Morocco’s Arab/African option

Morocco is trying to position itself as a gateway for international investors wanting to expand into Africa. Can it succeed? Published in The Middle East, 10 December 2014

At the height of the Arab Spring, in September 2011, Morocco and Jordan were both offered membership of the GCC, in what looked like a rather desperate attempt by the Gulf states to draw the region’s monarchs closer together at a peculiarly threatening time.

The plan, which always seemed a bit outlandish, has gone nowhere. These days, if it is mentioned at all by Moroccans, it is often accompanied by a wry smile. Instead, many in Morocco seem more interested in defining themselves as African rather than Middle Eastern.

“We are an African country,” says Said Ibrahimi, chief executive officer (CEO) of the Casablanca Finance City Authority. “We have ties with the Middle East but we are more African than Middle Eastern.”

“Apart from oil what do we buy from the Middle East? Not much,” says another senior business figure from Morocco. “We have ties of language and religion with the Middle East and we welcome Middle East investors to Morocco. However, from an economic point of view we are more integrated with Africa. Moroccan companies are very much involved in Africa, but they are not involved in the Middle East.”

In many ways such statements simply reflect the geographic and economic realities. Morocco is of course part of Africa, but while it also belongs to the Arab world it is a long way from the economic heart of the Middle East. Rabat is closer to New York than it is to Abu Dhabi or Dubai and its most important trading partners lie in Europe to the north rather than among the other Arab countries to the east.

“Morocco generally falls between the cracks between London, Paris and Dubai,” says Tarik Senhaji, director general of the Moroccan Fund for Tourism Development. “Technically we are in the MENA region but we feel African, European, Arabic, many different things.”

The Moroccan government and its business community is now trying to harness that sense of being as much African as anything else by making a concerted effort to establish the country as a business and finance hub for Africa.

At the heart of that strategy is the country’s commercial capital Casablanca, which is home to Casablanca Finance City and the Casablanca Stock Exchange. Senior executives from both bodies, along with other members of Morocco’s business elite, gathered in London on 22 October to put the message to UK-based investors at a conference called Morocco, Africa’s Business Gateway.

“The aim is to showcase Morocco as an investment destination in Africa and also as a gateway for companies seeking to establish a headquarters or to have operations in Morocco to cover the rest of north, west and central Africa”, explained Karim Hajji, CEO of the Casablanca Stock Exchange.

One element which should help to support this strategy came in June, when the Moroccan bourse signed a wide-ranging deal with the London Stock Exchange. This will bring modern technology to the exchange and, it is hoped, help to increase liquidity and attract more listings to the market, including share offerings from companies in other African countries.

However, the battle to change the perceptions that international investors have of Morocco will not be easy. Among the major hurdles it faces is the fact that Morocco is not usually categorised as an African country by international businesses, but rather as part of the MENA region. If it is considered an African country at all then it is generally just classed as part of Francophone Africa.

On the other hand, Moroccan companies are often well versed in doing business in Africa. For example Maroc Telecom, which is majority owned by the UAE’s Etisalat, has subsidiaries in Burkina Faso, Gabon, Mali and Mauritania. Morocco’s largest bank, Attijariwafa Bank, operates in 12 other countries around the continent and the national airline, Royal Air Maroc, has one of the more extensive route networks on the continent, serving 29 international destinations in west, north and central Africa from its Casablanca hub.

Given all this, for those interested in making financial investments, buying into Moroccan stocks could be one way to gain exposure to some of the more vibrant African economies.

“There are many Moroccan companies which are actively involved in sub-Saharan Africa either directly or through affiliates in banking and insurance, real estate, mining, telecoms or transportation,” says Hajji. “So Morocco is an ideal investment destination for investors seeking exposure to Africa’s growth potential.”

For companies wanting to set up operations around the continent, the depth of experience that Moroccan businesses have could also be useful, particularly in the French-speaking countries that many companies in the English-speaking world tend to shy away from.

“A lot of people in London look exclusively at Anglophone Africa, but I think that Morocco and Casablanca can be used as a bridge in order to do business in Francophone Africa,” says Senhaji.

Casablanca Finance City has hit upon the idea of using the phrase ‘greater northwest Africa’ as a way of explaining its core target region. This is an area that stretches as far west as Libya and as far south as the Democratic Republic of Congo. In all, this region encompasses some 550 million people in 28 countries and has an economy worth some $1.2 trillion.

However, this strategy means that Casablanca is going up against some well-established investment hubs serving at least some of the same areas, including Johannesburg, Nairobi, Lagos and Abidjan.

On the surface, Morocco has some advantages. It can point to political and economic stability, a decent regulatory environment, improving infrastructure and good connectivity. However, Casablanca also needs to develop an entire ecosystem of professional services companies and others to support investors and international companies looking for a regional headquarters.

