July 17th, 2014 by Tom Minney
Report cover by the Overseas Development Institute.
On average Africans are paying on average 12% ($25) to send $200 home, which is twice as much as the global average. According to UK thinktank Overseas Development Institute (ODI
): “The global community pledged to cut remittance charges to 5% by 2014, yet this ‘super tax’ shows there is a long way to go. Our report urges governments to increase competition in money transfer remittances and to establish greater transparency on how fees are set by all market operators.”
In addition, many African businesses are finding it harder to get access to banking services as banks are tending to shy away from countries where they see more risk and less profits, after a couple of years of massive fines by US regulators on global banks for their global operations. This means that there are less routes to send money to Africa, last year there was a fight to keep the last legitimate banking payment lifeline to Somalia, offered by Barclays, open. Cutting this would have ended many transfers including remittances and aid.
According to a story in Business Day of 16 July, the World Bank, Group of Eight (G-8) and Group of Twenty want the price charged by banks and money transfer operators to send remittances to and from Africa, as well as within the continent, reduced to the G-8 target of 5%, from the average 12.4%. It says that payments technology company Visa is working closely with South Africa’s banks and retailers to open more corridors for consumers to send remittances more cheaply.
ODI said 2 money transfer operators — Western Union and MoneyGram — account for two-thirds of remittance transfers. Remittance prices are even higher between African countries, according to the World Bank.
According to the Business Day report Visa has launched a programme “at a ‘tenth of the price of the traditional players’ using its network connecting banks across 200 countries, to send money from one Visa card to another, Visa sub-Saharan Africa head Mandy Lamb said in Johannesburg on Tuesday.
“Consumers can send money via cellphones, a bank branch, an ATM, internet banking or a point of sale machine at a retailer, in real time. Equity Bank in Kenya was the first sub-Saharan bank to launch the programme last year.
“Visa is certifying some banks and retailers in South Africa to allow them to offer remittances. Some are to start the service between now and the end of year, said Ms Lamb.
“‘In South Africa we have seen a great interest in banks wanting to offer remittance as they have seen the business case … it is lucrative for them and meets the World Bank requirements in terms of bringing down the costs of remittance,’ she said.
“Retailers are also interested in sending and receiving remittances as they have realised it is ‘commercially viable for the lower end of the economy’, said Ms Lamb.
“Visa research estimates that around $73bn was sent via money transfers in sub-Saharan Africa in 2012 and this would grow at double-digit rates to $101bn by 2017.
“This is a substantial opportunity for Visa which benefits from remittance flows, disbursement flows and prepaid cards in the market. By 2017, Nigeria would account for $55.8bn in remittances, Kenya $27.5bn and SA $17.6bn, according to Visa.
“Remittances sent from outside Africa would be the fastest-growing market, expected to amount to $38bn by 2017 — or 27% of the total remittance market. This would be an increase from $19bn in 2012 when this category made up 20% of the total remittance market.”
July 13th, 2014 by Lasitha Perera
By Lasitha Perera, Executive Director, Frontier Markets Fund Managers
At the recent Africa Debt Capital Markets Summit (ADCM 2014) in London I had the privilege of moderating a panel focussed on Nigeria’s Debt Capital Markets. I was joined by some of the key actors currently working to build deep and active debt capital markets in the country, including representatives from the Nigerian Sovereign Investment Authority (NSIA) and the Securities & Exchanges Commission (SEC).
The following were highlighted as the main challenges:
1) A need for improved coordination within the Federal Government of Nigeria (FGN) to ensure that the FGN’s own bond-issuance programme and rate-setting policies do not crowd out sub-sovereign and corporate borrowers from accessing the debt capital markets.
2) Greater efficiency, transparency, and lower transaction costs thereby encouraging more sub-sovereign and corporate borrowers in Nigeria to use the debt capital markets.
3) More financial education and capacity-building for all participants in Nigeria’s debt capital markets to enable better understanding of risk, facilitate better pricing decisions and improve liquidity.
The panel gave examples of initiatives that have been or are being developed to overcome these challenges:
1) The Nigerian Mortgage Refinancing Company, in which the NSIA is a shareholder, was highlighted as an example where different agencies of the FGN have successfully cooperated to build an initiative that will play a significant role in developing Nigeria’s debt capital markets.
