EMTA Forum on Sub-Saharan Africa (London) - Sept. 24

Additional support provided by Barclays and Rand Merchant Bank.

Registration fee for EMTA Members US$50/ US$695 for non-members. 

Rationale for Investment in Sub-Saharan African Markets Remains Strong 

Speakers at EMTA’s Fifth Annual Sub Saharan African Forum reviewed the effects of the global slump in commodity pricing, as well as the US FOMC postponement of a rate hike, on the continent’s debt markets.  The event was hosted by ICBC Standard Bank on September 24, 2015, and drew a crowd of 100 market participants.

Moderator Stephen Bailey-Smith (Standard Bank) opened the session by observing that the market had been pummeled earlier in the day in a commodity-related rout.  However, “if people are just noticing now that Chinese demand for commodities is declining, they are late to realize,” he stated. 

Kevin Daly (Aberdeen Asset Management) listed possible reasons behind recent investor selling of African debt.  “General lack of confidence in EM, weak commodity pricing, concerns over the Chinese economy and decreased liquidity have all led to a general overall decline in African debt pricing,” he summarized.  Daly saw opportunities in the carnage, however.  “People are lumping in Ethiopia with weak commodity prices – that is wrong…and we see value out there,” he concluded. 

Andreas Kolbe (Barclays) expressed concern at the overall deterioration in the terms of trade for African countries, and generally for EM countries.  He also cautioned that further downside was possible; “we might not yet have seen the worst.” 

“The tolerance for deteriorating stories has never been lower,” commented BTG Pactual Asset Management’s Alex Garrard.  He pointed out that benchmarked-investors were being forced to sell on weakness.  Rand Merchant Bank’s Nema Ramkhelewan-Bhana suggested that the market had been over-optimistic in the past, “and we are starting to see debt from Zambia and Ghana trade at levels where they should have been at the time of this conference last year.”

Echoing comments made at recent forums, speakers concurred that an eventual Fed hike had been telegraphed sufficiently so as not to provoke market turbulence.  “We are not focused so much on timing, but more on the magnitude of the hikes,” stated Ramkhelewan-Bhana, who argued that spreads had already widened far enough to absorb a rate increase.  Garrard saw a Fed hike as a market positive, “it will show confidence in growth,” while conceding that the Fed was correct in punting at its September meeting.  Kolbe noted that, as African debt had become more mainstream, it was more correlated to global Fed-related global sell-offs. 

Discussing specific credits, Daly warned that Zambia’s fiscal deficit was “anyone’s guess.  It could be double digits because of weak copper pricing.”  He recommended that Zambian officials make a better effort to communicate with investors.  “I like Zambia for yield reasons only,” stated Garrard, who compared the credit unfavorably to Ukraine.  Ramkhelewan-Bhana added that the lack of adequate electricity was a structural constraint to growth and would prove a barrier to greater development.  Moderator Bailey-Smith added his own opinion that an IMF agreement, which might be necessary if copper dropped below $5000, could lead to a potential Zambian spread compression of as much as 250 bps.

Acknowledging his past bearishness on Ghana, Daly suggested the market “might not be giving them credit for the small improvements …that they are making.”  He added that, at current pricing, investors in Ghanaian Eurobonds were being compensated for their risk.  “I see real commitment now from the government, and confidence in Ghana from official creditors,” seconded Garrard.  Bailey-Smith praised Ghana as being one of the few African countries to reduce subsidies.

On the other hand, Ramkhelewan-Bhana expressed a more bearish view.  “I’m worried about the pre-electoral effect [on government spending],” although IMF support was a positive factor. 

Garrard praised Gabon’s policy responses to weak oil pricing, and specifically its quick and transparent communications with investors, highlighting the willingness to slash the government budget.  “Ultimately they are very correlated to oil, but one can hedge that risk,” he concluded.

Cote d’Ivoire was an improving story in terms of GDP growth in Daly’s view, and political risk seemed to be kicked down the road with the likelihood that President Ouattara would be re-elected.  Kolbe cited the country’s declining debt/GDP ratio and included it among his list of recommended buys. 

Several speakers raised concerns on Kenya.  “Fiscal discipline is lacking, and they should have benefited from the drop in commodity prices,” Kolbe affirmed.  Mozambique was also urged to improve its communication with bondholders, with speakers suggesting ways to resolve confusion in its outstanding debt.

The panel also addressed local currencies.  The naira could be a short-term tactical trade, “but one would be mad to buy it on a fundamental basis,” stressed Daly.  Other speakers agreed the naira was overvalued, with Kolbe seeing potential opportunities post-devaluation.

Ramkhelewan-Bhana lamented the “policy paralysis” at the Central Bank and reconfirmed her bearish naira outlook, asserting that the market would ultimately force the thus-far “stubbornly resisted” devaluation.  Daly concluded the naira discussion by noting that investors would ultimately return to a weaker naira “because it is the most liquid African currency market.” 

As the panel neared its end, Garrard argued that, despite market swings, “my confidence in Africa has not been shaken.”  The continent was blessed with natural resources (“for which the current price environment won’t always be as it is today”), as well as young, dynamic populations and relative political stability.  “There are a lot of reasons supporting the long-term story; this is just part of the cycle,” he concluded.