Africa disappoints on global emerging market expectations

Africa has disappointed the world on its expected emergence as a strong and virile market, according to economic watchers.

The continent instead of riding on the birth of democracy in most of its countries and an equally working population, slipped into debts despite billions of dollar debt being forgiven her.

At the turn of the century, the continent was unanimously considered the next emerging market by major global analysts including McKinsey and Goldman Sachs, which particularly pointed to the return of democracy on the continent and accompanying transparency, as well as a huge population as major drivers for the growth of the continent’s domestic markets.

However, analysts say there has been little progress on the steps needed to foster local debt markets – pension reform, inflation targeting and making currencies more flexible. According to them, those markets that have emerged are small and with low trading volumes, a similar story to many African equity markets.

“We all thought (Africa) was going to be the next emerging market. Governments should have been getting rid of dollar liabilities and
moving into local currency liabilities, which is what Brazil did 20 years ago and Mexico 30 years ago,” Bryan Carter, head of emerging debt at BNP Paribas Investment Partners told Reuters.

Carter said that in 2007 he was optimistic enough to hold a third of his fund in sub-African local debt. Now he has zero exposure outside of South Africa, he said, adding: “They just fell back into the ‘original sin’ trap of borrowing in dollars.”

After the debt, owed to multilateral organizations such as the International Monetary Fund, was wiped out, investors such as Carter were prepared to accept the risks of buying local currency bonds, in exchange for higher returns.

That would have allowed governments to run their economies, regardless of exchange rate moves between the U.S. dollar and domestic currencies.

Currency and interest rates fluctuations have long been a source of emerging market crises.

The analysts believe that stimulating local bond markets, could have helped start a domestic savings and investment industry and also helped to reduce the reliance on commodities exports – a major source of the dollar income needed for debt repayments.

“While Africa’s current external debt ratios currently appear manageable, their rapid growth in several countries is a concern and
requires action if a recurrence of the African debt crisis of the late 1980s and the 1990s is to be avoided,” UNCTAD warned last year.

Other emerging markets in contrast have shifted almost entirely to borrowing at home. Debt denominated in emerging currencies totals about $15 trillion, or 80 percent of the developing world’s bond stock.

Investors do note some positives such as better regulation, growing pension assets and longer 10-20 year bond tenors in many countries.
Kenya recently sold the world’s first mobile phone-based bond to ordinary citizens

And Ghana last month auctioned $2.2 billion in cedi debt, the largest ever daily transaction in sub-Saharan Africa. The deal attracted Michael Hasenstab, Franklin Templeton’s high-profile fund manager.

A Ghanaian official said, speaking on condition of anonymity, the government would focus this year on extending the maturity of domestic
bonds and would not issue Eurobonds.

Felix Mutati, Zambian finance minister, too said he wanted domestic borrowing to be the first port of call in future, noting the 2017 budget was being financed largely on domestic markets.

“The domestic market, you cannot just go and dip a bucket into it. It is a delicate operation, the reason being that government borrowing can crowd out the private sector,” Mutati told Reuters, when asked why the government had continued borrowing from overseas.

Some argue external borrowing is key in the early stages of a country’s development.

“The (foreign) borrowing has been invested in infrastructure projects that will drive growth….it is setting the base for future economic performance,” John Rwangombwa, Rwandan central bank governor was quoted as saying.