Some firms have been setting up in recent years. Among those to have arrived recently are international law firms like Clifford Chance and Baker Mackenzie, both of which opened offices in Casablanca office in 2012. Boston Consulting Group set up its first office in Africa in Casablanca in 2010.

In all there are now about 60 companies, law firms, accountancy firms and consultancies in Casablanca Finance City. That provides a good foundation, but there is clearly still plenty more to be done. But perhaps the biggest challenge of all is simply to persuade international businesses to even consider Casablanca as a viable base for their African operations. That will take time and perseverance, as Moroccans acknowledge.

“The biggest challenge is getting the story across,” says Senhaji.

Mobile money: The next generation

Africa has forged a reputation as a global leader in mobile financial services. There are relatively few bank branches across the continent, and only a minority of people have bank accounts. Published in This Is Africa, 20 October 2014

Telecoms companies have stepped into the gap to provide financial services to large swathes of the continent’s population. Yet even as more customers sign up to the services, attention is turning to the next generation of mobile financial services: in particular developing savings and lending services using mobile technology. If this is done successfully, it has the potential to transform the financial landscape for individuals and small businesses who could gain access to affordable credit - many for the first time.

First generation mobile financial services like MTN Mobile Money offer a ‘virtual wallet’ on customers’ mobile phones, allowing them to conduct simple transactions like sending and receiving money, paying bills or topping up their phone credit. These services have brought tens of millions of Africans into the formal financial sector for the first time. According to the GSMA, a mobile telecoms industry body at least nine African countries now have more mobile money accounts than bank accounts.

And despite the spread of these services to other parts of the world, sub-Saharan Africa still dominates the global market. Of the 203 million registered mobile money accounts around the world as of June 2013, 98 million of them were in the region.

Now, banks are developing savings services that will leverage the reach of mobile. Pan-African lender Ecobank has plans to roll out mobile-based lending and savings services. The Togo-based bank plans to set up mobile savings accounts with MTN Mobile Money in a dozen countries around Africa.

“The potential for mobile saving is enormous,” says George Bodo, head of banking research at Ecobank.

“It is estimated that there is $1.2bn in cash stuffed under mattresses or in biscuit tins across Africa. If these funds could be leveraged through mobile banking, they could transform lending to local businesses, which currently pay exorbitant interest rates.”

Some services have already been launched. As was the case with the first generation of mobile services, Kenya is a leader. Safaricom offers the M-Shwari service in conjunction with Commercial Bank of Africa (CBA), and the M-Kesho service with Equity Bank. Also in Kenya, Airtel has partnered with microfinance bank Faulu Kenya to offer small, short-term loans under a service called KopaChapaa. Kenya Commercial Bank has its own M-Benki offering.

Across the rest of the continent, however, such services are still relatively rare. The GSMA says there are 21 services in Africa which link mobile money to some other banking products. Of those, only nine offer loans. Among them is M-Pawa in Tanzania from CBA and Vodacom, and Mjara loans in Ghana from MFS Africa and MTN Mobile Money.

A role for regulators

If the potential for mobile savings and loans is to be realised elsewhere in the region, then it may require encouragement from regulators. Some, at least, seem keen.

“The ultimate goal is to use these mobile financial services to start creating savings. This supports the ultimate aim of financial inclusion…but also poverty reduction,” says Rwangombwa John, governor of the National Bank of Rwanda.

“Going forward, we are going to have savings on the mobile services that are linked to micro-loans, so it is going to have an even bigger impact on the lives of the population.”

But some countries are still dragging their heels. In Sudan, for example, even basic mobile financial services are only just starting to gain traction. Elsewhere, there are concerns about how to regulate these services.

“Central banks are becoming extremely cautious of these developments in mobile banking,” says Mr Bodo of Ecobank.

In Nigeria, for instance, there is an ongoing battle between the between the central bank and the telecoms regulator over who should regulate the mobile platforms, according to Mr Bodo.

Assuming that such regulatory issues can be ironed out, the key to a successful rollout of mobile banking services is to first of all encourage more savings via mobile devices. One factor which augurs well for the uptake of these practices is the fact that many customers already save small amounts just by maintaining a credit balance on their mobile money accounts.

Of course, non-bank providers cannot lend these funds out, so the trick will be to both encourage customers to save more and to link their mobile wallets with the formal banking sector. At that point, banks can recycle the accumulated capital and lend it to local businesses.

“It is not enough simply to save. You need to get that money to those that use it for investment,” says Benno Ndulu, Tanzania’s central banker.

However he believes that in order to allow savers and investors to meet, banks and other deposit-based services still need to be the point of intermediation. “For us, as we go forward, it is extremely important that we make that connection between the mobile money services and the banking system,” he says.

