Hunt for alpha leads to Africa

18 Mar

Posted by The Ethiopia Observatory

By Dambisa Moyo

In my book Dead Aid I suggested that African governments could and should access the international capital markets to finance their development objectives such as infrastructure, healthcare and education. I argued that the relatively transparent global bond markets would help impose discipline on governments that were otherwise viewed by investors as reckless and, in many cases, corrupt. Critics argued that my suggestion was naive, and that African policy makers were ill-equipped to venture into the international debt markets.

Four years later, and African governments are proving the naysayers wrong.

In just the past year at least four sovereigns – Angola, Tanzania, Morocco and Zambia – have issued international debt. In nearly every case the bonds were over-subscribed – in some instances by over 10 times, and in some cases more attractively priced than the debt of Italy, Portugal or Spain at the time of issue. Today Africa boasts 17 countries with credit ratings by leading rating agencies of at least single B, fuelling expectations that other countries, such as Kenya and Mozambique, will soon also come to the international bond markets.

Solid debt and deficit dynamics, attractive labour trends from the improving quality and quantity of young workers, and prospects for productivity gains, are the backbone of the recent IMF forecasts, which have sub-Saharan Africa poised to be the world’s third fastest growing region in 2013 and 2014, with many African economies growing above 7 per cent.

Savvy investors are not only focussed on Africa’s evolving debt story; on the back of the compelling growth story, the MSCI Africa equity sub index posted returns of over 60 per cent in the last 12 months. The fact that 85 per cent of the roughly 1,000 stocks that trade on Africa’s 19 stock exchanges are non–commodities, indicate significant investment opportunities in the banking and insurance, logistics, telecommunications and retail sectors.

Today, helped by better information flows and more transparent policymaking, investors are better able to delineate between measurable risk and incalculable uncertainty. Recent market-friendly fiscal and monetary policies, improvements in the overall political environment – more than 50 per cent of African countries are now deemed democratic – and notable declines in continent-wide perceived corruption, all make for easier risk assessments and asset valuations. Moreover, the relatively low correlation between African public market returns and those of developed markets mean African investments promise superior uncorrelated risk-adjusted returns, and can add positively to the diversification of global investment portfolios.

Despite significant progress, a lot of work remains to be done.

Finally, although Africa’s political environment has markedly improved, becoming more stable and predictable than in previous decades, there will undoubtedly be volatility as Africa’s nascent political regimes transition to liberal democracies over the next decade. For example, the recent electoral experience in Kenya is a stark reminder that even when the trajectory of political reform points upward, the path to the new equilibrium will not necessarily be a straight line.

Read the full article from The Financial Times

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