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Investment bankers are grappling with a novel challenge: explaining to potential investors that exotic places such as Abuja and Accra, the capitals of Nigeria and Ghana, are among the new frontiers in the international capital markets.
That challenge has become more difficult in the aftermath of recent elections in Nigeria, which were completed amid violence and accusations about fraud. There are fears that if the incoming government has to struggle to establish its legitimacy and authority, the military may be tempted to intervene.
But it hasn’t stopped bankers such as Stephen Jennings, chief executive officer of Renaissance Capital, the Moscow-based investment bank, from enthusing about prospects for the continent. Renaissance is making a big push into Africa, with Nigeria at the heart of its strategy.
“We have a super-conviction about Africa,” he says. “We are very optimistic that the corner has been turned economically. You have to imagine where it will be in two or three years’ time, and it is going to change in ways that people don’t expect.
“I fully expect the capital markets in Sub-Saharan Africa to develop as rapidly as they have done in Russia over the past 10 years.”
Irrespective of its chequered and often bloody history, and in spite of ongoing political uncertainty, Nigeria is attracting an unprecedented wave of interest from bankers and investors. Ghana, Kenya, Zambia, Botswana and Uganda are also increasingly attracting foreign investors.
This underscores an apparent disconnect between the view in the financial community and some of the political realities on the ground. Aside from South Africa, the rest of sub-Saharan Africa’s markets are still in a nascent stage. Only time will tell if this exuberance about the potential for Africa is likely to transform them.
There is a glut of liquidity in the global financial system that is helping to fuel the current enthusiasm for far-flung markets such as those in Africa. Yield-hungry investors are increasingly searching further afield for investments that may offer higher returns.
“There is a ton of liquidity sloshing about looking for yield and I don’t see that going away any time soon,” says Kevin Colglazier, chief investment officer at Standard Asset Management.
But he says there are two camps of investors. “There are people who are digging in for the long haul and there is another group that is making a short-term bet on the market in order to pick up yield.”
Another market participant says: “People have been putting their toes in the water and have so far been doing very well. But many people are flying blind because there is not a lot of information on the African markets.”
The long-term enthusiasts point to the vast economic improvements seen in Nigeria and the rest of Africa in recent years. Nigeria, for instance, was once one of the world’s most heavily indebted countries. But in the past year – thanks to revenues from surging oil prices and also debt relief – it has shed more than $30bn of external debt.
For the third year in a row, sub-Saharan Africa recorded growth in the 5-6 per cent range, according to a report published in April by the International Monetary Fund. In 2006 economic growth was more than 5 per cent, and for 2007 a pick-up to 6-7 per cent is expected, mainly because of higher production in the oil-producing countries.
“The higher growth in the region is attributable both to positive external developments, such as strong foreign demand, and to strong domestic investment and productivity gains supported by sound economic policies in most countries,” the report says.
A decade ago only one sub-Saharan African country had a credit rating; today more than a dozen are rated. Some African governments, including Nigeria, Ghana and Kenya, are now considering tapping international markets. Ghana could become the first to launch a bond that may provide a benchmark by which its peers can judge appetite for new African debt.
Much more needs to happen, however, before it attracts a broader group of investors.
“The basic problem that we have as an investor is the lack of African paper. There is massive demand for it but most of the paper is not liquid,” says Jerome Booth, head of research at Ashmore, the emerging markets specialist.
“There has to be sovereign benchmark eurobonds that can be the basis for pricing of a huge amount of corporate issuance.”
However, even as the uncertainty about Nigeria’s elections mounted, RenCap and JPMorgan last month helped United Bank for Africa, the country’s largest bank by assets, to raise $300m from international institutional investors through an equity capital placement, $100m more than initially planned.
“We could not have imagined doing such a deal this time last year,” says Neil Harvey, deputy chief executive of Renaissance Capital.
Emeka Emuwa, country officer of Nigeria for Citi, is also optimistic. “There are deals we are doing today that a couple of years ago we would not even have contemplated,” he says.