The incentive for banks to tap into mobile services is very strong, allowing them to connect directly with the millions of previously ‘unbanked’ citizens across the continent.

“As we go further into connecting banks to this infrastructure of mobile money services, the opportunity to increase the community that saves with banks and to increase savings is phenomenal,” Mr Ndulu claims.

Shifting attitudes

The role that the various industry participants have to play seems clear enough. However, it will require a cultural change for some financial institutions.

“A few banks have started to integrate with mobile wallets, but this is a relatively new trend,” says John Owens, senior policy adviser on digital financial services at the Alliance for Financial Inclusion (AFI), a non-profit organisation. “Most banks are still trying to compete rather than integrate with mobile wallets, so there is still a ways to go.”

The problem is that many banks have seen the launch of financial services by telecoms companies as unfair competition because, typically, these new service providers are not as tightly regulated as the banks themselves. Attitudes are changing, but it is a gradual shift.

Consensus is emerging amongst players across the two sectors, as well as regulators, on the need to create “an open ecosystem of financial inclusion which allows a variety of players along the value chain” to participate, says Alfred Hannig, executive director at the AFI. “We are looking for very smart partnerships among mobile money issuers, payment platforms, banks, telcos, agent networks and so forth.”

Assuming the industry and the regulators can build on that nascent sense of cooperation, there are some advantages to using the mobile networks to promote savings and loans. As technology becomes more sophisticated and cheaper, it is easier for companies to roll out a wider range of services. In addition, a customer’s mobile payment record can serve as a relatively simple credit history, providing an easy way for banks to evaluate the risk they are taking on when they lend.

Security risks?

However, with the benefits of mobile services also come some real risks to the security and privacy of users – something that has been recognised by regulators around the world. In a report issued last year, the UK’s Financial Conduct Authority pointed to several areas of weakness, including mobile banking apps that can get infected with ‘malware’ or other viruses. Others, such as California-based IT security firm Guardian Analytics point to the danger of users being tricked into downloading fake security apps on their phones and criminals hacking into wi-fi networks to redirect transactions or capture usernames and passwords.

The risk of fraud is something the industry is well aware of, and some measures are being taken. The AFI, for example, says it has started to put more effort into the issue of consumer protection. The AFI has been running a Consumer Empowerment & Market Conduct working group since April 2011, in which policymakers from around Africa and beyond can discuss regulatory issues related to consumer protection.

The AFI has some protection principles in mind already. “The ‘e-money’ funds of the public must be protected and available for redemption at all times. They must be unencumbered and maintained in the banking system or in liquid government securities that are equal to the amount of outstanding e-money issued,” Mr Owens explains

The way in which Africa forged ahead with the first generation of mobile banking services offers reason to suppose that such hurdles can indeed be overcome. If that is the case, then the continent could emerge as a global innovator in the next stage of the industry’s growth as well.

Upgraded links crucial to growth in Africa

Improving its infrastructure can help Africa lift its economic performance. Published in MEED, 22 April 2013

You do not have to drive far in Africa before you encounter unsealed roads. According to the World Bank, just 19 per cent of sub-Saharan Africa’s roads are paved. While moving around the rest of the continent, you are often at the mercy of bad weather. This makes it difficult to move goods and people, but Africa’s infrastructure problems are not confined to the quality of its roads. It lags behind other regions of the world in most aspects of infrastructure.

According to the Swiss non-profit organisation World Economic Forum, the continent’s ports are badly run. Measured on a scale from 1-7, from extremely inefficient to extremely efficient, it gives Africa a score of just 3.8. Customs procedures are barely better, with a score of 3.9. The situation is similarly bad among other transport sectors. Rail networks are thin on the ground and air links between capitals and other major cities are often scarce or non-existent.

Inadequate telecoms

Telecoms connections are another gap, although the vibrant mobile phone market is at least starting to close the divide with other regions of the world. There are just 12 million phone lines in Africa, according to the Switzerland-based International Telecommunication Union (ITU). That is equivalent to about 1.4 lines for every 100 people, by far the lowest in the world. About 3 million people also have a fixed-line broadband internet connection, a penetration rate of 0.3 for every 100 people, which again ranks as the world’s lowest.

The key to telecoms and communications in Africa is the mobile phone. There are 545 million mobile phone subscriptions, easily outnumbering the number of fixed-line connections. Even so, that still only means a penetration rate of 63.5 per cent, which is below the global average of 96.2 per cent, according to the ITU. Mobile phones also provide a better, cheaper internet link for many people, with 93 million mobile broadband subscribers.

Additionally, mobile phone and laptop batteries need to be recharged on a regular basis. Yet, the Washington-based World Bank estimates that only a third of the population has access to electricity in sub-Saharan Africa, against a global average of 74 per cent. Access to other utilities is better, although often still inadequate. Only 65 per cent of the urban population and 38 per cent of the rural population has access to improved water and sanitation networks, according to the UN Economic Commission for Africa (ECA).