2) When GuarantCo, a development finance fund that my firm manages, credit-enhanced one of the earliest Nigerian corporate bonds in 2011 it took nearly 18 months to obtain SEC approval. With the benefit of technical assistance from GuarantCo, the SEC can now approve in 2 weeks.
3) GuarantCo is also partnering with the NSIA, to develop a Nigerian Credit Enhancement Facility that will credit enhance infrastructure bonds, improving their credit ratings to investment grade, thereby enabling the debt capital markets to finance critical infrastructure.
The story of how Nigeria’s debt capital markets develop will be one based on marginal gains such as those above. It remains however a story full of positives and potential.
July 3rd, 2014 by Tom Minney
After a high-speed 8 weeks installation, Dar es Salaam Stock Exchange (DSE) successfully “went live” on 27 June with an integrated trading system and clearing and settlement technology supplied by South Africa’s Securities and Trading Technology (STT). As reported on this blog the DSE has switched from Millennium IT systems supplied by the London Stock Exchange group.
Happy at the launch, STT CEO Michelle Janke and DSE CEO Moremi Marwa
Moremi Marwa, CEO of DSE (www.dse.co.tz) said in a press release: “This is another milestone for our national exchange – we have not only achieved to execute this in the shortest period possible but we also have managed to procure a system that seamlessly integrates our automated trading platform with the central securities depository and the national payment system through SWIFT interface – this means we have now achieved a true Delivery versus Payment (DVP) and hence risk-management assurance to our investors.
“Furthermore the system is more efficient, it is more scaleable and flexible, which is line with our strategic intent of introducing new products and increasing accessibility to our system through the use of mobile, Internet and SMS trading facilities. We are very grateful for what we have achieved during this short period of time. We are thankful to the STT team for partnering with us and making it possible for us to pull this off.”
He told AfricanCapitalMarketsNews on Monday 30 June in London that the system is also priced in a favourable way that incentivizes both parties to boost the exchange’s performance.
Michelle Janke, MD of STT (www.sttsoftware.co.za) said: “I am extremely proud on this momentous occasion. Today the Tanzanian exchange becomes STT’s third exchange to go live with STT’s integrated exchange solution. Furthermore, the DSE is STT’s first African exchange to go-live with our equities platform as well as our central securities depository (CSD) system, and this was all accomplished within 8 short weeks.”
Founded in 1985 in South Africa, STT started working with the South African market for government bonds (gilts). It specializes in developing financial market software solutions to South African and other clients. Core products include exchange solutions, back-office management systems and to front-end trading tools. Other systems include clearing systems, custodial systems, trading systems, risk-management systems and customer relationship management systems for clients such as central, reserve, commercial, private and investment banks, brokers, insurance companies, trading houses, corporate treasury operations and central securities depository participants
Former JSE director Allan Thomson is working with STT in a consortium to rival South Africa’s authorised central securities depository, Strate, according to a report in Business Day. He has been involved in setting up the Bond and Derivatives Exchange of Zambia and the Nairobi Securities Exchange’s derivatives exchange for the East African region.
June 28th, 2014 by Tom Minney
Nairobi National Park (credit: Kenya Tourism Board, www.magicalkenya.com)
Global investors offered a record $8.8 billion in bids for Kenya’s 5- and 10-year Eurobonds this month. The country issued $0.5bn in the 5-year bond at 5.875% and $1.5bn in the 10-year at 6.875%. The resounding success is likely to encourage more African governments to speed up plans to come to international markets for credit while cheap global rates continue and appetite is high for frontier markets debt.
This is Africa’s biggest Eurobond issue to date. According to the BBC, investors from the US took about 67% of the issue and UK investors about 25%. Bond rates on Kenya’s 10-year debt in issue came down since the new issue was first announced on 16 June to 6.41% which is 381 basis points over the similarly dated US treasuries, according to Bloomberg.
President Uhuru Kenyatta was reported on Reuters telling a news conference: “By accessing these external funds, we will reduce government borrowing from the domestic markets, thereby helping drive down interest rates which should boost investment, spur economic growth, provide more employment opportunities to our people.” He described the sale as “a vote of confidence”. At a state of the economy address on 25 June he said the funds would be used prudently to fund infrastructure including transport and energy and to fund agriculture.
