Africa’s Overlooked Lined Pockets

2020 August 26 by

As official agencies routinely repeat, Covid-19’s impact on trade, tourism and remittances is battering much of the sub-Sahara. The World Trade Organization expects global trade to fall at least 13% this year, while the World Bank predicts remittances to Africa will sink 23%.  International travel has largely stopped. The UN estimates that for every USD 1 million lost in international tourism revenue, national income could drop by 3-times as much on feeder sector unemployment spikes. In Africa the global downturn in most commodity prices has hit exporters, and country-specific black-swan events compound headline misery.

The maritime disaster in Mauritius comes as the eastern region battles “biblical” swarms of locusts. Food insecurity is rising across the continent as the IMF predicts the region’s economy will contract 3.2% this year while the African Development Bank forecast is even gloomier, between 4.9% and 6.6%. Stock markets throughout the sub-Sahara are on average down just over 20% in USD terms so far this year, with tourism-dependent Mauritius underperforming peers with a 40% loss. Cote D’Ivoire, where the economy grew an average 8% in recent years, has lost only 1.3% into an election cycle.

As the world locked down for the pandemic, the G-20 nations offered bilateral debt repayment relief though end-year for the poorest nations, many in Africa, and program extension is likely. The private sector was encouraged to offer a similar standstill, but the Washington-based Institute for International Finance as designated investor body claimed last month that its private financial institution members had not received any formal requests. In Africa of the 25 countries eligible for debt relief, only 4 with commercial bonds so far have requested assistance: Cameroon, Cote d’Ivoire, Ethiopia, and Senegal.(?). 

Kenya, where the worst locust swarms in decades are destroying food crops, has refused debt repayment relief. While accessing IMF rapid funding for the virus, it signaled a debt payment moratorium with official creditors would breach the terms of its outstanding Eurobonds and cut it off from the international market. Last year the country raised USD 2.1 billion in a massively over-subscribed offering in its third foray into the international markets in 5 years. Tourism, remittances and exports account for more than one-quarter of GDP. Ratings agencies have lowered the sovereign outlook to negative, noting the IMF expects the economy to contract 0.3% this year.

The continent’s two biggest markets, Nigeria and South Africa, tapped IMF emergency facilities to help finance their pandemic response. The IMF projects the commodity-exporting giants will see GDP slump 5.4% and more than 7%, respectively, this year. The OECD warns if South Africa is hit by a second wave the economy could contract 8.2%. Exports account for 30% of GDP and tourism nearly 9%, one-third business travelers unlikely to return soon. Last year South Africa’s sovereign rating was downgraded to junk by the major agencies, and the rand has been battered on portfolio outflows forcing the government to tap a USD 4 billion IMF loan. When the pandemic hit it was already in recession and suffering from rolling blackouts due to its debt-laden state-owned power company, with its downturn spilling over to immediate neighbors Botswana and Namibia. Meanwhile Zambia is struggling to restructure external debt and cannot participate in the G-20 debt suspension program because it does not satisfy the IMF’s advance sustainability criteria. 

For Nigeria, the price of oil is critical and the Covid-induced price collapse highlighted continued failure of economic diversification efforts. Oil accounts for 90% of FX receipts and 60% of total revenue, while remittances account for 6% of GDP. Debt servicing takes some 50% of the annual budget.  Nigeria has pledged to unify its multiple exchange rate systems to secure a World Bank loan while the official rate has been devalued twice this year, making debt servicing more expensive.  

Also in West Africa, political protests continue to plague Mali. The IMF has provided debt service relief and USD 200 million in pandemic aid.  Despite the social chaos and downturn in the price of its key export cotton, as a net oil importer the Fund expects the economy to grow 1.5% this year.  Senegal, where remittances account for over 10% and exports over 20% of GDP, embraced the G-20’s debt relief offer. Raters reacted in part with a revision to negative on its sovereign rating outlook despite expected economic expansion this year. Neighboring Cote d’Ivoire carries a “positive” outlook on its sovereign rating from Fitch. However, the agency noted political instability could threaten economic prospects: with only one exception, every presidential election since 1994 has resulted in violence, twice resulting in external debt defaults. Cote d’Ivoire’s economy is slated to grow slightly this year, largely due to comparative domestic demand strength.  Ghana too is expected to record slight expansion this year as it prepares to vote for president in December. While the cedi continues to depreciate, Ghana successfully sold an international bond a month before locking down. Ghanaian exports account for 35% of GDP, one-third oil/fuels, while tourism and remittances together are another 10%.