All this helps to explain why the World Bank ranks African countries far down the list in terms of the ease of doing business. In its latest Doing Business report, which compares 185 economies around the world, the best-ranked country in the region is Mauritius in 19th place, followed by South Africa in 39th and Rwanda in 52nd. Most of the continent languishes in the lower reaches of the table, where 30 of the 50 lowest-ranked countries are African.

This clearly has an impact on the continent’s economy. According to the African Development Bank (AfDB), poor infrastructure reduces business productivity in Africa by about 40 per cent and amounts to a tax of 2 per cent on annual economic growth.

“There is a lot that needs to be done,” says a senior international development official. “Some of the challenges of doing business in Africa are that infrastructure is very weak. The total [power] generating capacity of Africa is something like the size of Spain. Only 32 per cent of people in Africa have access to electricity. Just 19 per cent of the roads are paved. There is a major infrastructure challenge and bureaucracy is still a big issue.”

Investment crucial

Solving these problems requires massive investment. A widely quoted 2010 report by Vivien Foster and Cecilia Briceno-Garmendia for the World Bank and Agence Francaise de Developpement estimates that $93bn a year is needed over the next decade just to bring Africa’s infrastructure up to the level of other developing regions. Actual spending is about $45bn a year.

AfDB has been doing its bit to try and close the gap. The bank is involved in at least 95 transport projects that are approved or already under way. The vast majority are road projects, although there are some airport, rail and port schemes as well. In 2011, AfDB approved $2.36bn in loans and grants for infrastructure, including transport projects and water supply and sanitation, energy, and information, and communications technology (ICT) programmes.

Within the transport sector, the ongoing projects include two major bridges: the Gambia bridge linking Gambia and Senegal, and the Kazungula bridge linking Botswana and Zambia. A loan has also been approved for the construction of the Lome Container Terminal in Togo to provide a gateway to the landlocked countries of Mali, Niger, and Burkina Faso.

Many AfDB projects contain an element of finance from outside the continent. International involvement is clearly needed, to provide both funding and expertise. The country most closely associated with developing Africa’s infrastructure is China. According to the ECA, from 2001 to 2009, Chinese infrastructure financing commitments in Africa reached $14bn. About half of this was channelled towards power projects and the rest into transport and ICT schemes. In 2008, among the top 225 international contractors working in Africa, Chinese firms controlled 42 per cent of the market.

Air links

GCC countries have a far smaller footprint in Africa, but they have been working to address the poor infrastructure, particularly by providing vital air transport links to connect Africa with the rest of the world. The route networks of Qatar Airways, Abu Dhabi’s Etihad and Dubai’s Emirates now reach right across Africa, linking the continent’s cities to Asia and Europe via their Gulf hubs. Emirates has the most extensive network, serving 16 cities in 14 sub-Saharan Africa states from Dubai. Etihad serves four cities, while Qatar Airways flies to 10.

Such route networks mean that, for some international companies, the Gulf can be used as a regional headquarters for Africa. Dubai is the most well-established GCC location for this, with the likes of US hotel group Hilton Worldwide, Dutch electronics giant Philips and US polling firm Gallup using it as their base for the Middle East and Africa region.

In other areas of transport, Dubai-based ports operator DP World operates terminals in Senegal, Djibouti and Mozambique, and Saudi Binladin Group is currently building the Blaise Diagne International airport in Senegal.

Gulf countries also play a key role in the continent’s telecoms industry. Until recently, Kuwait’s Zain Group was operating in 17 countries across the continent. Although it sold most of its operations in Africa in 2010 to India’s Bharti Airtel for $9bn, it still operates in South Sudan, Sudan and Morocco. The UAE’s Etisalat is active in eight countries around Africa, mostly through its holding in Moov, which is based in Ivory Coast but is also active in Togo, Benin, Niger and elsewhere.

In March this year, Kuwait-headquartered Gulf Investment Corporation, which is owned by the six GCC governments, said it would invest $50m in Virgin Mobile Middle East & Africa, a UK/UAE mobile telecoms firm with operations in South Africa, Oman, Jordan and Saudi Arabia.

Other suggested deals, however, have not been completed. In 2008, Qatar was reported to be in talks with the government of Kenya to build a deepwater port on the island of Lamu in return for a long-term lease of 40,000 hectares of African farmland. Those talks appear to have gone nowhere and no work has yet started on the port, which is part of a wider transport scheme including overland rail links to South Sudan and Ethiopia.

The investments that do go ahead, however, are vital for the future of the African continent. Improving the region’s infrastructure offers one of the best chances of being able to lift its overall economic performance, and the quality of life of its citizens as well.