Cabinet secretary for the National Treasury (equivalent to Finance Minister) Henry Rotich said: “Investors were impressed with the management of our economy and perceived it to be very strong.” He said it would diversify government’s financing for development programmes. He also said the Government would come back to the markets in the next fiscal year (starting 1 July) but may consider a sukuk bond (see here for UK’s £200 million sukuk bond success) or a diaspora bond. The sovereign is also set to be a benchmark for Kenyan firms issuing corporate bonds on international markets, similar to the success of Nigeria’s sovereign issue.
Rotich said that from 8 July the Central Bank of Kenya would start setting a new reference rate for banks, the Kenya Banks Reference Rate. Banks would have to use this, although they would still be able to add risk premiums according to the creditworthiness of borrowers. This is also expected to lower interest costs and the rate would be set according to the average of the CBK’s main lending rate and the average yield on benchmark 91-day Treasury Bills every 6 months.
The Government announced its 2014/15 budget this month and forecast a budget deficit of 7.4% of gross domestic product (GDP) and local borrowing of KES190.8bn ($2.18bn) or 4.1% of GDP, according to Reuters. Macro-economist Rotich was a colleague when Kenyatta was Finance Minister and the two are working together to speed up Kenya’s economic growth to over 10%. According to a story in the Financial Times blog Beyond Brics, Rotich says Kenya will grow at 5.8% this year and 6.4% next year, however the World Bank has just cut its forecast from an earlier 5.3% forecast for this year and forecasts 4.7% for both years.
The blog cites the World Bank report: “The new projections reflect the effects of the drought, the deteriorating security situation, the low level of budget execution, and tighter global credit as the US Federal Reserve winds down its expansive monetary policy.”
The World Bank says drought has cost Kenya $12bn over the last 10 years and that foreign direct investment (FDI) is only 1% of GDP. The blog reports: “The World Bank is also increasingly preoccupied by the impact of inequality on growth and stability.” The World Bank is optimistic and is backing Kenya with a $4bn programme, double the Eurobond.
Kenya plans $43bn of infrastructure by 2017, but there are questions as to whether they get value for money in a $3.7bn deal with Chinese for new rail and rolling stock. Kenya is likely to become a middle-income country by September after re-basing because of statistical revisions.
June 26th, 2014 by Tom Minney
Top speakers including Government leaders, policy-makers, bankers, investors and experts will be debating the future of Africa’s debt capital markets on Monday 30 June at the London Stock Exchange. The African Debt Capital Markets ADCM 2014 conference is organized by African Banker magazine. I am honoured to be moderating some sessions.
Among the conference highlights are debates on whether African governments have been using bond proceeds wisely, the future for African bond issuances, local currency markets and the challenges of deepening the debt capital markets. There will be calls for policy-makers to make changes to support securitization and other steps to boost finance for development, jobs and growth, following successes in Asia and the world.
Speakers include the Hon Kweku Ricketts-Hagan, Ghana’s deputy Minister of Finance, and Dr Abraham Nwankwo, Director-General of the Nigeria Debt Management Office and Jaloul Ayed, a former Minister of Finance from Tunisia. There will also be Mary Eduk from the Securities and Exchange Commission in Nigeria, Uche Orji of the Nigeria Sovereign Investment Authority, and Stephen Opata from Bank of Ghana.
Stock exchange leaders include Sunil Benimadhu, dynamic head of the African Securities Exchanges Association and CEO of the Stock Exchange of Mauritius, Moremi Marwa CEO of the Dar es Salaam Stock Exchange and Innocent Dankaine from the Uganda Securities Exchange.
Banks, fund managers and stockbrokers include HSBC, Renaissance Capital, Investec, Ecobank and Exotix and there will be many leading legal and other experts including rating agencies Moody’s and Fitch.
There will be a special focus on the Nigerian Debt Capital Markets. Other panels will cover infrastructure, public-private partnerships, sovereign Eurobonds and local currency markets, shadow banking, Islamic finance, new institutional investor trends, and Africa’s standing among global markets.
For more information, look at the website here.