Recovery across the continent will be uneven. The IMF projects Africa will grow 3.4% next year. The start of the African Continental Free Trade Agreement in January, delayed from this year due to the pandemic, will boost economies as trade rebounds. Tourism dependent countries will remain under pressure well into 2021 absent a global vaccine. Travel and tourism account for more than 10% of GDP in Mauritius, Namibia, and Botswana, and across Africa contributed USD 168 billion to economies in 2019, according to the World Travel and Tourism Council.  Countries in French-speaking West Africa slated to expand this year could rapidly recover. For example, Cote d’Ivoire, where GDP grew 6.9% in 2019 will see  surge 8% or more next year (source).Giants South Africa and Nigeria, with pre-existing conditions including structural, fiscal and debt issues, will lag smaller neighbors, but bleakness will give way to relative bright spots.

Central Africa’s CFA Franc Deception

2020 March 19 by

As leaders representing the two CFA Franc zones declared after long negotiations with Paris that they will no longer keep half of foreign exchange reserves with the French Treasury under the euro peg, the IMF described the Central African economic and monetary union (CEMAC) at a “crossroad” still reeling from oil export price reversal five years ago. All member countries, Cameroon, Gabon, Congo, Chad, Central Africa Republic, and Equatorial Guinea are already in or about to enter formal adjustment programs, with regional growth due to repeat 2018’s 2.5%, as the non-oil segment languishes. Inflation is the same figure, and fiscal deficits beyond agreed EU-modeled convergence criteria keep public debt over 45% of output. With stricter currency rules and modest private capital inflows the balance of payments gap is only half a percent, but the current account one could hit 3% in 2020 on lower petroleum earnings. The common central bank BEAC has tightened monetary policy but excess liquidity and an almost 20% bad loan ratio afflict banks, and ailing smaller units should be swiftly closed. Staff and expertise shortages at the system supervisor are obstacles as Basel III prudential standards will soon apply. The November CEMAC high-level summit acknowledged that foreign reserves were insufficient covering three months of imports, and that budget discipline was tilted toward government investment cuts harming medium-term growth rather than tax revenue collection. Economic diversification is slow toward agriculture and transport industries in particular, with dominant Cameroon also in the grips of a breakaway struggle with armed Anglophone groups. Repatriation of bank overseas assets should compensate for reduced donor aid, but credit extension is zero as institutions park money at BEAC or in Treasury bonds available through the nascent securities market. A 1% possible growth pickup toward mid-decade will hinge on business climate reforms, where the zone ranks behind neighbors according to the World Bank’s flagship reference.

Tax exemptions should be eliminated as collection improves, and the region needs to pay off contractual arrears above 5% of GDP, possibly in securities form, to stimulate the private sector and financial markets. The benchmark 3.5% borrowing rate stayed at the November meeting, as the IMF urged authorities to increase “absorption” operations to drain liquidity. Repos are a main short-term instrument, but pilot certificates of deposit may soon be issued. BEAC refinancing will no longer be approved beyond 10% of bank assets, and under new procedures foreign exchange can only be retained for trade purposes and not surpass 30% of repatriated client funds. Oil and mining companies have not yet adopted the regulations and are in stiff opposition, as central bank officials fan out for “consultations” that may result in big revisions. A first credit bureau will launch in 2020 accessible to microfinance providers, and in fixed income secondary trading development is a priority to create a yield curve. Treasury market-makers have been designated to sell at least one-third of inventory, and on the equity side the separate Cameroon and regional markets were merged and state enterprise IPOs are set for the coming months. The BDEAC development bank may also eventually float shares if it can be placed on a sound footing after years of minor changes, as the currency regime tempts similar fate.

Africa’s Sequenced Securities Screens

2019 November 29 by

Despite a near 5% loss on the Morgan Stanley Capital International Frontier Africa Index through the third quarter, with Kenya (+15%) and Nigeria (-22%) at opposite ends, and the International Monetary Fund evoking sovereign debt unsustainability in its annual meetings financial stability publication, a separate measure of stock market progress in twenty countries averages above 50 for positive direction for the first time. The third year of the tally, compiled by pan-African banking giant Absa in collaboration with the London-based Official Monetary and Financial Institutions Forum (OMFIF), covers a half dozen categories including securities market depth and diversity, macroeconomic trends and foreign exchange access, and  legal/regulatory and institutional investor status. The Africa Financial Markets Index (AFMI) draws from desk analysis and interviews with executives and officials across and outside the continent. In Washington World Bank International Finance Corporation experts were consulted, and aggregate scores ranged from 88 for sophisticated South Africa where Absa is headquartered, to 27 for startup Ethiopia which plans stock exchange launch next year.