GCC-Africa trade flows to grow

Trade levels could soar if Africa reins in its reliance on commodity exports. Published in MEED, 22 April 2013

Despite its endowment of globally desirable natural resources, sub-Saharan Africa is one of the worst performing regions when it comes to trade. That is true both in terms of intra-regional commerce and dealings with the rest of the world. However, international investment has been picking up and, if the continent can move away from relying on commodity exports, there is a chance that trade levels could quickly rise.

Currently, just 13 per cent of African exports go to other countries on the continent, according to the Switzerland-headquartered World Trade Organisation (WTO). Only the Middle East, where 10 per cent of exports stay in the region, performs worse on this count. Other parts of the world manage far higher levels of intra-regional trade. In Latin America and the Caribbean, the figure is 29 per cent; in North America, 48 per cent; in Asia, 54 per cent; and in Europe and the former Soviet countries of the CIS it is 75 per cent.

Lacking diversity

The low level of intra-African trade is due to weak economic and infrastructure ties between countries, coupled with a lack of diversity in what nations produce. Just as Gulf economies are reliant on oil, in Africa most exports are drawn from a relatively small list of commodities.

These commodities include oil and gas from Angola, Cameroon, the Democratic Republic of Congo, Equatorial Guinea, Gabon and Nigeria; cocoa and coffee from Burundi, Ivory Coast, Ethiopia, Ghana and Rwanda; aluminium from Guinea and Mozambique; cotton from Burkina Faso and Mali; cashew nuts from Gambia and Guinea Bissau; and tobacco from Malawi.

While crude oil brings in significant sums for a number of African countries, overall trade levels remain small by global standards. Close to 60 per cent of African exports by value are accounted for by oil, natural gas and related products.

In total, the continent’s merchandise exports were worth $572bn in 2011, lower than for other regions. Figures from the WTO show that only two sub-Saharan African countries – Nigeria and South Africa – had more than $25bn-worth of trade in commercial services in that year. Meanwhile, the value of merchandise trade for each country on the continent was less than $250bn.

At those levels, African countries generally sit in the bottom half of global league tables. Nigeria and South Africa are the only two to feature in the WTO’s list of the 50 largest exporters, with exports of $116bn and $97bn respectively in 2011. None features among the world’s 50 biggest exporters of commercial services.

A key problem is that Africa generally ships cheaper raw materials, rather than the manufactured goods and high-end services that people pay more for. “The lack of [added value] in so much of the continent’s exports [means] it is still not getting to the point where a new African urban class lives by the value-added sectors of manufacturing and services,” says one former senior UN development official.

Increasing trade

Africa’s trade profile helps to explain why the value of trade between sub-Saharan Africa and the GCC countries is limited: the Gulf is certainly not in need of hydrocarbons imports, so trade has to revolve around other products. However, it has been growing quickly. In the first decade of this century, GCC exports to Africa grew by an average of 14.7 per cent a year and imports increased by an average of 27.5 per cent, according to the Switzerland-based Gulf Research Centre.

In total, GCC exports to Africa in 2011 were worth $26.6bn, while imports from the continent were worth $7.2bn, leaving the GCC countries with a healthy trade surplus of $19.4bn that year.

The main product the GCC sells to Africa is fuel, which accounted for about half of all exports to the continent in 2011. This was followed by other goods closely connected to the hydrocarbons sector, such as plastics and fertilisers. Of the trade going the other way, the most significant category is precious stones and metals, worth $1.5bn in 2011, followed by electrical equipment, fruit, and iron and steel.

In the future, food imports from Africa could lift the trade figures much higher, particularly if the GCC countries continue to invest in overseas farmland in their pursuit of food security. Given the size of Africa’s Muslim population, religious tourism, particularly to Saudi Arabia, is another potentially important market.

Currently, just seven sub-Saharan African countries feature among the GCC’s 50 largest trading partners, led by South Africa in 22nd position and followed by Kenya, Nigeria, Tanzania, Ethiopia, Uganda and Zambia. The trade between the GCC and those seven countries amounted to close to e13bn ($16.7bn) in 2011, according to figures from the European Commission. The most important trade links that these and other African countries have with the GCC are with the UAE and Saudi Arabia, which between them account for 75 per cent of trade. All the GCC countries have a trade surplus with Africa, the smallest being Qatar’s $424m, rising to $7.4bn in Saudi Arabia.

These GCC-Africa trade figures pale in comparison to Africa’s trade with its most important partners. A third of the continent’s trade is with the EU, with a total value of e268.5bn a year, according to the European Commission. The next most important partners for Africa are China, with e99m of trade; the US with e93bn; India with e41.5bn; and Japan with e21.7bn.

