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Do Africa’s $372bn pension fund assets facilitate inclusive growth and social stability?

One of the key challenges pension funds face: identifying enough appropriate, local investment opportunities to invest ever-increasing contributions
• Deregulation of prescription will unlock capital to flow where it is required in Africa

RisCura’s annual Bright Africa 2018 report is a highly recommended read on Africa’s capital markets. Check out the interactive website and download the short report at brightafrica.riscura.com.

Africa’s pension fund assets are now thought to be $372bn, according to leading pension fund consultancy RisCura. Some 90% of these assets are concentrated in Nigeria, South Africa which has $307bn in AUM, or 82%, Namibia and Botswana. Further, a few large funds dominate, including: Government Employees Pension Fund (GEPF) in South Africa, Government Institutions Pension Fund (GIPF) in Namibia, Botswana Public Officers Pension Fund (BPOPF), and a few large funds in Nigeria.

(NOTE, in a comparable story in 2015 we noted that total pension fund assets in 10 African countries were $379 billion in assets under management (AUM),85% or $322bn of this was based in South Africa. The change since 2015 may partly be due to currency decline at the time of compiling the statistics)

According to the Organization for Economic Cooperation and Development (OECD), total pension fund assets in OECD member countries in 2016 totalled $38 trillion, of which $25trn is held in the US, followed by Canada ($2.4trn) and UK ($2.3trn), the three countries making up 78% of the total pension assets.

In OECD countries, pension funds made up 50% of the economy, measured in gross domestic product (GDP) in 2016, up from 37% in 2006, while in other countries measured (“non-OECD countries”), they rose to 20% of GDP from 12%.

The table below shows pension fund assets in selected different African markets, according to data collected by RisCura. Assets under management (AUM) total $306.7bn in South Africa (pension AUM are 104% of GDP), $16.8bn in Nigeria (lots of space to grow as pensions are 4% of GDP), $10.7bn in Kenya (16% of GDP), $10.5bn in Namibia (99% of GDP), and $7.2bn in Botswana (48% of GDP). There is huge potential for growth in Egypt where pension AUM are estimated at 1% of GDP, Tanzania (10%) and Uganda (7%), Ghana (7%) and even Zambia (3%).

African Pensions statistics collated by RisCura

In OECD and non-OECD countries, pension fund assets are predominantly invested into bonds and equities, with 45% of assets allocated to equities. As capital markets have grown and regulators have advanced, the proportion of African pension funds invested into equities has increased, but in Nigeria and East Africa local currency bonds predominate. Local regulation is a key driver of asset allocation and often does not match the opportunities: “In many countries assets are growing much faster than products are being brought to market, limiting investment opportunities if regulation does not allow for pension fund to invest outside of their own countries” says RisCura.

“African pension funds have a pivotal role to play in facilitating inclusive growth and social stability. Larger pools of capital allow for investment in economic and capital market development,” argues the Bright Africa report. It says there is an urgent need to build resources: “Local institutional investors add credibility and often serve as a catalyst for greater external interest. Local investors also allow global peers to leverage local knowledge and networks.”

RisCura urges other countries to follow the lead of South Africa, Nigeria, Namibia and Botswana (we can also add Kenya to this list) in allowing pension funds to invest into private equity – in Nigeria the National Pension Commission (PENCOM) allows for 5% of assets into private equity as an asset class, which would amount to $842m on 2016 figures, but 75% must be invested in Nigeria and general partners have to be able to invest at least 3% in the fund, limiting the options and size of investment.

The report also highlights a huge role for supporting Africa’s urgently needed infrastructure development (Africa Infrastructure Country Diagnostic estimates $93bn per year of investment needed). However, it is important that frameworks created are compatible with the mandates and risk and liquidity factors, as well as “mindful of prudential oversight and limits necessary for pension and savings investment” says RisCura.

For these stats and more on the changing dynamics of retirement in Africa, download the excellent Bright Africa report and visit the interactive website. More than half, 52%, of African males over 65 years and 33% of females were “active in the labour market” in 2015, compared to 10% older men and 6% older women in Europe. Pensions in Africa are also seeking to adapt to the fact that many Africans earn and save informally, including Micro Pension Scheme in Nigeria where the informal sector is thought to be 70% of the workforce with 38m potential contributors and the Mbao Pension Plan of Kenya, using M-Pesa or Airtel Money mobile transfer services.