The IMF’s Global Financial Stability report landed with a thud at the annual gathering, as it termed one-third of emerging market debt “overvalued” in contrast with more fairly priced equities. External high-yield sovereigns were frothiest, while state-owned companies that are half that asset class are a “growing concern,” it noted. Half of countries with “B” or lower ratings, mainly low-income economies in Africa and elsewhere with bonds outstanding tripling to $200 billion the past five years, are at risk of sudden spread widening or access cutoff. Commercial debt equals 7% of gross domestic product and half of foreign reserves, with heavy medium-term servicing loads.  Chinese creditors not following standard restructuring rules hold a large portion, and commodity linkage can result in physical asset seizure in default. Record-keeping and reporting and an overall strategy are often absent, as the Fund has started to work with private industry bodies like the Institute for International Finance to promote better frontier market hard currency borrowing transparency and capacity.

The latest AFMI update underscores South Africa’s dominance in market liquidity and size, with the Johannesburg exchange capitalization triple GDP, but a half dozen neighbors including Ghana, Kenya and Nigeria are above 50 with new bond listings. However local yield curves and secondary trading have been slow to develop, with easy Eurobond resort and separate systems like the UEMOA Francophone West Africa zone’s auction platform. Primary dealers exist in most places but are inactive, and Kenya has an interest rate cap and Ghana may introduce an international ownership one for domestic debt. Small firm offerings are rare and further stunted by meager venture capital and private equity scope. Exchange consolidation has also been gradual, with Cameroon just recently merging with the regional Central Africa bourse and Anglophone West African countries still exploring joint frameworks.

Combined foreign exchange reserves were flat at around $250 billion, with Angola and Zambia running low. South Africa’s interbank currency turnover was $1.7 trillion in 2018, dwarfing second-tier Egypt and Mauritius in the $10 billion range. Pegged regimes remain in Cote d’Ivoire and Botswana, and managed floats in Angola, Egypt, Morocco and Rwanda feature regular central bank intervention. The best performing area was regulation and tax with a median 67 result for the majority due to clear tax codes and bilateral treaties, and equal treatment of capital gains and interest income. In 17 of the 20 economies international financial reporting standards apply, although the accountant and auditor pool is limited. Inaugural corporate credit ratings were assigned to issuers in Cameroon, Senegal and Uganda, and most countries use modern Basel III prudential norms for core banks. The institutional investor foundation is narrow, with half the list at less than $100 per capita in pension fund assets. Mauritius and the Seychelles are among the exceptions with thousands of dollars for each citizen, but government bonds are typically the chief compulsory allocation across the universe with Namibia an outlier on half the portfolio in equities. Funds are also confined to the domestic market, but infrastructure needs and technology are expanding the pension sector. Nigeria recently enacted reforms for managers to invest directly in power and transport projects, and mobile money inclusion strategies now target poor and rural populations with retirement schemes even as underlying financial markets are in their infancy, according to the survey.  

Africa’s Oil Bounce Backfire

2019 August 10 by

With oil prices on an indefinite roll with geopolitical and production squeezes, big African exporters suffering budget and balance of payments blows and often turning to IMF rescues seek to return to investor favor amid wider economic overhaul doubts. Nigerian stocks continued to perform badly through mid-year with an over 10% MSCI frontier index loss, with banks shunned in particular over lingering mid-size lender weakness. The central bank has seized units and forced mergers most notably between Access and Diamond, as the sector reels from bad corporate and consumer debts from petroleum sale and associated supplier reckoning. The Finance Minister on a US roadshow proclaimed the 5-year downturn was over, and that economic diversification and infrastructure building set a bright future despite scant structural evidence. The recession is technically over, but GDP growth is still in the 3% range with foreign exchange and import restrictions firmly rooted. Electricity shortages have worsened with a flailing private provider and renewables push, and the naira below 500/dollar on the parallel market even as official channels improve hard currency access. JP Morgan has not reinstated local bond index membership, as public debt worries spike despite the modest headline 30% level as a share of output. Tax collection is only 5% of GDP, unable to bridge the fiscal deficit as debt repayment absorbs two-thirds of central government revenue.