The continent’s strong trade links with the EU are a legacy from the colonial era, when the UK, France, Belgium and other states controlled vast swathes of Africa. Their armies and administrators may have largely left, but the trade routes they set up have proved more resilient.

The continent’s investment flows are even more skewed towards the world’s richest countries. According to African Economic Outlook, a partnership between the African Development Bank (AfDB) and the France-headquartered Organisation for Economic Cooperation and Development, the EU and US together accounted for 81 per cent of inward investment into Africa between 2005 and 2010. China, by contrast, accounted for just under 1 per cent. The Middle East provided 6.1 per cent of the total, up from 3.2 per cent in the first half of that decade.

Investment grows

The good news for Africa is that investment is increasing. Foreign direct investment inflows to sub-Saharan countries jumped from $29.5bn in 2010 to $36.9bn in 2011, a level comparable to the peak of $37.3bn achieved in 2008, according to the UN Conference on Trade and Development. The main beneficiaries were Nigeria, South Africa and Ghana, all of which received more than $3bn in 2011. Republic of Congo, Mozambique and Zambia all received between $2bn and $3bn, while Chad, Democratic Republic of Congo, Guinea, Tanzania and Niger all received more than $1bn.

One further area of investment could open up in the coming years if, as some anticipate, more African countries begin to offer sovereign bonds to international investors. Of particular interest to the GCC countries is sovereign sukuk (sharia-compliant bonds). To date only Gambia and Sudan have issued them, but according to credit ratings agency Standard & Poor’s (S&P), a number of others are lining up to join them. North Africa is one obvious source, but governments in South Africa, Nigeria, Senegal and Mauritius have also expressed an interest in offering sovereign sukuk.

“We believe that sukuk issued by African sovereigns could address an investor base in the GCC countries or at the Saudi Arabia-based Islamic Development Bank, which may be looking for sharia-compliant investment opportunities,” says Christian Esters, a primary credit analyst at S&P.

If that happens, it will help to broaden the economic ties between the Gulf and Africa and perhaps help grow trade as well.

Africa: Teflon-coated bonds

There is no clearer sign of the strength of investor interest in emerging markets than the scramble for African sovereign bonds, but how long can it last? Published in Euromoney, November 2012

Zambia’s debut international bond issue in mid-September marked a new high point of interest in emerging market sovereign debt. Lusaka had set an initial target of $500 million, but $12 billion-worth of orders came in and the scale of the demand led the government to increase the size of the issue to $750 million.

Zambia was just the latest country in sub-Saharan Africa (SSA) to tap into the market. Besides South Africa, which has long been involved, there has been a steady stream of other issuers since 2006, when the Seychelles offered a $200 million bond. In 2007, it was the turn of Congo, Gabon and Ghana. They were followed by Senegal in 2009 and the Côte d’Ivoire in 2010. Last year, Nigeria and Namibia entered the market and Senegal returned to the scene with a $500 million issue.

All these countries have found a ready audience among investors keen to get involved in the growth of African economies, as more developed markets in Europe and the US are struggling. In a research report released in September, South Africa’s Standard Bank went so far as to describe African Eurobonds as ‘Teflon-coated’, which hints at the level of interest and confidence that now exists.

"There has been plenty of liquidity out there for most of the year, and that liquidity needs to be put to work," says Florian von Hartig, global head of debt capital markets at Standard Bank.

With the problems with some European sovereigns, investors are looking for safe havens. Emerging markets have been the biggest beneficiaries of that trend, and any transaction that is reasonably priced from that area, from Africa in particular, will see a strong demand in primary and good follow-through trading. We’ve seen a strong rally in Brazil and Asia over the last few years, but Africa is now the hottest thing."

It is not just bonds that have proven to be of interest. This year, Kenya issued its first international syndicated loan. The $600 million, two-year facility was sold to a group of 13 lenders from the region and beyond, including the State Bank of Mauritius, Ghana International Bank and Bank of India. Citi, Standard Bank and Standard Chartered acted as bookrunners and mandated lead arrangers on the deal.

In a more complex move, Angola agreed a $1 billion, seven-year loan with Russian bank VTB Capital in August with a fixed interest rate of 7%. VTB then sold the debt on to other investors through loan participation notes issued by a special purpose vehicle, Northern Lights III, listed in the Netherlands.

"What we’ve seen over the past year is quite a bit of interest, not only in African bonds but also in emerging market bonds generally, as investors go in search of high-yielding products," says Carmen Altenkirch, a director at Fitch Ratings. "There are a few components to it. One is the search for yields. Added to that, Africa in general is seen as a positive growth story, and a lot of investors want to get access to that. For African countries generally, it is very positive. It opens up another very important source of foreign funding at quite reasonable rates."

