Gerald Gondo, Business Development Executive, RisCura Africa. Credit: afsic.net
Given the continued global search for yield and growth in an increasingly low-yield world, debt markets in Africa should and will attract increasing attention from institutional investors.
Pensions and savings institutions around the globe are facing rising liabilities because of low interest rates. Coupled with the effect of volatile markets and low equity returns, the gap between assets and liabilities has widened for many advanced economy pension plans.
African fixed income investments are presenting a compelling asset class, particularly the sub-set of infrastructure bonds, which could help institutional investors narrow this gap.
According to the World Bank, Africa’s current need to finance its infrastructure amounts to approximately US$ 93 billion a year, one third of which is for the maintenance of existing infrastructure. Over the next four years, (2017-2020) emerging market and developing economies are forecast to achieve a real GDP of 4.91%, which will further exacerbate the need for infrastructure investments.
In recent years, several African countries have participated in the international issuance of Eurobonds.
In theory, African governments should be able to fund the infrastructure backlog from domestic sources, such as pension funds and insurance companies. However, the ability of most governments – in particular, Sub-Saharan countries (SSA) excluding South Africa – to fund this infrastructure is limited by inherent fiscal and current account deficits, as well as by relatively small and illiquid domestic debt markets.
Besides South Africa, only two countries, Mauritius and Ghana, have a domestic bond market capitalization exceeding 40% of GDP. Consequently, the infrastructure backlog dwarfs the capacity of SSA debt-capital markets.
Therefore, Eurobonds are a potential way to tap a broader investor base. Such potential is further facilitated by the fact that most SSA Eurobonds are included in global bond indices. Eurobonds overcome the limitations of SSA bond markets’ size and liquidity. Furthermore, Eurobonds do not have the currency risk associated with investing in local currency bonds.
With the deepening and development of local capital markets within emerging and developing markets, one should expect to see local pensions and savings also playing a greater role in these markets.
The divergent economic growth prospects between advanced economies and emerging and developing economies are self-evident. Emerging and developing economies offer investors a solution to the structural economic challenges that investors face in advanced economies. Emerging and developing economies feature young populations, which feed into growing workforces, rapid urbanization and rising disposable income for an emerging middle class. Infrastructure development and the provision of long-term financing to enable the provision of such critical infrastructure is a strong underpinning to the noted structural investment themes.
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