June 26th, 2014 by Tom Minney
Sultan Ahmed Mosque, Istanbul (credit: Wikipedia)
Britain attracted £2.3 billion ($3.9 bn) in orders when it became the first western country to issue an sharia-compliant bond, that obeys Islamic religious rules. The £200 million ($340m) 5-year Islamic finance bond does not pay interest but instead shares profits based on rental income from three properties owned by Her Majesty’s Government. The return is 2.036%, the same as the yield on UK 5-year Government bond or gilt.
The bond was marketed by HSBC, Malaysia’s CIMB, Qatar’s Barwa, National Bank of Abu Dhabi and Standard Chartered Bank. HSBC said that more than a third of the issuance went to UK investors.
A story in the Financial Times says London is aiming for a place as a global centre for Islamic finance. The bond attracted orders from investors in UK, Middle East and Asia for more than 10 times the amount sold. It was launched a few days before Ramadan. According to Dealogic, so far this year global sukuk issuance has totaled $21bn. The UK bond is considered high-grade debt.
George Osborne, the Chancellor, was reported as saying the sukuk is part of a long-term economic plan to make Britain the centre of the global financial system. “We have seen very strong demand for the sukuk, resulting in a price that delivers good value for money for the taxpayer.”
The FT reported Farmida Bi, European head of Islamic finance for law firm Norton Rose Fulbright, saying: “The UK government bond will be particular attractive to Islamic banks because they need to hold highly rated paper to meet the requirements of Basel III.” There have only been 4 Islamic bonds rated AAA since the start of 2013, of which 3 were issued by Islamic development bank in Saudi Arabia and one for public-sector finance in Malaysia.
Several African countries including South Africa have expressed strong interest in introducing sharia-compliant bonds and have altered tax and other rules to allow this.
Osborne hopes this will pave the way for future corporate issues. In 2007 British grocer Tesco issued a sukuk through its Malaysian arm and in 2009 online grocer Ocado borrowed £10m in a sharia-compliant loan. Only one domestic manufacturer, International Innovative Technologies in northern Yorkshire, has borrowed money in UK through a sharia-compliant bond.
May 28th, 2014 by Tom Minney
African Banker Awards 2014 (credit IC Publications)
Women triumphed at this year’s African Banker Awards 2014: Vivienne Yeda, Director General of the East African Development Bank, scooped the award for African Banker of the Year; Linah Mohohlo of the Bank of Botswana was named Central Bank Governor of the Year; and Elizabeth Mary Oleko, chairperson of the Kenya Women Finance Trust, scored the Lifetime Achievement Award.
President of Rwanda HE Paul Kagame received a Special Recognition Award for his leadership and vision. He thanked Rwandans who have sacrificed a much to put Rwanda where it is today: “Rwandans have made me the kind of leader that I am and they have given me the strength that has added up to taking our country forward.” Bob is back, as Bob Diamond the former CEO of Barclays Bank who quit after the bank faced global scandals and fines, was in the deal that was awarded equity deal of the year. Andrew Alli of the African Finance Corporation won African Banker Icon.
This year the judges – I was again privileged to be a judge for some categories – again awarded Nigeria’s GT Bank as African bank of the year. South Africa’s Rand Merchant Bank is investment bank of the year and South Africa’s Nedbank won both an award for innovation in banking and the socially-responsible bank of the year. Mastercard won a well-deserved award for financial inclusion.
Investec Asset Management won fund of the year and State Bank of Mauritius won retail bank of the year. Banque Islamique de Mauritanie won best Islamic finance initiative.
The awards also recognized smaller financial institutions and those pioneering in challenging environments. Trust Merchant Bank, an independent commercial bank operating in DR Congo, won Best Bank in Central Africa. Ecobank Mali won Best Bank in West Africa after Mali successfully transitioned back to its historic democracy after a 2012 coup that crippled the economy. Stanbic Zimbabwe beat tough competition from bigger banks to become Best Bank in Southern Africa, despite challenging economic conditions. Bank of Kigali scored in East Africa and Morocco’s Banque Centrale Populaire in North Africa.
