Tag Archives: frontier markets

World’s Toy: the African Country

Ouagadougou City Burkna Faso. image from wikipedia

Investors are yanking their cash from African assets, until recently a popular play for the adventurous, as a toxic confluence of factors overhangs the continent.Crashing commodity prices, a Chinese slowdown and a string of policy failures are forcing investors to reassess the risk of investing in Africa after years of optimism about its growth prospects.Stock markets and currencies have been selling off across the continent, especially in commodity-dependent economies. Nigeria, the continent’s largest economy and longtime investor darling, has one of the world’s worst-performing stock indexes this year, down by 14% since the start of 2016. The S&P Zambia Index has fared even worse over the past year, plunging 45% as the country’s copper exports tumbled on softening Chinese demand. President Edgar Lungu last September called for a day of national prayer to petition God to shore up Zambia’s currency, the kwacha. At the time, the kwacha had lost 45% of its value against the dollar in 2015.  The declines mean African equities are performing worse than any other frontier markets. The MSCI Africa index tumbled 19% last year, significantly more than the overall MSCI Frontier Markets index….The upshot is that frontier investors are moving their money from Africa to Asian countries like Pakistan, Bangladesh and Vietnam; net energy and commodity importers which have shown more commitment to industrialization….

The shift has also pushed up the costs of sovereign borrowing, even as African countries slow down their issuance of bonds in international capital markets. In 2014, African sovereigns issued $12 billion worth of bonds in international capital markets; last year it was half that, according to Deutsche Bank.Ghana, mired in an economic crisis, issued the most expensive African Eurobond in history late last year, paying a whopping 10.75% for $1 billion; far higher than the single-digit interest rates the government had become accustomed to paying for international bonds in recent years….

[T]here are important exceptions to the rule: Kenya, which has a more diversified economy, and Ivory Coast, the world’s top producer of cocoa, are still attracting frontier investors…..

“One of the biggest flaws when investors look at Africa is that they think of it as a country and not a continent composed of very unique countries and companies,” says Laura Geritz, who runs U.S.-based Wasatch Frontier Emerging Small Countries with $1.1 billion under management.

Excerpts from  Africa Bruised by Investor Exodus, Wall Street Journal, Feb. 26, 2016

Riding the Frontier Markets: the easy money

frontier markets

A desperate search for bonds that pay a decent rate of interest and a keen desire for exposure to economies that are still growing quickly have taken rich-world investors to some exotic places. The raciest bets are made in so-called frontier markets, poorer places with even less mature financial sectors than emerging markets. Africa is full of them. Rwanda and Tanzania, for example, have found willing buyers this year for their debut issues of dollar-denominated bonds. The farthest edge of the investing frontier has now reached Mozambique.

In September Credit Suisse and BNP Paribas raised $500m on behalf of EMATUM, a state-owned company in Mozambique. Credit Suisse advanced the $500m; slices of the debt were then sold as loan-participation notes, maturing in 2020, at a yield of 8.5%. VTB, a Russian bank, raised a further $350m for EMATUM shortly afterwards. Such a deal can be done more quickly and with less fuss than a typical bond issue. VTB had already raised $1 billion for Angola in a similar fashion. Those notes are included in J.P. Morgan’s emerging-market bond index, an industry benchmark.

The concern is less about the way the money was raised than how it will be used. Mozambique is poor. Its budget is part-funded by grants and low-interest loans from rich countries. Its public finances were solid in part because it has been granted extensive debt relief. When such countries borrow in private markets, it is usually to fund projects, such as toll roads, airports or power stations, which might have broad enough benefits to justify the expense. But EMATUM is a tuna-fishing venture that came into being just a few weeks before the $850m was raised in its name.

It is not obvious that a state-run fishing startup is a compelling business proposition. But investors know there are huge gas reserves off the shores of Mozambique that will eventually bring in lots of foreign exchange, even if tuna does not. The bonds come with a guarantee from the finance ministry. And the handsome yield (far higher than the rate on comparable Treasury bonds) is some reward for the risks.

A French shipyard has received orders worth about $300m for two dozen fishing vessels and a handful of patrol boats. It is not yet clear what the rest of the money, which is accruing hefty interest, will be used for. What is clear is that the temptation to grab at easy money offered by yield-hungry investors is proving too great to resist for some countries. As usual, the role of party-pooper has fallen to the IMF. It has called for the cost of the guarantee and for “possible non-commercial activities” related to the EMATUM bond to be clarified in the next budget.

Investing in frontier markets: Fishy tale, Economist, Nov. 23, 2013, at 73