Despite all the activity, it is still only a minority of governments that have issued foreign-currency bonds. To date, 13 of the 54 countries across the continent have done so. In most cases, they have substantial reserves of commodities, and the money has been raised to improve their infrastructure, particularly transport.

"Countries with commodities have a better chance of accessing the market as long as they are well governed, have a credit rating and don’t have any conflicts," says Makram Abboud, chief executive for the Middle East and Africa at VTB Capital. "What investors are looking for is stability.

"The biggest need in Africa by far is infrastructure. These countries need railways, roads and ports. They need everything. A lot of it is needed to get their commodities out of the country and get their trade moving. Some of these countries need infrastructure investments worth four or five times their GDP."

While the number of governments that have accessed the Eurobond market has been limited, more might follow in the next year or two. Kenya is expected to issue a bond to repay its two-year loan, and other countries, including Angola, Mozambique, Rwanda, Tanzania and Uganda, are seen as likely candidates to turn to the international bond market in the next few years. Moody’s Investors Service says most will try to raise at least $500 million.

For the governments in these countries, there are a number of reasons to issue. For a start, there is the benefit of having a new source of funding that, given the high level of interest, can be secured at attractive prices. While many governments need to raise substantial sums, they are also keen to reduce their reliance on bilateral and multilateral funding or on domestic sources.

An additional benefit is that sovereign bonds can also provide a benchmark yield for local corporates wanting to issue, helping to broaden and deepen local capital markets.

From the point of view of investors, the bonds are an attractive way to gain access to the strong growth of sub-Saharan economies, particularly commodity exporters. The average growth rate of GDP across SSA was 5.2% in 2011 and is expected to be 5.3% this year and next, according to the IMF.

"The emerging markets space has remained strong this year," says John Wright, a director of the London syndication team at Barclays that helped to manage the recent Zambian bond issue. "Investors looking for growth realize there aren’t many parts of the world that can deliver that right now.

"The range of investors interested in emerging markets is increasing. More speople are trying to get involved. The Zambia bond proves there is the investor appetite. If anyone was sat on the sidelines wondering if the demand is there, they won’t wonder anymore."

There is also a rarity value to African Eurobonds that helps to boost demand. South Africa has gone to the market most years and issued bonds worth $7.25 billion since 2007, but relatively few bonds have being issued by other governments. When they are they are often for relatively low amounts. Nine other sub-Saharan governments have issued 10 bonds between them during the past five years. The smallest was for just $30 million in the case of the Seychelles in 2007.

In addition, there have been strong improvements in financial management and governance in many countries in the region, which act as a boost to the confidence of investors.

"Sub-Saharan Africa has made enormous economic progress over the past decade or two, especially in respect of macroeconomic stabilization," says Daniel Zelikow, global head of the public sector group at JPMorgan. "By that I mean stronger fiscal and monetary policies, less reliance on fixed exchange rates to preserve monetary stability, more effective regulation of financial systems and more transparency overall.

"I’m not suggesting there’s a parity of good economic management and strong central banking throughout the continent, but it’s fair to say that in South Africa there’s a long tradition of a strong central bank and in Nigeria there has been particularly effective leadership in cleaning up some of the problems that have beset the banking system over the past couple of years.

"In general, the resilience to the 2008/09 crisis and sustained GDP growth experienced recently by several SSA economies owes much to economic reform and macroeconomic stability, both on the part of governments and central banks."

However, despite all the improvements, there are still risks for investors and defaults can happen.

Another constraint is that relatively few governments are covered by the big three ratings agencies. Standard & Poor’s and Fitch rate 16 countries in SSA, while Moody’s rates just six. Between them, they cover only 20 countries in the region.

In the case of countries that do have ratings, it is not just investors that are taking a chance with the Eurobonds. There are some risks for the governments too. In particular, the international bonds expose governments to a higher degree of foreign-exchange risk.

For some commodity exporters, that should be manageable, given that much of their earnings will be in dollars. However, while the recent commodity boom has led some central banks to become more sophisticated in how they manage their reserves, not all countries are equal in this area.

Peter Sullivan, head of the public sector group for Africa at Citi, says there are some clear leaders when it comes to reserve management. "It is a function of size," he says. "Countries that are blessed with commodities are the ones that need to address this first. The larger ones – South Africa, Nigeria and Kenya to a degree – are probably the most sophisticated and hands-on, providing leadership for the region."

A senior official at a finance ministry in one small but relatively fast-growing African country adds: "The main challenge we have is capacity constraints. In my experience, there is a very small pool to draw from and government remuneration is quite low compared with the private sector."

Many governments, while grappling with such challenges, will be hoping that, as public finances become more sophisticated, the same thing will happen with private-sector firms. A key motivation for issuing Eurobonds is to encourage local corporates to issue their own bonds to international investors. The jury is still out on how quickly this will happen.