Two landmark deals were rewarded. Citigroup Global Markets won equity deal of the year for helping Bob Diamond, previously of Barclays Bank, in the $325m initial public offer (IPO) of his new investment vehicle, Atlas Mara Co-Nvest. Standard Chartered Bank won debt deal of the year for the $3.3bn finance facility for Dangote Group petrochemical plan, building the continent’s largest refinery, petrochemical and fertilizer plant.
The winners of the 8th African Banker magazine’s African Banker Awards were announced at a prestigious ceremony on 21 May at the Kigali Serena Hotel, linked to the African Development Bank summit. Among the guests were HE Festus Mogae, former President of Botswana, and many ministers of finance and bank CEOs were also present.
Omar Ben Yedder, Publisher of African Banker and IC Publications, commended the achievement by banks: “Here in Kigali.. we have witnessed the transformation of a country. Since we have launched the awards we have witnessed the transformation of an industry. There is no room for complacency because there is much room for growth and development to achieve the transformation we all desire and work towards. But seeing local African banks finance and structure international deals is a step forward and unimaginable a decade back. And I am delighted to see three women pick up three coveted individual awards. Congratulations to them all!”
The African Banker Awards are organized by African Banker magazine and BusinessinAfrica Events (BIAE). It is a landmark event that celebrates excellence and best practices in African banking and finance.
Special Recognition Award: HE President Paul Kagame
Lifetime Achievement Award: Elizabeth Mary Okelo
African Bank of the Year: GTBank
African Banker of the Year: Vivienne Yeda, Director General, East African Development Bank
African Banker Icon: Andrew Alli, CEO, Africa Finance Corporation
Central Bank Governor of the Year: HE Linah Mohohlo, Botswana
Finance Minister of the Year: Hon Armando Manuel, Angola
Investment Bank of the Year: Rand Merchant Bank
Award for Innovation in Banking: Nedbank
Socially Responsible Bank of the Year: Nedbank
Award for Financial Inclusion: MasterCard
Deal of the Year – Equity: Atlas Mara Co-Nvest, Citigroup Global Markets
Deal of the Year – Debt: Financing Facility, Dangote Group Petrochemical Plant, Standard Chartered Bank
Fund of the Year: Investec Asset Management
Best Retail Bank in Africa: State Bank Mauritius
Best Islamic Finance Initiative: Banque Islamique de Mauritanie
Best Bank in North Africa: Banque Centrale Populaire
Best Bank in Southern Africa: Stanbic Zimbabwe
Best Bank in East Africa: Bank of Kigali
Best Bank in West Africa: Ecobank Mali
Best Bank in Central Africa: Trust Merchant Bank
Mortgage Bank of the Year: Nigerian Mortgage Refinance Company
May 28th, 2014 by Tom Minney
Trading at ECX, (credit www.ecx.com.et)
A dynamic African builder of turnkey commodity exchanges, eleni LLC, has teamed up with pan-African Ecobank through a Memorandum of Understanding (MoU) to work together to accelerate development of African agriculture. Ecobank was also recently announced as a keystone investor in the Ghana Commodity Exchange being set up by eleni, reported here
Ecobank Transnational Incorporated (ETI), with 600,000 shareholders and listed on the Nigerian and Ghana Stock Exchanges and the Bourse Regionale des Valeurs Mobiliers (BRVM), is the parent company of the leading independent pan-African banking group, Ecobank. It is incorporated in Lomé, Togo and has presence in 35 African countries as well as France, Dubai, London and Beijing.
The co-founders of eleni LLC are Eleni Gabre-Madhin, Keith Thomas and Jawad Ali, who previously established and led the Ethiopia Commodity Exchange. The ECX traded $1.4 billion in spot contracts during its 4th year of operations and can claim to have improved the lives of millions of smallholder farmers in Ethiopia.
Their new firm, eleni, was launched last year as a turnkey commodity exchange builder for frontier markets skilled exchange investors as announced in January 2013, including Morgan Stanley (www.morganstanley.com), with a string of profitable and successful exchange investments and market centre worldwide, and the International Finance Corporation (www.ifc.org) who had put up seed capital of $5 million. Its business model is to provide design, finance, build, technology and operations support services. It has projects in Ghana, Cameroon, Mozambique, and Nigeria and aims to transform African agriculture through creating functional commodity exchanges using its experience. In May 2013 Reuters reported that Bob Geldof’s 8 Miles private equity fund had made eleni its first investment, joining 8 Miles and the IFC were co-investors into the GCX alongside Ecobank.