 The IMF has recommended a value added levy to shrink the gap, but the re-elected Buhari administration remains unpopular with scant political capital it husbands for the anti-terror fight against Boko Haram and allies. The conflict has widely displaced populations at home and abroad and mixed with a Francophone/Anglophone split in next-door Cameroon, which accounts for half of activity in the Central Africa Monetary zone. The IMF issued a regional report in July with mixed views praising fiscal and monetary changes under new arrangements while criticizing commodity overreliance and lagging non-oil revenue. Other member countries Gabon, Chad and the Central African Republic have Fund programs, and Congo and Equatorial Guinea are in discussions. Congo restructured its debt with China but faces lawsuits from other creditors over unpaid bills, while Equatorial Guinea’s application to join the extractive industries transparency initiative as a first step is pending. Area growth was “subdued” at 2.5% last year, with the oil sector up at double that pace, with public debt at 50% of GDP. The common central bank drained liquidity and tweaked the policy rate, but overdue loans are one-fifth the total as only half of banks comply with concentration risk standards. They have large sovereign and state enterprise exposures, and smaller institutions face closure. The current account hole improved slightly but reserves cover less than three months imports, and new foreign exchange rules surrendering export proceeds have been applied slowly. Angola is the continent’s number three oil producer with the biggest IMF facility at $3.5 billion, after $30 billion was found missing in an audit when successor ruling party President Lourenco took office. Debt/GDP is near 100%, and insider deals continue to plague banking system cleanup and telecoms privatization, where an influential general won a disputed tender with anti-corruption commitment equally questioned.

Zimbabwe’s Unsettled Real Time Wreckage

2019 June 29 by

While South African shares brightened on President Ramaphosa’s solid election win for his own term despite a ruling ANC party result barely above 50% as he vowed to stick to a moderate anti-corruption path, Zimbabwe’s MSCI frontier component continued to flail on uncertain cross-border relations and meltdown in the new electronic real-time gross settlement currency. It replaced “bond notes” after elections a year ago installed President Mnangawa as previous autocrat Mugabe’s successor with the decades in power Zanu-PF getting a two-thirds majority. The grouping drew on its traditional rural voter strength, but opposition protests erupted soon after to a harsh crackdown criticized by democratic activists. Another round preceded a planned trip to the World Economic Forum in Switzerland to promote international business opening, and the Finance Minister, formerly the African Development Bank’s chief economist and other officials were forced to cover human rights rather than fiscal and monetary issues. At the gathering the government also intended to discuss a formula for repaying development lenders an estimated $2.5 billion in arrears and extend an informal staff monitored program with the IMF, with the latter agreed in March. On assuming office the RTGS/US dollar rate was at parity, and months later it was devalued to 2.5 and in subsequent parallel trading fell 20% in a week. Despite commercial borrowing from a regional hedge fund and the Cairo-based African Export-Import Bank, the fuel import official exchange level could no longer be maintained as pump prices and shortages spiked. Depreciation pass through brought inflation to 65% as GDP is due to contract 2-3% after original predictions of growth at that clip. Agriculture was also devastated by drought followed by a tropical cyclone, undermining planned tighter fiscal policy to halve the 7% deficit in 2018. A 2% financial transaction tax has generated revenue, as the treasury is trying not to tap the central bank to bridge the gap.

A half- dozen state-owned enterprises could be sold soon to stem losses, and the new one-stop foreign investment promotion agency intends to feature the candidates in its pitch. As to other industries mining is on hold after a project conference fizzled out for lack of detailed financial and operating terms, while cheap tourism around Victoria Falls resorts has begun to revive. Tobacco is in long-term decline with global anti-smoking movements and electronic substitutes, and potential joint venture partners remain confused about “indigenization” legislation expecting local control. Civil service payrolls and grain subsidies will be cut, and the state asset management unit is to be restructured for competitive and transparent deals. Commercial banks, insurers and pension funds are to buy T-bills, and the last pool will shift from pay as you go to a defined contribution scheme over time with cities and provinces able to launch their own systems. Reserve targeting will be the core monetary lever, with emphasis on deepening the interbank foreign exchange market if the RTGS$ is to last. With the currency adjustment banks may need recapitalization amid already swollen bad loan portfolios. On private sector development more broadly the Mnangawa administration is committed to improving the bottom tier ranking in the World Bank’s Doing Business, including on basic electricity supply as a real time infrastructure bottleneck.

