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Access to financial markets. The final frontier?

Article - November 17, 2015

International finance institutions have largely neglected to offer assistance to sub-Saharan nations on the markets but several are making their own way in an untapped emerging area.



On a continent where access to markets is a novel phenomenon and where it is still difficult to attract investors due to legacy issues of poor macroeconomic management and fiscal discipline, as well as persistent corruption and weak institutions, attempts to raise capital from the markets is a laudable goal. The discipline required by the process has no doubt helped countries that have been successful in recognizing the importance of market perceptions and the need for better macro-fiscal discipline. The number of international bond issuances by sub-Saharan African countries in recent years has accelerated. In addition to South Africa, eight countries in the region have tapped the international capital markets, including first-time issuers Ghana, Gabon, Senegal, Namibia, Nigeria, Tanzania, Zambia and Rwanda. Furthermore, market intelligence suggests that other sub-Saharan African countries may tap international markets in the near future. Cape Verde state company Imobiliária, which provides housing for disadvantaged people, carried out an $8.8 billion bond issue in October, its second foray into the securities exchange, while Kenya has seen two Eurobond issuances in the past 12 months.

International capital market access is still relatively new to most sub-Saharan African countries. Local financial markets are underdeveloped and consequently the in-country knowledge and expertise needed to make informed decisions are often weak or lacking entirely. Global investment banks have a critical role to play. As part of their market penetration strategy, they will need to carry out more capacity building and client education. In addition to playing the role of solicitor, firms must be more transparent and provide active development training to countries.

Very few sub-Saharan African countries that have accessed capital markets in the last two years received any support from international finance institutions. As this method of financing becomes more significant, international development agencies will have to play a wider role in supporting countries’ access to markets.

With European economies struggling with a debt crisis and sluggish growth forecast in the U.S. and elsewhere, investors are eyeing Africa as the next frontier, thanks to a surging economy and positive growth estimates over the next few years. Indeed, Africa “could be on the brink of an economic take-off, much like China was 30 years ago, and India 20 years ago,” notes the World Bank.

This year, sub-Saharan Africa’s economy is forecast to expand by 5.9%, ahead of North Africa’s growth of 4.2%, according to the IMF. Seven African countries are expected to be among the 10 fastest-growing economies in the world for the period 2011-2015. Perceptions of Africa among investors “are becoming more distinctly positive over the long-term horizon,” said Ernst & Young in its 2011 Africa Attractiveness Survey, with capital investments there set to reach $150 billion by the end of 2015.

Nowhere exhibits the progress that has been made in Africa more than Morocco. The country is the fifth-largest economic power Africa and has achieved GDP growth of 4-5% over the past decade. However, since 2013, the country has made a concerted effort to enact political and economic reforms in order to expand its ever-growing financial sector, and also to attract foreign investment.

As Mohamed Boussaid, the Minister Of Economy And Finance explains: “This increase in the rate of growth can be explained through a change of model of the Moroccan economy. This model is no longer driven by a sector; it is a model which is based on a sector diversification.” Such reforms have enabled Morocco today to be on a much more stable, much more prosperous platform, where they rely on their competitive advantages to attract other businesses to the country.

Since the beginning of the year, for example, the automotive sector has been the largest export sector. In 2015 the rise in Morocco’s exports of cars was around 32.6%, 26% for electronics and 17% for aeronautics. Mr. Boussaid notes: “The immediate response to this extremely positive assessment of the economic performance of our country enables us to attract increasing numbers of foreign investors. Last year we achieved the biggest increase in foreign investment yet, at around $4 billion – an increase of more than 23% compared to the previous year.”

In addition, efforts by the government to reduce red tape have been hugely successful. In the latest World Bank Doing Business report Morocco moved up eight places in its ranking, while the most recent World Economic Forum competitiveness survey, Morocco climbed five places.

Morocco prides itself as an emerging financial center, with Casablanca’s Finance City, the regional financial hub, progressing very well.

The net result of the reforms and improvements in access to capital is that Morocco has become the second most attractive country in terms of foreign direct investment on the African continent, behind only South Africa.

Morocco is leading the way in terms of access to capital and financial markets in Africa, and, given the rewards that it is already experiencing, it is just a matter of time before other countries get on board. The reputation that previously existed with regard to African states and poor access to capital and financial markets is now a thing of the past.