Ecobank, represented by group chief executive Albert Essien, and Gabre-Madhin for eleni signed the MoU on 22 May during the African Development Bank meeting in Kigali.
According to the press release, Essien said: “As well as increasing market transparency and reducing transaction costs, commodity exchanges play a crucial role in the monitoring and assessment of risk. Instruments such as warehouse receipts reduce uncertainty and improve access to finance across the value chain. We look forward to collaborating further with eleni to enhance Africa’s agricultural financing capabilities.”
Gabre-Madhin added: “We are very excited to be working with one of Africa’s leading financial institutions, with a solid pan-African focus, as this opens up a tremendous opportunity to establish the leading platform for commodity-related payments and transactions across the continent.”
Ecobank signs for $1.8bn of trade finance
Also at the meeting, the African Development Bank (AfDB) and Ecobank signed a $200m trade finance facility, which has 2 components and will support approximately $1.8bn of trade transactions in Africa over 3.5 years. It includes a $100m unfunded risk-sharing facility to bolster Ecobank’s capacity as an international confirming bank for trade transactions originated by issuing banks in Africa, and another $100m trade facilitation loan which will be used by Ecobank to provide trade finance support to local corporates and SMEs in Africa.
According to a release issued by Ecobank, Mr Essien said on 21 May: “This facility would greatly support international and intra-regional trade in Africa..We look forward to an ever-deepening collaboration with the AfDB to provide vital trade finance support to promote regional integration and the development of SMEs across Africa.”
May 14th, 2014 by Tom Minney
The Nairobi Securities Exchange (www.nse.co.ke) is pushing ahead fast with its demutualization plans and will sell up to a 38% stake in an initial public offering (IPO) in June. According to a report on Reuters, NSE chief executive Peter Mwangi said the NSE will offer up to 81 million shares, subject to regulatory approval.
The offer price will be set by the IPO advisors closer to the offer date. The bourse will use the funds for new products and enhance transparency.
Reuters quoted Mwangi saying: “We want to list through an IPO on the main market. We need to open this listing before 30 June. That conversion from a private to a public company will position us to be a very effective player.”
“We are playing in a sweet spot where the frontier funds think Africa is rising. East Africa is a hot spot on the African map and we are the gateway into that east African region.”
Soaring profits, new products
The NSE’s pretax profit more than doubled to KES 379m shillings last year from 2012. It has been lifted by a surge in trading turnover after the 4 Mar 2013 presidential election went peacefully. The dynamic Nairobi exchange is a mutual company owned by its stockbrokers, and demutualization is the process converting into a private for-profit company, as reported on this blog. The ordinary shares have a nominal (par) value of KES 4 shillings ($0.05) each.
Kenya’s Capital Markets Authority is reviewing the exchange’s advanced plans to offer currency and interest-rates futures and options. The NSE futures market will offer standardized contracts for currency futures that will be traded. Mwangi said: “We are seeing more and more international investors who might want to invest in Kenya and they might want to hedge the currency risk.” Local banks offer foreign-exchange forward contracts, which are negotiated directly with buyers, but they cannot be traded.
Mwangi added that part of the funds raised in the IPO will be used to bankroll new products such as derivatives, exchange-traded funds (ETFs) and Sharia-compliant indexes. The NSE has already led the way with a number of FTSE-branded index products and is working with the CMA and CDSC to introduce a real estate investment trust (REIT) market in Kenya and trading platform and a futures and commodities exchange.
The 60-year-old Nairobi stock exchange has been diversifying through new sources of revenue including sales of publications, provision of services through the Broker Back Office (BBO) and data-vending. It bought a prime commercial property in Nairobi’s Westlands area to tap into rental income, according to a report in Standard Digital.
The region is enjoying many benefits from increasing regional integration under the East African Community (EAC). The Nairobi bourse is a key player in the East African Securities Exchange Association (EASEA), which aims to standardize regulations and operations within the region to make cross-border investing easier. Members are the Dar es Salaam Stock Exchange (DSE), the Rwanda Stock Exchange (RSE), the Uganda Securities Exchange (USE), and the Central Depository and Settlement Corporation (CDSC). It also has a memorandum of understanding with the Somalia Stock Exchange Investment Corporation (SSE) under which it will have primary responsibility for the technical development of the Somalia Stock Exchange including identifying the most suitable partners and expertise.