"Over the medium term, issuance by the region’s sovereigns will promote further issuance from government-related institutions, local governments, corporate and financial institutions," predicts Aurélien Mali, senior analyst at Moody’s and the author of a recent report on international sovereign debt issues in Africa.

He suggests that financial services companies and those involved in infrastructure and commodities are among the best placed to follow the lead of their governments. Indeed, he points out that this is what happened in Ghana after its inaugural $750 million Eurobond in September 2007. Two months later, Ghana Telecom placed a $200 million issue in the international market.

There have been few other examples, but VTB Capital’s Abboud says more deals could emerge in the second half of next year. "What always happens is that you start with sovereign issues, and then you have corporates and financial services companies following," he says.

"There will be some deals in 2013. Perhaps not in January 2013, but by the third or fourth quarters some will be coming into the market. It will start in the stronger countries, and with corporates that are quasi-government businesses and that are involved in commodities, whether oil or minerals or diamonds."

However, the small scale of many enterprises around the continent means that the potential for this to happen remains limited for now, according to others.

"There are not that many corporations that could absorb a $300 million to $500 million Eurobond," says von Hartig. "There are some in the big economies, such as Nigeria and Kenya, but in the smaller economies there may be just one or two potential corporates that could take advantage of the Eurobond market properly."

Another trend that could pick up momentum is the interest among African investors in putting more money into the continent, but again the potential in the short term is limited.

"There’s a lot of thought going into sub-Saharan African banks should be investing in Africa rather than the EU," says Citi’s Sullivan. "The answer is yes, but it depends on the depth of the local capital markets and the risks. I wouldn’t be surprised if in the next few years there was more recycling of these reserves through the region."

Among those considering greater investments is the South African government-owned Public Investment Corporation. At a conference in London in early September, its chief executive, Elias Masilela, laid out its evolving attitude to investing in the rest of the continent.

"We’ve been in business for over 100 years," he said. "For the first time we are looking beyond the borders of South Africa. As the largest asset manager in the continent, we’ve seen the continent as the next wave of growth globally. [We want to] make Africa more dependent on its own savings in terms of capital raising to fund investment on the continent."

Ultimately, whether it is regional or international funding African governments are trying to attract, the long-term viability of international bonds for them will only become clear when the current generation of bonds starts to reach maturity – something that will not happen for several more years.

In the meantime, investors and others will also keep a close eye on how the money raised from the bonds is invested and what sort of returns it has brought, not just to the buyers of the bonds but to the countries themselves.

"We’ll watch very closely from a rating perspective to see how effectively they utilize the money from this bond issue," says Fitch’s Altenkirch of the recent Zambia bond. "You don’t want to see that money being frittered away and spent on higher wages for civil servants. One of the things we’ll focus on for the next rating is getting a very clear idea of how the money is being spent; what infrastructure projects it’s tied to."

Zambia issues debut Eurobond

Prices at 5.625%; Issuance increased to $750 million. Published in Euromoney, October 2012

Zambia has completed its first international bond issue, with demand far outstripping supply as investors continue to seek exposure to emerging market debt.

The 10-year bond was issued on September 13, priced at 5.625%. The government originally planned to raise $500 million but high levels of interest led it to increase the target to $750 million. Barclays and Deutsche Bank, the joint lead managers and bookrunners, say they received more than 425 orders worth $12 billion.

"The appetite for emerging market debt has been high all year," says John Wright, of the London syndicate team at Barclays. "Investors are increasingly willing to look further afield for what is rare in today’s market: strong growth prospects and yield."

He adds that the strong order book "enabled Zambia to price well inside initial expectations of low 6%".

Zambia joins other recent Eurobond issuers from the region, including Gabon, Ghana, Namibia, Nigeria and Senegal.

Analysts say the level of demand for Zambia’s bond was far higher than expected. "The extent of the interest was a surprise," says Carmen Altenkirch, an analyst at Fitch Ratings. "It highlights that people are desperate for a slice of the action."

Buyers from the US took up 56% of the bond issue after an investor roadshow in London, Los Angeles, San Francisco, Boston and New York. The remainder was bought by European investors (40%), Asian (3%) and others at 1%. In terms of sectors, fund managers received 85% of allocations, followed by banks with 8%, pension and insurance funds with 5% and others at 2%.

As well as the interest in emerging markets generally, demand was also fuelled by Zambia’s own buoyant economy, which the IMF expects to grow by 7.7% this year.

Zambia’s finance minister, Alexander Chikwanda, issued a statement on September 14 saying "our expectations have been surpassed" with the issue and hinted more could follow. "The development process of Zambia will incline us ever more to seek recourse to the international markets," he said.

Standard & Poor’s and Fitch Ratings assigned a rating of B+ to the bond, the same as the country’s long-term foreign currency rating.