetite, linked to an improved credit environment for many African countries, following several debt relief initiatives.”
Breaking new ground
The naira transaction pushed the boundaries in several ways. It was the first naira-denominated transaction issued by a supranational, the AfDB’s largest-ever debt issue in a local African currency, and the first with an African lead manager – Standard Bank. It also involved the first interest rate and currency swap in naira, with First Bank of Nigeria and Stanbic Nigeria as counterparties.
Investors in the naira deal are buying AfDB’s top-notch rating but they are also buying currency risk – the deal settles in Europe in dollars. They are getting a coupon of 9.25% by way of compensation, but even that might not have been enough if Nigeria’s economic fundamentals were not looking so respectable. The country has paid down more than $30bn of debt in the past two years and is poised to become – with the exception of some tricky oil-linked warrants – virtually debt-free. Its foreign reserves were recently reported to have exceeded $40bn.
Worldwide appeal
As a result, most investors took the view that the naira would, if anything, strengthen against the dollar – and since the deal closed, it has done just that. Interest was widespread. More than half the investors came from the US (52%), 31% from the UK, 15% from continental Europe and even 2% from the Middle East. Fund managers took nearly 78%, banks bought 22% and there was some minor retail participation.
This will not be the last local currency deal from the supranational but, as Mr Nalletamby points out, these things do not happen in a flash. “We are looking at other currencies,” he says. “And we are looking at repeats. But it takes time. There are a lot of administrative hurdles to overcome, both in our own internal processes and with local authorities.
“The object is to maintain the visibility. These are not the longest deals on earth but, as more people become aware of them, they may bring in additional investors.”