Africa’s Preferred Prosper Pivot

2019 June 2 by

Six months into the Trump Administration’s unveiling of its “Prosper Africa” initiative intended to boost the middle class, youth employment and business climate in the interest of national security and Chinese aid and investment competition, the Washington-based Center for Strategic and International Studies issued a report on turning it “into reality.” It notes that over half of Sub-Saharan countries are “free” in political terms, aided by the spread of cellphones and other technology to enhance accountability and democracy. The middle class should triple to over $1 billion by mid-century, but media searches show 80% negative mentions with a corruption, conflict and disaster focus. For the past decade US aid averaged almost $10 billion, reflecting longstanding ties but otherwise “economic disengagement. “ Exports to the continent have been under 1% of the total, despite urbanization raising goods and services demand.  Bilateral trade, finance and professional training can reduce joblessness and social instability and tap into household consumption estimated at $2 trillion over the medium term. Europe and Asia have dedicated programs such as Germany’s private sector development “Marshall Plan” and China’s array of infrastructure and loan for natural resource efforts. Its two-way $150 billion trade was triple the US figure in 2017, and for the five years preceding that date credit lines averaged $17 billion under their own debt and environmental sustainability criteria.

Washington has deployed thousands of troops in twenty countries on security and humanitarian missions, and seven are in the top ten of aid recipients globally. The African diaspora is 5% of the immigrant population, and tens of thousands of students are at US universities. One million Americans toured the region in 2017, and overall numbers are projected at 85 million by end-decade as big hotel chains like Hilton and Marriott expand. The visa restrictions recently proposed on Nigeria and neighbors could provoke countermeasures stifling this potential, the think tank warns. The twenty-year old duty-free AGOA arrangement, extended through 2025, is a linchpin but petroleum products dominate despite also targeting garments and manufacturing. AID’s sub-regional trade hubs have created $600 million in projects, and the MCC has approved dozens of host nation public-private sector compacts according to strict objective criteria on good governance, economic growth, and social indicators.

 Power Africa was launched five years ago to catalyze over 100 deals and power connections to 60 million citizens. It “de-risks” investment through official guarantees and financing, and promotes policy reforms and free-market pricing under a dual mandate. The African Development Bank otherwise puts infrastructure needs at $150 billion annually, with half the sum still outstanding. Prosper Africa has not yet been fleshed out, and lacks a communications strategy and specific goals.  Free trade agreements should be a priority as the African Union forges a continental structure, and a dedicated commercial corps through embassies and the main organizations at home could be recruited for business leads and relationships. Telecoms is a particularly promising industry for American competitive advantage and the Ex-Im Bank still lacking board members and the new Development Finance Corporation to succeed OPIC would benefit from thematic and activity reorientation in a new “reality,” CSIS suggests.

West Africa’s Non-Benign Benin Signal

2019 May 27 by

In March even hard core frontier market investors raised eyebrows when tiny Benin, part of the West Africa CFA Franc Economic and Monetary Zone (WAEMU) dominated by Cote d’Ivoire and Senegal which previously issued abroad, floated a 500 million euro 8-year bond at an initial near 6% yield. It followed another debut deal from Uzbekistan, where the new President has embarked on far-reaching currency and trade reforms and the stock exchange opened to foreign funds with capital control modification.

Benin’s inaugural sovereign ratings were in the speculative “B” category, with Fitch pointing out that over 6% gross domestic product growth from cotton and cashew exports was offset by poor development indicators and weak diversification and external accounts. For two decades the country of 11 million with $11 billion in output has been under International Monetary Fund programs, and relied on agriculture and port activity often directed cross-border to Nigeria. That large neighbor is just emerging from recession, and Benin’s government infrastructure spending as a backstop will likely breach the regional 3% of GDP fiscal deficit target.

The IMF’s March report on WAEMU common policies pointed out that budget and current account gaps were increasingly funded through Eurobonds rather than regional central bank loan facilities and the Abidjan-based government bond market. Public debt approached 55% of GDP and servicing one-third of revenue in 2018, and the “structural impediments” of the local bond market include the lack of primary dealers and a single supervisor and depository stifling placement and secondary trading. External borrowing diverts from core stock exchange challenges such as increasing non-bank investor participation, and also dilutes the zone’s tighter monetary stance to preserve low 2% inflation and the CFA Franc-euro peg, the review suggested.