Regional integration has also boosted expansion among listed firms and investor confidence after the discovery large quantities of gas and oil across several east African countries. There are many cross listing between the exchanges.
Mwangi said they wanted to attract more listings on the NSE’s Growth Enterprise Market (GEMS) which is aimed at small firms wishing to list their shares. There is only one listing, property developer Home Afrika so far. The NSE hopes to attract more listings through easier listing terms such as allowing business owners to offer a minimum of 15% if the shares in the market. Mwangi told family business owners who may be reluctant to lose control: “With 85% you have effective control of your company but you enjoy all the advantages of being listed. We are in a sense offering the best of both worlds.”
The NSE is a key member of the African Securities Exchanges Association and an affiliate member of the World Federation of Exchanges (WFE) and intends to become a full member.
May 12th, 2014 by Tom Minney
Ethiopia, Africa’s fifth biggest economy, is thinking of a debut Eurobond, after it received its first international credit ratings on 9 May. With a population of some 90 million it is second-most populous country in Africa, after Nigeria. Growth has been some 10% a year, making it the fastest-growing economy and this growth has been sustained through infrastructure investment rather than resources.
Fitch rating agency assigned a long-term foreign and local currency Issuer Default Debt Rating (IDR) of “B” with stable outlook. This matches Fitch’s ratings for Kenya and Uganda, according to Reuters. Standard & Poor’s (S&P) assigned “B/B” foreign and local currency ratings and also said the outlook was stable, reflecting the view that strong growth will be maintained over the next year and the current account deficit will not rise.
According to a press release from Fitch: “With an average real GDP growth of 10.9% over the past five years, Ethiopia has outperformed regional peers due to significant public investments in infrastructure as well as growth in the large agricultural and services sectors. Despite a track record of high and volatile inflation, it declined significantly in 2013, reflecting lower food prices and the authorities’ commitment to moderate central bank financing of the government.
“Fitch expects real GDP growth of 9% in 2014 and 8% in 2015. Ethiopia’s growth over the medium-term can be sustained by large, untapped resources, including large hydro-electric potential. However, the private sector’s weakness, reflecting the country’s fairly recent transition to a market economy, and its inadequate access to domestic credit, could limit growth potential over the medium-term as public investment slows.”
According to S&P press release: “The ratings are constrained by Ethiopia’s low GDP per capita, our estimate of large public-sector contingent liabilities, and a lack of monetary policy flexibility. The ratings are supported by strong government effectiveness, which has halved poverty rates over the past decade or so, moderate fiscal debt after debt relief, and moderate external deficits. Ethiopia’s brisk economic growth–far exceeding that of peers–also underpins the ratings.” S&P forecasts GDP growth at 9.1% in 2014, 9.2% in 2015 and 2016 and 9.3% in 2017. IMF estimates in the World Economic Outlook database are lower, at a still very creditable 7.5% for 2014 and 2015 and 7.0% for 2016 and 2017.
“Ethiopia’s economic growth has consistently well outpaced the average for peers in Sub-Saharan Africa, averaging at least 9% real GDP growth over the past decade, partly due to significant government spending in public sector infrastructure. We estimate that real GDP per capita growth will average 6.5% over 2014-2017. The government has primarily invested in transport infrastructure (roads and rail) and energy (power generation through hydro). Agriculture has also been a key growth driver.
“We estimate GDP per capita at a low $630 in 2014. However, strong economic growth has translated into significant poverty reduction and fairly homogeneous wealth levels. According to International Monetary Fund (IMF) data, poverty declined to about 30% in 2011 from 60% in 1995.
According to S&P: “We expect current account deficits to average 6% of GDP over 2014-2017, driven by rising imports of capital goods and fuel. Ethiopia has a services account surplus, predominantly due to Ethiopian Airlines’ revenues, and large current account transfers mostly made up of remittances that we estimate at about 10% of GDP. Over 2014-2017, we project that gross external financing needs should average 118% of current account receipts and reserves.”
