Africa’s Untamed Frontier Ferocity

After probing the non-commodity turnaround in a half-dozen Sub-Saharan economies due to a combination of policy stability, good aid use, high investment and deeper financial markets, the IMF’s regional outlook turns to lessons from the past three years’ frontier portfolio frenzy with doubled net private inflows to almost 2 percent of GDP. They have held since the mid-year US Federal Reserve tightening signal and MSCI stock exchange components were up 25 percent through November as Kenya, Tanzania and others join the public sovereign bond queue despite a recent Paris Club meeting on the future workout implications of recent rapid commercial debt accumulation with data limitations likely understating the true total. The reference attributes the “muted impact” to illiquidity but noted that currencies in Ghana and Nigeria were ensnared in the second selloff wave and they moved to adjust fiscal and monetary stances. With greater integration exchange rate and balance of payments issues will be affected by both government and corporate actions which may work at cross-purposes and heighten financial system risk, the review stipulates. The 2009 Nigerian banking crisis stemmed from a stock market bubble fueled by foreign borrowing and macro-prudential controls have since been applied there and elsewhere, including capital adequacy supplements and individual institution and industry contingency planning. These measures are preferred to outright capital restrictions which should only be considered in an emergency and may thwart the development need to raise private sector credit and financial services access, the Fund advises. Local-currency bond takeoff is a priority outlined at a 2011 G-20 summit and bilateral and multilateral agencies have since drafted a diagnostic framework for the separate money, government, corporate and derivatives markets. A working group on securities databases is compiling structural information about the yield curve, investor base, foreign participation, benchmark instruments and turnover ratios and bid-ask spreads. The supervisory, clearing and settlement and dealing networks are the subject of qualitative assessments designed to gain official commitment to “upgrade and reform,” according to the manual. The central bank’s open market operations will help guide short-term activity while a medium-term debt management strategy though the main Economic Ministry or dedicated unit will set the primary and secondary parameters and target buyer categories over time through regular auctions and competitor selection.

Retail scope could be minor in early stages and institutional diversification could be hampered by the lack of insurance, mutual and pension funds. Dealers should have their own professional association for standard-setting and discipline and all transactions should be reported to the authorities and pass through a central depository, the guide suggests. Repo and short-selling introduction will facilitate efforts and local credit rating houses can be considered should they be commercially viable and credible. Taxation and the division between over the counter and exchange issuance are important factors in the context of   overall sequencing of policy and practical steps, and a detailed checklist is designed to tame building fears.