The global banks which led Benin’s offering may have wished to extend longstanding Francophone Africa relationships and tap favorable temporary high-yield appetite, but could attain dual long-term commercial and development returns through a model shift as technical advisers. They can compete with traditional development institutions like the African Development Bank, with its own dedicated data collection and market building initiative.

Cote d’Ivoire and Senegal Eurobonds in 2018 did not lift international reserves to the recommended five months imports range for the zone, although they covered almost 90% of the combined fiscal deficit. The current account gap rose to almost 7% of GDP on negative terms of trade with oil import demand, and the Fund found “shrinking room for maneuver” to avert debt distress. The average tax revenue/output ratio for the eight member group, which includes conflict and terror-prone Burkina Faso, Mali and Niger, was up only 1% the past decade to 15%. The original public debt ceiling was set at 70% in the aftermath of the 2000s HIPC official relief program when concessional financing dominated, but a 10% lower sustainability threshold is now in order in multilateral agencies’ view.

Banks are phasing in Basel III prudential standards over five years, as annual credit growth remains in high-single digits and concentrated on the public sector. Three large banks could not meet the new capital minimum, and bad loans were almost 15% of the total in mid-2018. A repo market does not yet exist to support broader bond transactions, with banks at rollover risk especially if existing sovereign instruments are of limited collateral use.

Cote d’Ivoire is projected to grow 7% annually over the medium-term aided by state enterprise restructuring, and its debt strategy envisions a two-thirds/one-third regional-external split. However, over the past two years the latter has been the main channel and foreign debt increased to 30% of GDP, and in net present value terms the debt distress trigger is close with the repayment profile, the IMF warns. Maturities range from 8-30 years, and officials are considering hedges with international counterparties for dollar exposure.

Senegal has only a policy support program with the Fund, but it too was admonished about vulnerabilities following “breaches” in debt-to-export measures and missing information on total liabilities, including to Chinese creditors under showcase road and stadium projects. President Macky Sall easily won reelection in February after opponents were disqualified, as critics raised questions about off-budget financing also reflected in asset manager research.

Countries have long promised simple improvements to the regional bond market such as aligning auction and syndication approaches, eliminating multiple regulators, and creating a private insurance and pension fund institutional base, but progress stalled amid recent access to global fixed-income investors. The Benin deal was a breakthrough as well as a wake-up call that the zone may have leverage and functional cracks. International issue underwriters could work to fix them for a more durable franchise, at the same time they seek immediate fees and returns, and the next Francophone exercise can commercially seize this frontier.

Africa’s Pervasive Power Struggles

2019 March 17 by

African stock markets got off to a mixed start through February with presidential elections and chronic electricity shortages dominant themes in the continent’s biggest economies South Africa and Nigeria. Nigerian equities were lackluster ahead of the contest between political veterans Buhari, vying for a second term, and former vice president Abubakar, a wealthy business executive from energy privatization deals. Both candidates are running on similar platforms, with state oil and gas company reform and fuel subsidies largely untouched as half the population lacks power, as they call for improved standing in the World Bank’s commercial environment rankings and easier foreign exchange access without unraveling controls. The challenger’s main departure is a fiscal decentralization changing revenue and responsibility relationships between the state and federal governments, designed to appeal to grassroots voters long resentful of Abuja’s authority and spending. The plank also aims to slow domestic debt growth to fund chronic budget deficits, with a possible shift toward external fund-raising at one-third the total. The campaigns promise to raise minimum and civil service wages to keep pace with double-digit inflation, and redouble the fight against Boko Haram and other insurgent groups, with moderate 3% GDP growth predicted this year on hesitant consumption. Corruption scandals around both major parties have served to neutralize it as a wedge issue amid official claims against multinational oil companies and banks for aiding embezzlement. JP Morgan is the target of a $900 million lawsuit for allegedly allowing a former state governor to abscond with funds, after the institution was excoriated for dropping the country from its benchmark domestic bond index for currency restrictions. A naira float is not in the cards for the post-election period, although analysts expect further liberalization of the multi-tier market that could suggest an eventual timetable.

