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AfricaJune 5 2005

Tough reform efforts pay off

Sub-Saharan Africa remains dogged by problems but in many countries there are signs of a real upturn, marked by the emergence of domestic capital markets, write Jon Marks in Cape Town, Thalia Griffiths in Nairobi, Kevin Godier and Paul Melly.No wonder Africa has been placed so high on the Gleneagles G8 agenda by a UK government anxious to show that its concern for a more just international order goes beyond military intervention in the Balkans, Africa and the Middle East.
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Human resources managers across swathes of southern and eastern Africa are confronted with the results of the Aids pandemic every day, as their staff are invalided off; the consequences of civil war and kleptocracy continue to blight some of the most resource-rich economies; and across the continent, the benefits of a decade of macroeconomic reform have yet to trickle down to help enough people. Africa badly needs the sort of lift that well-targeted external support can bring, and a Gleneagles agreement on external debt could provide a boost for many economies.

For all the bad news, there are real signs of an upturn in many sub-Saharan economies. Little noticed by the rest of the world, the planet’s poorest continent has been notching up a signal success. Any debt deal that Gleneagles serves up – if the UK can persuade its more sceptical G8 partners – will be a justified reward for some tough reform efforts, not charity.

Growth improves

According to IMF data, sub-Saharan Africa notched up its highest growth rate for eight years in 2004, with GDP rising by 5% in real terms, and per capita GDP rising 2.7%. Even many oil importing countries, which have been struggling with a dramatically increased cost of energy, managed to grow strongly: Ghana’s GDP was up by 5.5% in real terms last year.

Some oil producers did even better. But not all did so well. Nigeria’s growth rate was just 3.5%, an indicator that says much for the enduring legacy of the ‘resource curse’, despite the genuine efforts made by President Olusegun Obasanjo’s government to overturn decades of gross mismanagement in Africa’s most populous country.

Real change is touching some of the worst offenders of Africa’s years of kleptocracy (a term first coined for Congo/Zaire in the early 1960s). In Kenya, not all the high hopes that accompanied the December 2002 election of President Mwai Kibaki have been fulfilled. Rooting out a long-standing culture of corruption is proving a particularly tough task. Complaining that not enough was being done, Germany and the US suspended their funding for anti-corruption campaigns following the February 7 resignation of the government’s corruption commissioner, John Githongo.

In Nigeria, some simple government actions have made a real difference, however. Primary education is now free; the police are paid more, which makes them more inclined to fight crime; government revenue collection has doubled over the past two years and the government says that it will not need to include grants in its 2005-06 budget (to June). “People are willing to pay taxes – they can see what it’s doing for them,” a Nairobi-based banker told The Banker.

Cotton club suffers

Despite green shoots of recovery across the continent, there is no room for complacency for extremely vulnerable economies. As the price of cotton, a key export for much of francophone west Africa, has slumped, it has cost some countries a slump in export earnings that is equal to a painful 3% of GDP. The prices of many other non-oil African commodity exports rose in 2004 but are not expected to do so well this year. But the cotton crisis is probably the biggest cause for donor concern, threatening well-run but poor economies that had hitherto begun to make real progress in reducing poverty. A special meeting of African governments, donors and cotton companies was hosted by Benin in May to discuss the crisis.

The West continues to trumpet ‘trade not aid’ but cotton subsidies in the developed world, especially in the US, are partly to blame. However, donors are also concerned that China’s massive export drive, which may benefit from hard-to-gauge internal subsidies, is also a factor.

According to some estimates, the rise in Chinese cotton output in 2004 was equal to the entire cotton production of francophone west Africa. Harsh geopolitical realities suggest that hard-pressed African economies will not emerge from Gleneagles or other coming global ‘gabfests’ with a more favourable trade regime. But they can aspire to a better debt situation, and this will add to other positive trends in the continent’s financial sector to persuade some investors to look again. These trends include the emergence of domestic capital markets and the start of increased inter-African trade.

It is notable that a key reason proposed by Barclays Bank for buying South African ‘sleeping giant’ ABSA (and then reversing its already substantial African assets into ABSA) was to create ‘an African giant’ capable of exploiting the more positive trends emerging from the continent. Barclays has bid R33bn ($5.2bn) to take a key strategic position in one of the South African big four, with a view to expanding further north of the Limpopo.

Banks have a role

The balance sheets of leading African banks do not always reflect the problems of the wider economies in which they function. There are some notably solid institutions around, their strength based on doing business with a few corporate clients. The sort of micro- and small and medium-sized enterprises (SMEs) that could create jobs and new layers of wealth across the continent often miss out.

The IMF believes that unlocking the funds held in African banks and putting them to economic use is a major challenge that could bring significant yields. “The banking system is loaded with liquidity, and yet the real economy has no liquidity,” Siddharth Tiwari, deputy director of the IMF’s African department, told The Banker.

One of the obstacles is the lack of legal business infrastructure that could underpin more active lending. For example, many African farmers do not hold formal legal title to their land, which means that it cannot be pledged as security for credit. Banks are also deterred by the weakness or absence of effective bankruptcy legislation and procedures that can curb the risk of bad debt and offer a measure of security.

Mr Tiwari believes that Africa could learn from the experience of post-communist Russia, which also had to build up the institutional structure for a credit market from scratch. In this context, efforts by the African Development Bank, the World Bank Group and others to help stimulate SME development will be watched closely.