Liquidity and cost of trading on Africa’s stock exchanges – Bright Africa 2018

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RisCura’s annual Bright Africa report is a highly recommended read on Africa’s capital markets. Check out the interactive website and download the short report at brightafrica.riscura.com.

Africa’s equity recovery started in the last quarter of 2016, with an uptick in index returns across the different regions. Growth had stopped in African stock markets from 2014 to mid-2016. RisCura says this was “largely due to decreasing commodity prices and a flight to safety from global investors. In 2015 the region saw the lowest recorded growth rate since 1998.” Bright Africa singles out Kenya as “Africa’s overall winner in terms of listed equity performance”. It is relatively immune to the commodity cycle, has a business-friendly environment and is a beneficiary of continued integration of the East African Union. However, returns only represent a compounded annual return of 10% in US dollar terms.

These key challenges facing investors into African listed equities should top the agenda for capital-markets policy-makers, operators and regulators.

Liquidity
The Johannesburg Stock Exchange turns over a respectable $1.8 billion a day. After that, Africa’s stock exchanges “remain stubbornly illiquid”, according to Bright Africa. The second most liquid is the Egyptian Exchange (the report refers to one of its exchanges, the Cairo and Alexandria Stock Exchange CASE) with $72m traded daily. Next are the Casablanca Stock Exchange at $17m a day and the Nigerian Stock Exchange (NSE) $15m in turnover for 2018, each less than 1% of the JSE daily trade.

Daily turnover on the NSE soared 71% during 2018, due to a median increase in turnover of 125% across its 10 largest companies, all in the financial sector. The key boost was recovery in world oil prices seen towards the end of 2017, causing improved economic fundamentals and a boosting investor sentiment. Highest average daily turnover value across African exchanges, excluding JSE, and most of the market capitalisation are with the financial sector. Morocco has 30% of the financial sector capital (ex-JSE), followed by Egypt (18%) and Nigeria (15%).

Free float and liquidity
The “free-float” represents the proportion of a listed companies’ shares that are available for active trading and excludes: any directors’ holdings, shares with lock-in periods and those otherwise held without the intention of trading pursuant to a regulatory or commercial purpose. Excluding these shares from the liquidity consideration, we get a truer representation of the liquidity in an exchange. The JSE has an adjusted market capitalisation of $750bn and a free-float of 73%.

On average larger exchanges exhibit higher levels of free-float, as expected, but this is generally low across the exchanges. The free-floats of the Egyptian and Moroccan exchanges average 26% of their market capitalizations. Both exchanges have higher overall market capitalizations than Nigeria, but the NSE has a higher free-float at 46% of market capitalization, and so a higher adjusted market capitalization. The Ghana Stock Exchange tops the African rankings as the highest free-float (ex-JSE) at 66%, followed by Namibia at 61%. The lowest free-float level relates to the Bourse Régionale des Valeurs Mobilières (BRVM), free-float of only 2%.

Cost of trading and brokerage commissions
RisCura says: “The cost of trading on African exchanges is substantially higher than developed markets”.

Bright Africa report says it is difficult to obtain cost of trading information. “A significant portion of trading fees is made up of brokerage commissions… The limited pool of licensed brokers in each country results in very low power to investors to switch to a more affordable competitor. However, the low volume of trades on these exchanges means that brokers charge more on each trade to cover their costs. It’s a difficult position to get out of without incentivization for brokers to lower their fees.”

The report’s verdict: “Trading costs of up to 4% makes short-term trading strategies unviable, further reducing the liquidity in these markets. Egypt’s relative high liquidity, in comparison with Nigeria (which has a similar free-float), can at least in part be attributed to the significantly lower cost of trading.”

The cost of trading below represents the cost of a single transaction, but in order to realise profits investors would need to also sell shares resulting in double the costs. The substantial portion of other fees in South Africa, mostly represent Securities Transfer Tax, which is not charged in most developed markets.

African Economic Outlook 2018 flagship report is released

“African economies have been resilient and gaining momentum. Real output growth is estimated to have increased 3.6% in 2017 and to accelerate to 4.1% in 2018 and 2019″ says Akinwumi A. Adesina, President of the African Development Bank Group. “Overall, the recovery of growth has been faster than envisaged, especially among non-resource–intensive economies.”

The latest edition of African Economic Outlook 2018 was released yesterday, and contains a lot of excellent analysis and short- to medium-term forecasts on the evolution of key macroeconomic indicators for all 54 regional member countries.

