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,
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 this need.
In recent years, a number of African countries have participated in the international issuance of Eurobonds.
Theoretically African governments should be able to fund the infrastructure backlog from domestic sources (pension
funds and insurance companies), however, the ability for 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 their small and illiquid domestic debt markets.
Besides South Africa, only two countries, Mauritius and Ghana, have a domestic bond market capitalisation exceeding 40% of GDP. It stands to reason that the infrastructure backlog dwarfs the capacity of SSA debt-capital markets. Further, exclusive reliance on domestic markets for financing large deficits would quickly crowd out credit extension to the private sector and further cloud the growth outlook.
Eurobonds are thus a potential way to tap a broader investor base. This is also facilitated by the fact that most SSA Eurobonds are included in global bond indices. Eurobonds also overcome the limitations of the lack of size and liquidity, in combination with the currency risk associated with investing in local currency bonds as well as the risk of capital controls.
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 as they should have expanded capacity to invest in the capital market instruments within their respective countries.
The divergent economic growth prospects between advanced economies and emerging and developing economies are self-evident. Emerging and developing economies offer investors the solution to the structural economic problems that investors face in advanced economies, where emerging and developing economies feature young populations, which feed into growing workforces, rapid urbanisation and rising disposable income for an emergent middle class. Infrastructure development and provision for long-term finance to enable the provision of critical infrastructure is a critical underpinning to these enduring structural investment themes.
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