South Africa’s President Ramaphosa, preparing to run for formal election in May, had to contend with another wave of power operator Eskom’s rolling blackouts after proposing a plan to split it into separate operating units.  Its $30 billion in debt weighs on the precarious sovereign investment-grade rating as Moody’s considers a demotion, and follows restructuring negotiations for the ailing state airline. With such contingent liabilities the debt/GDP ratio may be well into the 70-80% danger zone, as Finance Minister Gordhan reluctantly agreed to another bailout in view of Eskom’s “too big to fail” status. The management was replaced, and higher tariffs may be approved in the face of labor opposition prompting strikes. The board of the top public pension fund, Africa’s biggest by assets, was also revamped after members were implicated in graft under the previous administration. The President’s housecleaning is in line with his “New Dawn” platform to rally ruling ANC party support into the polls, although critics reiterate establishment ties dating to independence and urge fresh entrants. The successor team faces a continuing fiscal mess on anemic 1-2% growth as well as the fallout from next-door Zimbabwe’s renewed crisis, following a violent crackdown on fuel price hike protestors. President Mnangawa returned from a trip to the World Economic Forum in Switzerland to handle the aftermath, amid rumors the army would unseat him. The electronic proxy currency was formally devalued against real dollars, bowing to daily consumer and banking reality, as the Finance Minister tries to draw on earlier African Development Bank ties to overcome sanctions and obtain hard international community cash.

Africa’s Churlish China Debt Denial

2019 March 4 by

After double digit declines on African stock markets last year in the face of dire official and private analyst warnings on sovereign debt accumulation, the African Development Bank (AfDB) in its 2019 outlook acknowledged rising loads but dismissed systemic crisis risk. Its more upbeat assessment contrasted with the International Monetary Fund’s recent designation of 15 countries “in distress” and the World Bank’s citation of widespread commercial borrowing above 30% of gross domestic product in its January Global Economic Prospects publication. A separate Washington think tank, the Center for Global Development continued to sound the alarm on Chinese loans in particular owed by poorer countries like Djibouti and the Maldives, which has asked Beijing for restructuring.

 The AfDB report noted the continent’s gross debt/GDP ratio topped the 50% danger zone as of 2017, worsened by commodity price decline affecting the denominator while the numerator increase could be justified by an annual infrastructure financing gap in the $75-100 billion range. It suggested that external debt service was manageable amid a Eurobond boom which brought the total outstanding to $70 billion in 2017, and that new Chinese yearly lines have stabilized below $15 billion. The Bank acknowledged serious average fiscal and current account deficits at 5% of GDP, but urged better foreign funding use for capital goods imports and other productive investment as opposed to reduction.

Economic growth this year is projected at 4%, below the early decade peak, although almost half the region will reach 5% offset by 2% population expansion. The pace will not cut unemployment and poverty, and assumes big oil exporters continue to enjoy price recovery at $70/barrel, despite subsidies in Nigeria and elsewhere exerting countervailing fiscal drag. East Africa is the highest growth area at 6% led by outperformers Ethiopia, Rwanda and Tanzania but also saddled with South Sudan’s unending civil war and refugee crisis. West Africa was hurt by Nigeria’s recession and modest rebound despite fast Francophone clips in Cote d’Ivoire and Senegal. Southern Africa likewise was constrained by giant South Africa’s meager 1% result as i credit ratings were lowered on debt concerns along with lagging public and private investment. The AfDB points out that the latter now equals consumption with each representing over 45% of regional output, with the rest net exports. Inflation is also steep at above 10% and could spike with further currency depreciation, and global trade disputes and rising interest rates, coupled with extreme weather and political unrest, could compromise these forecasts. Upcoming elections in South Africa and Nigeria, where China maintains close natural resources and financial services links, will be scrutinized for economic reform and adjustment signals.

Tax revenue is almost 10% below the 25% of GDP needed for development spending, and Angola will introduce a value-added levy this year, while Botswana, Kenya and Zambia emphasize easier on-line payment that can also elevate their ranking in the World Bank’s Doing Business reference. Remittances at $70 billion in 2017 are roughly double portfolio inflows and outpace as well foreign direct investment and overseas aid.  West Africa and Ghana especially is a popular FDI destination, and expatriate transfers are a large slice of national income in Senegal and Uganda, where the Indian community remains a powerful commercial force. Exports as a share of GDP declined everywhere except for Southern Africa since 2010, and are concentrated in raw materials with “low jobs content and volatile terms of trade.” Global value chain integration is sporadic, with lagging logistics and technology impeding good scores on the World Economic Forum’s Global Competitiveness Index, according to the Bank’s review.