The staff economists of African Development Bank present their analyses of African economic development during the previous year and near term, and on the state of socioeconomic challenges and progress made in each country.

According to Adesina, global institutional investors and commercial banks manage more than $100 trillion in assets and for some of that they search for high returns, some of which could support African investments. Key challenges for Africa are managing the demographics, with a fast-growing young population, by creating more jobs and reducing poverty. Policy-makers can create structural transformation and economic diversification by deeper investment in agriculture and developing agricultural value chains to spur modern manufacturing and services.

Top priority is a shift to growth that absorbs labour; another to invest in human capital, particularly in entrepreneurial skills of youth, to facilitate transition to high-productivity modern businesses. Macroeconomic policy should be prudent and aim to ensure external competitiveness, blending exchange-rate flexibility, mobilizing domestic revenues including tax, and judiciously managing demand and rationalizing public spending.

Infrastructure need soars to $130-170bn a year

The year’s theme is infrastructure. The Bank says that new research shows that Africa’s infrastructure requirements are $130–$170 billion a year, much higher than the long-accepted figure of $93bn a year. According to Adesina: “African countries do not need to solve all their infrastructure problems before they can sustain inclusive growth. They should focus on how best to use their scarce infrastructure budgets to achieve the highest economic and social returns.

“Infrastructure projects are among the most profitable investments any society can make. When productive, they contribute to and sustain a country’s economic growth. They thus provide the financial resources to do everything else.

Changes to 2018 AEO

The report is great reference material for researchers, investors, civil-society organizations, development partners and many others. The African Development Bank has made some changes, to make this key document even more useful:
1. Earlier release date – mid-January each year – so that the Bank, as a leading African institution, will be among the first to provide headline numbers on Africa’s macroeconomic performance and outlook.
2. To boost advocacy and dialogue, the 2018 AEO is being shortened to 4 chapters and 54 country notes in about 175 pages, down from more than 300 pages in previous years.
3. Regional economic outlooks for Africa’s five subregions. These self-contained, independent reports focus on priority areas of concern for each subregion and provide analysis of the economic and social landscape. They also highlight issues of pressing current interest.

The chapters of the report cover 1: Macroeconomic performance and prospects; 2: Growth, jobs and poverty in Africa; 3: Africa’s infrastructure, great potential but little impact on inclusive growth; 4: Financing Africa’s infrastructure, new strategies, mechanisms and instruments. Boxes include China’s 3 lessons for Africa, the Africa50 Infrastructure Fund, PPP dos and donts. Tables include real and per capita GDP growth 2009-2019.

Download your copy in English, French or Portuguese here

How big are African pension funds?

Here are selected findings from a recent hunt through the Internet:

According to a recent report by PricewaterhouseCoopers, “Africa Asset Management 2020” (get your copy here) total assets under management in 12 selected Africa countries were $293 billion in 2008, more than doubling to $634bn by 2014. They are forecast at $1.1 trillion in 2020. (The 12 countries are: South Africa, Morocco, Mauritius, Namibia; Egypt, Kenya, Botswana, Ghana, Nigeria; Angola, Algeria, Tunisia).

Pensions are increasingly important as many countries set up and grow pension schemes. Mauritius and Ghana are examples of countries with 3-pillar pension systems and some countries are starting to revise their regulations to allow pension funds to invest more widely than just into domestic bonds, money market and equities

How big are the funds and are do they invest in infrastructure?

The giant African pension fund is South Africa’s Government Employees Pension Fund (GEPF), which had an investment portfolio of ZAR1.67trn ($124bn) at 31 March 2017 while accumulated funds and reserves grew at 10.2% a year for the last decade, according to the latest annual report.

The fund has 14 direct investments in 904MW of renewable energy including Bokpoort (50MW concentrating solar power CSP), wind and the 175MW photovoltaic (PV) Solar Capital Plant. GEPF has also backed 646 housing projects and unlisted investments include ZAR3.9bn ($290m) into the Pan African Infrastructure Development Fund run by Harith General Partners, ZAR2.4bn into South Africa’s airports and ZAR996m in telco MTN Nigeria, with a total of 1.2% of assets in infrastructure including roads and power in South Africa and across Africa.