Ethiopian Prime Minister Hailemariam Desalegn had told Reuters in October (see also below) that it planned a debut Eurobond once it had secured a credit rating, though he gave no time frame.
The state and state-owned companies continue to dominate the economy and key sectors such as banking, telecoms and retail are closed to foreign ownership, with state monopolies still dominating telecoms, power and other services and state-owned banks still predominant in banking despite many private banks existing. S&P says there could be room for an upgrade “if we saw more transparency on the financial accounts of Ethiopia’s public sector contingent liabilities and their links with the central government. We might also consider a positive rating action if we observed that monetary policy credibility was improving, either through better transmission mechanisms or relaxed foreign exchange restrictions on the current account.”
In December Reuters reported that Ethiopia had hired French investment bank and asset manager Lazard Ltd in a bid to select rating companies and secure its first credit rating
IMF director warns of risks to sustaining growth
In a presentation last November by Jan Mikkelsen, IMF Resident Representative for Ethiopia titled “Regional Economic Outlook for Sub-Saharan Africa & Macroeconomic Issues for Ethiopia” he praises solid growth and price stabilization but warns about a large fiscal deficit, an appreciating real exchange rate, declining competitiveness and increasing trade deficit. In his powerpoint presentation, he says there is a “Large fiscal deficit without appropriate financing options. This leads to: large domestic borrowing; crowding out of credit to private sector; risk of debt distress; large exposure of banking system to public enterprises; and inflation concerns. He is concerned about the “Non-functioning FX market, FX shortage, and competitiveness,” as well as “Failure to develop financial sector and markets”. (NOTE: The Ethiopian Government has resisted setting up an organized and regulated securities exchange, even for locals only, and this has led to a plethora of unregulated IPOs and problems for investors). Mikkelsen adds that Ethiopia is “Missing out on private sector dynamics – opening up! Tap into FDI flows!”
He warns that the Growth and Transformation Plan (2009/10-2014/15) had estimated to invest $36 billion in public-sector financing and had achieved $11.2bn of investment in the first 3 years, leaving $22bn to be invested in identified projects in the last two years, which would be 19.7% of GDP, of which 9.9% could be domestic financing and 9.8% external. He pointed out that this meant less credit to the private sector, with banks cutting back their credit growth to non-government and giving 83% of this “non-government” share to state-owned enterprises and only 17% to the private sector.
His policy recommendations included enhancing competitiveness via exchange-rate flexibility and cutting logistic costs for trade, phasing out the forced 27% bill holding restriction on banks by the National Bank of Ethiopia, developing a securities market and making interest rates flexible and that putting the private sector in the driving seat is the only way to create sustainable employment opportunities.
Bloomberg cited Finance Minister Sufian Ahmed in December saying: “The main challenge is investment financing needs. We know it’s huge.” He said funding targets would be met by increased domestic financing and borrowing as much as $1bn a year on non-concessional terms from China, India and Turkey and key projects will also be prioritized, he said. According to that report, the Government planned to spend ETB 105.2bn ($5.5bn) on infrastructure and industry including hydropower dams and sugar plants in the 12 months ended 7 Jul 2014 and ETB 70.7bn in the year to July 2015, according to the GTP that ends in mid-2015.
Ethiopia’s PM explains economic policy
The Reuters interview with Prime Minister Hailemariam Dessalegn gives good insight into the Government’s rationale for maintaining control. It is worth reading. He said other bonds could come from the rating.
The Government aims to move from a largely agrarian economy into manufacturing, including textiles. Hailemariam said this was no time for a change of tack, either by selling monopoly Ethio Telecom or opening up the banking industry – now dominated by 3 state banks – to foreigners. “Why does the government engage in infrastructure development? It is simply to make the private sector competitive because in Africa the lack of infrastructure is the main bottleneck. From where do we get this financing? We get this from government banks,” he said. “We engage ourselves in railway construction simply because we get revenues from telecoms.”
He said neighbouring countries which have opened up their banking industry to foreigners had lost a source of funds. “They have handed over their banks to the private sector and the private sector is not giving them loans for infrastructure development.”
He added that the Government was channelling loans to business, while income for the state from selling licences or taxes could not match Ethio Telecom’s annual revenue of ETB 6bn ($318m).