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CommentFebruary 25 2013

Africa needn’t be scared of bond investors

Africa's upturn in fortunes in the past few years shows the advantages of having an open economy.
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Africa’s local currency bond markets have been developing rapidly in the past few years. Demand for fixed-income assets, particularly in Ghana, Kenya, Nigeria and South Africa, has risen significantly, and much of it has come from foreigners.

Nigeria has seen heavy inflows recently. Gross investment from foreign portfolio investors totalled $13.4bn in 2012, almost triple the 2011 figure of $4.5bn. This was largely a result of the country being included in JP Morgan’s local currency emerging market bond index in October.

Nigeria has profited handsomely. Not only has its image as a place friendly to external investors been boosted and helped attract more foreign direct investment, the government’s funding costs have fallen. While the central bank should also be credited for putting inflation on a downward trend, the yields on naira-denominated sovereign bonds fell over 500 basis points in the few months after the country’s admission to the index (which is set to be followed this month by its inclusion into Barclays’ equivalent index).

These developments would not have been possible if Nigeria did not have an open capital account and allow foreign investors to exit the country as easily as they can enter it (something which has been the case since 2011, when it lifted a rule requiring non-resident buyers of government bonds to hold them for at least a year).

Having an open economy can sometimes be painful. Nigeria — and many other African countries — saw billions of dollars of outflows during the 2008 global financial crisis, which hammered their currencies and equity and bond markets. But most analysts say it is precisely because investors were able to exit at will during that period (even if they had to take losses in the process) that they have returned so quickly.

Several countries in sub-Saharan Africa are still closed to portfolio investors. Angola, the region’s third largest economy, is the most obvious example. Strict capital account controls and an underdeveloped bond market (not to mention the absence of a stock market) make it very difficult for foreigners to buy kwanza-denominated securities. But as Nigeria and others have shown, changing that would bring plenty of long-term benefits.

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Read more about:  Africa , Analysis & opinion , Comment , Africa , Nigeria