Next-door Namibia has 2.5m people and David Nuyoma, CEO of the Government Institutions Pension Fund (GIPF) told a workshop in October 2017 its total assets were N$105bn ($7.9bn), 64% of the nation’s gross domestic product. Its unlisted portfolio includes residential, tourism and commercial developments, solar power and an infrastructure fund run by Old Mutual.

Botswana Public Officers Pension Fund has assets under management of BWP54.6bn ($2.6bn), including BWP11m invested with Harith.

Other markets are growing fast. In September 2017, Nigeria’s Pencom put pension fund assets at NGN7.16trn (down to $20.1bn after currency falls) of which NGN5.2bn was in infrastructure funds and NGN221.5bn in real estate including real-estate investment trusts (REITS). Earlier the industry had been growing by 30% a year from 2008-2015. There are 2015 regulations governing investment into infrastructure, and fund managers Asset and Resource Management Company and Harith General Partners, based in South Africa, have teamed up to create a $250m infrastructure fund for West Africa that meets the requirements.

 

Source: PricewaterhouseCoopers

In December 2016, Kenya’s Retirement Benefits Authority then CEO Edward Odundo said the industry would be KES1trn ($9.8bn) by the end of that month. The regulator is investigating structures for pensions and other funds to invest in road Government-led infrastructure such as Nairobi-Nakuru-Mau Summit superhighway (report in Nation newspaper)

Investments of social security schemes in Tanzania were TZS7.8trn ($3.6bn) in June 2015 and had grown 17% in the year, according to the Social Security Regulatory Authority (SSRA). The National Social Security Fund invested for 60% of the $140m Kigamboni toll bridge (Government has 40%).

Social Security and National Investment Trust (SSNIT) in Ghana, has assets GHS8.8bn ($2.0bn) and is invested in power projects, housing, health and other infrastructure in support of Government initiatives.

 

(Figures from author’s Internet research of annual reports of regulators and funds or recent news updates)

African pensions and infrastructure investment – recent research

Learning from Latin America
The challenge to create structures so that pension funds can invest in local infrastructure projects and help develop the capital markets has led to some innovative ideas across Latin America. There are lessons for African regulators of pensions and social security as well as for those promoting public-private partnerships for a full range of African infrastructure, including roads, bridges, telecoms, hospitals and house. Here are a couple of examples (from a 2017 World Bank paper by Fiona Stewart, Romain Despalins and Inna Remizova).

Mexico’s CKDs (Certificados de Capital de Desarrollo) securities are traded on the Mexican Stock Exchange (Mexican Bolsa/BMV) and were created in July 2009 with the mandatory pension funds (Siefores) as their key source of capital. CKDs are designed to boost infrastructure projects from ports to electricity and water, and real estate amounted to 30% of the total since 2009. Regulator CONSAR has deregulated investment restrictions for Siefores in stages to allow them to invest into private equity, real estate and infrastructure projects through CKDs.

Peruvian funds have created trust structures to allow pension funds to invest in infrastructure projects. The World Bank has helped Columbia develop infrastructure debt funds which pension funds can invest into.

 

Excellent recent research

Several excellent papers have been published this year. Here are some of them, with links to their sources.

  • Maurer, Klaus (April 2017). “Mobilization of of Long-term Savings for Infrastructure Financing in Africa”. Study prepared for Germany’s Study prepared for Federal Ministry for Economic Cooperation and Development (BMZ). Bonn. Deutsche Gesellschaft fur Internationale Zusammenarbeit (GIZ) GmbH, available here. Sources include 2 articles on this blog in Feb 2017 and in Mar 2015!
  • PricewaterhouseCoopers (2017). “Africa Asset Management 2020”. PwC. Download here.
  • RisCura (current). Bright Africa. Cape Town. RisCura. The report was published in 2015 but the website is interactive and updated, check out the excellent information and stats here.
  • Stewart, Fiona, Romain Despalins and Inna Remizova (July 2017). “Pension Funds, Capital Markets, and the Power of Diversification”. Policy Research Working Paper. Washington, DC. World Bank Group. Download via here.
  • Sy Amadou (Mar 2017). “Leveraging African Pension Funds for Financing Infrastructure Development”. Washington, DC. African Growth Initiative of The Brookings Institution with NEPAD and the United Nations Office of the Special Advisor on Africa (OSAA). Available from Brookings.

Another good resource is African Development Bank’s Making Finance Work For Africa (MFW4A).

Tanzania’s Kigamboni Bridge, an investment by NSSF (Credit Nairobi Wire)