With the launch of a pan-African free trade agreement and China’s Belt and Road Initiative push to forge continental commercial and transport hubs, the respective West and Central African economic and monetary unions are revisiting their purpose against a mixed record of policy and practical outcomes. The benefits of exchange rate calm and reduced transaction costs must be weighed against framework inflexibility that is reinforced with cross-border labor, goods and capital flow restrictions. Unhindered movement should be a “reality” rather than an objective, and central independent fiscal and banking authorities are a “tall order” yet to be achieved despite acceptance of short-term debt paths, the AfDB concludes.

Zimbabwe’s Tempestuous Transition Toss

2018 December 24 by

Emerging and frontier stock markets this year have been battered with one unusual exception: Zimbabwe’s MSCI Index was up 100% through October as local investors are desperate to preserve savings value, with bank collapse and hyperinflation again looming a year after longtime President Robert Mugabe was forced to resign. His successor and former deputy and army head Emmerson Mnangagwa won his own term for the ruling Zanu-PF party in elections this July, with the opposition claiming widespread violence and vote-rigging. The President and his team, with previous African Development Bank chief economist Mthuli Ncube as Finance Minister, have tried to shake off years of international commercial sanctions and shunning with outreach at the recent International Monetary Fund-World Bank meetings and conferences in the US and UK. They have endorsed state enterprise privatization, fiscal discipline and official arrears clearance while the banking and multi-currency systems heavily reliant on electronic transfers and artificial “bond notes” unravel. Foreign portfolio investors remain at a distance from the monetary chaos and lingering pariah status, when they could join domestic counterparts in formal collaboration to press for urgent steps to hasten a return to the developing financial market mainstream.

In October in Washington an executive delegation, hosted by the US Chamber of Commerce and Corporate Council for Africa, proclaimed Zimbabwe “open for business.” Banking and finance was not represented as presentations focused on difficulties accessing credit and funding normal operations in real estate, energy, agriculture and technology. Potential partners attending the roundtable noted the absence and basic nature of slide shows reflecting inexperience at global investor gatherings. Zimbabwe’s Ambassador urged participants to again consider its human and natural resources after a long period where cross-border engagement was confined mainly to the South Africans and Chinese. A State Department official expressed the Trump Administration’s view that political and economic reforms were preconditions to stronger diplomatic and trade ties, as individuals associated with the Mugabe regime remain under asset freezes.

President Mnangawa later ramped up the rhetoric for a Financial Times London event, when he compared planned restructuring efforts to the Thatcher “revolution” four decades ago in cutting the public sector payroll and selling off state-run companies. He promised to collect taxes and proposed a new levy on electronic transfers comprising 95% of financial transactions, and also targeted hundreds of millions of dollars in revenue through an anti-corruption crackdown. A “zero tolerance” campaign resulted in top business and government representative arrests, with suspects going into exile to avoid investigation. Gross domestic product growth may exceed the IMF’s 3%-4% forecast with gold production already higher than the 2017 total, and the private sector will expand in farming with compensation for previous seizures. The President lauded Minister Ncube’s official creditor overtures on debt settlement, and progress toward a full Fund program.  

However the Minister admitted in October that the 11% of GDP budget deficit was triple the original target. Staple food, fuel and medicine costs suddenly spiked several hundred percent, recalling the pre-2009 hyperinflationary era, as he signaled intent to purge bank accounts of “bad” electronic and bond note dollars which trade at a discount to hard cash. His office also threatened 10 years in prison for underground currency traders, and the central bank further stoked financial system anxiety with an order to keep remittance flows in separate quick access facilities. The Cairo-based African Export-Import Bank, which backed the bond notes introduced in 2016, again agreed to guarantee them at full parity value with physical money, and the Mnangawa administration as a backstop also borrowed $250 million from London investment fund Gemcorp, which was founded by a former executive with Russia’s VTB Capital. According to local brokerage reports, out of $9 billion in deposits only around 10% is US dollars, euros or South African rand, with the overwhelming balance so-called “zollars” which economists agree should be phased out over time for monetary stability.

Minister Ncube has implored citizens for patience over the transition, but the memories of massive devaluation and lack of trust are too embedded. Against this background, London conference investors in November were unmoved by the MSCI Index’s triple-digit gains and his pledge to end indigenization laws and permit foreign majority ownership of listed companies. To resolve confidence and policy impasses, both sides should form a joint economic and financial market task force to speed rebuilding and reintegration. It would concentrate private capital focus still lacking under the new leadership, while finally tackling dual banking and currency crises for a fresh start. This interim model could also fill a glaring gap as post-sanctions countries elsewhere on the continent, like Sudan, begin the journey toward longer-term commercial financing.