That does not mean that financial markets are being reopened to the poor, however. African governments are under strong pressure from the IMF to steer clear of new debt obligations at commercial or even sub-market rates. Moreover, the lending opportunities are relatively few and tend to be highly specific – the preserve of niche specialist banks and project financiers for occasional quasi-offshore ventures, such as the massive Nigeria liquefied natural gas (LNG) project, and Mozambique’s Mozal aluminium smelter and oil projects.

Capital markets emerge

Sub-Saharan Africa’s capital markets still lack critical mass but interest from overseas is growing steadily. When the City of Johannesburg launched its debut R700m ($112m) bond in April, under its ground-breaking public borrowing programme to raise R6bn from capital markets over the next five years, the issue was 3.8 times oversubscribed and cleared 154 basis points above the benchmark of R157.

Billions of rand have been raised in this way in South Africa’s sophisticated capital markets. Now, their structures are being copied across emerging markets from Egypt to Poland. Botswana, a diamond-rich economy that is often taken as an exception to the ‘resource curse’ rule, showed that some of the pioneering spirit had rubbed off when, in February 2004, the parastatal Debt Participation Capital Funding entity attracted a 20% over-subscription to a 1bn pula ($218m) collateralised debt (CD) bond containing tranches with redemption periods of more than 20 years.

Most other markets south of the Sahara are still a mile away from benchmarks of this depth and structure, but international interest has come on a great deal in a handful of better-performing economies. According to Francis Beddington, head of research for CEEMEA at Standard Bank: “Overseas investors are already quite significantly invested in the Nigerian T-bills market and are looking at fixed income markets in Kenya, Zambia, Botswana and Ghana in a way that was not apparent one year ago.”

Mr Beddington attributes this to various factors, particularly the search for yield and reduced correlation risk as the dollar has weakened. “These are generally uncrowded markets, driven by improving fundamentals, where the foreign reserves accumulation tends to be quite strong. Nigeria now has $22bn in foreign exchange and the currency is stable,” he says.

“There is quite a large regional investor base in west Africa,” says Gregory Kronsten, regional economist, Africa/Middle East, at WestLB. “Trade is mostly in local currency bonds; only Nigerian bonds are tradable in hard currency.”

In terms of size, Nigeria’s plan to make tradable about $10bn of government debt would represent the largest issue to date. Analysts say that issuance duration is also gradually lengthening but that investors would nevertheless prefer longer yield curves than Nigeria’s one-year T-bills, and the three years available for local investors in Ghanaian 21% fixed rate paper. “Most of the obligations in west and east Africa are short-term,” says Mr Kronsten.

In the CFA franc zone, not much is happening, says another analyst. “Benin has issued a T-bill that trades on the Abidjan bourse and Senegal is mooting a debut issue. Ivory Coast [Cote d’Ivoire] continues to make payments on its domestic debt, although external creditors have received nothing for half a decade, but investors that were able to trade quite actively in restructured Cameroonian debt two years ago have taken some hits as the liquidity has fallen away.”

Ivorian turmoil

Cote d’Ivoire is west Africa’s biggest economy after Nigeria and used to be a major player in this market, but activity has plummeted as it has plunged into political turmoil. Payments on Ivorian Brady bond commercial debt dried up in 2000 and, in the absence of donor support, state finances limp from crisis to crisis. With the CFA franc pegged to the euro, it ought to be an attractive market, but Cote d’Ivoire’s civil conflict has depressed the economies of its neighbours in the West African Economic and Monetary Union.

Sub-Saharan corporate issuance has been disappointing. Some analysts believe that this is due to a universal African preference for syndicated loans, while others argue that corporate bonds will develop only in the wake of more suitable primary market structures.

Kenya has long been touted as a potential corporate bond hub and “the market is probably as developed as Botswana”, says Abbai Belai, head of global markets coverage for central Europe and southern Africa at Deutsche Bank. However, sizeable deals have been limited to a one-off Ks4bn ($53m) floating rate note bond issue by Safaricom in 2001, fully placed with Kenyan banks, pension funds and insurance companies. A debut Ks500m issue from microfinance company Faulu Kenya was gobbled up at the Nairobi Stock Exchange in mid-April, but investors have tended to hold paper to maturity, eliminating any secondary trading.

Encouragement that the market may evolve is provided by two developments, says a senior executive of an international bank based in Kenya. “Pension funds are stepping up their participation a bit more and even more important is a move by the government to move debt issuance from the central bank to the ministry of finance.”

The latter step is designed to address the delivery-versus-payment issues and the lack of an over-the-counter market, which have stymied secondary trading. “The hope is that by facilitating more trade in government paper, trading in corporate paper will gain momentum,” says the executive.

Progress is mainly intermittent elsewhere. Ethiopia’s T-bill market excludes offshore investors. “Zambia and Namibia are becoming more interesting,” says Mr Belai, but the lack of liquidity remains a problem in both. And in Rwanda, Kenyan investment banker Jimnah Mbaru, the executive chairman of Dyer and Blair Investment Bank, has been appointed as a consultant to advise on setting up a stock exchange.

Africa must act

The consensus is that developing and broadening Africa’s capital markets will be no easy ride, given the general lack of stability and credit ratings that afflict some countries, and more specific fiscal, legal and governance issues in others. Ultimately, however, “governments have to make things happen. A lot of African countries are sitting back and taking money from donors, rather than looking at other ways to enhance their finances,” says one market observer.

Most low-income countries will remain dependent on aid to finance long-term development and – it is now increasingly recognised – most new infrastructure. Even so, “capital markets have to be the trend – governments will have to borrow more domestically,” says Mr Kronsten.

There is a long way to go but many African economies are now on the right track.

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