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The great African growth story is proving to be little more than a fairy tale, at least for now, as the continent takes a beating from all sides.
It is feeling the pain of collapsing commodity prices, a drop in foreign direct investment and slower trade. Inflation in some major African economies is alarmingly high, pushing interest rates higher. An El Niño-induced drought is hitting agricultural production, and causing 18-hour load-shedding in Zimbabwe. The low oil price has hit some nations hard, including Nigeria, which has imposed knee-jerk foreign exchange controls as it runs out of foreign exchange.
African nations’ economic woes are well reflected, if not amplified, by the performance of their stock exchanges (with the exception of the JSE and the West African stock exchange, the BRVM), which have experienced double-digit negative growth over the past year.
Growth forecasts have been revised downwards substantially. Last month, the International Monetary Fund (IMF) revised its 2015 growth forecast for the sub-Saharan region down from 4.5% to 3.75%. “While activity remains more solid than in many other developing and emerging regions of the world, the strong growth momentum evident in the region in recent years has dissipated,” the IMF said in its regional economic outlook.
“And, with the possibility that the external environment might turn even less favourable, risks to this outlook remain on the downside.”
Cobus de Hart, an NKC economist, said: “Apart from Central and West Africa, a number of the other regions across the continent will also experience a marked decline in real GDP [gross domestic product] growth in 2015. East Africa will likely be the outlier in terms of regional performance, with strong growth expected for a number of countries in region, including Kenya, Ethiopia, Tanzania and Rwanda.”
On the sidelines of the African Securities Exchange Association (Asea) conference in Johannesburg this week, Oscar Onyema, the Asea president and chief executive of the Nigerian Stock Exchange, said African markets are indeed “taking a beating”. The FTSE Asea index, which drives the pan-African markets, is down by 17% over the past year.
Brian Mugabe, the head of Africa Research (ex South Africa) at Imara SP Reid, said: “Five years ago, all of those stock exchanges were booming. What is happening now is part of an economic cycle.”
Onyema said the slowdown in growth in China has had an effect on Africa. It has affected commodity prices negatively – “most of our economies rely on one form of commodity or another”. The stronger US dollar has also affected commodity prices and African currencies, as well as resulting in a significant reduction in foreign direct investment.
According to the Chinese ministry of commerce, direct investment in Africa contracted by 40% to $1.19-billion in the first six months of 2015.
Data from fDi Intelligence, as reported by the Financial Times in October, shows China’s investment patterns in Africa tend to be lumpy.
Its investment neared $12-billion in 2008, but annual investment remained beneath the $3-billion mark for each of the following years, until last year, when $6-billion was invested.
Trade with China, Africa’s largest trading partner, is also suffering. Chinese imports from Africa shrank by 43% from January to June this year.
In some markets, it has proved difficult to get even local funds to invest in equities. It’s a problem in Nigeria where the pension fund administration has assets of more than $25-billion under management but has only 11% exposure to equities, despite regulation allowing for a maximum exposure of 25%, Onyema said.
“We are trying to encourage them to invest in the real economy, through infrastructure bonds for example, but they are saying, ‘Show me the bankable deals’.”
But in countries such as Botswana, Zimbabwe and Zambia, pension fund investment dominated their stock exchanges and could explain their lack of liquidity, said Mugabe.
Onyema said there is an on-going debate about whether governments are crowding out private sector borrowing.
“For most of the [African] economies, the government yield is really high and the government tends to raise a lot of debt through the capital markets.”
For example, the Nigerian 10-year government bond (the benchmark) was offering an interest rate of 12.74% this week. In contrast, the Nigerian Stock Exchange has been down 18% over the past year.
“But if you look back two or three years, an average return for a real sector investment in Nigeria was 30%. So returns are pretty high,” Onyema said. “In countries like Ghana, where you have got a rate gazetted 25%, it is hard to find real- economy business that will give you a lot more than that.”
It depends on each country’s local dynamics, bankable projects and the type of demand available for them, he said.
Higher repo rates tend to have a negative correlation with stock market performance as it pushes fixed income rates of return higher, said Mugabe.
“It is a function of economic policy. When central banks raise rates, they are not looking at how it affects the stock markets, like in South Africa, they are looking at targeting inflation.”
Some large African economies have fairly high repo rates. In Angola it is 10.5%, Kenya 11.5%, Nigeria 13%, Zambia 15.5% and Ghana 26%.
Brigid Taylor, KAON Capital analyst and chief executive, said all investors will have both an equity portfolio and a bond portfolio.
She said it is easier for investors to buy into African equities currently as bonds presently have very little, or no, secondary market.
Onyema said that, in Nigeria, foreign investors remain on the sidelines because they are unsure of the currency direction and the IMF has called for a devaluation of the already weak naira.
Elsewhere, such as in Egypt, there is confidence in monetary policy, and devaluation is already priced in. Temporary foreign exchange controls have also affected investor confidence in the West African country.
“The newly formed Nigerian Cabinet will soon articulate what fiscal policy will look like, and then investors can make informed investment decisions,” Onyema said, adding that one has to show the investor something that has a high likelihood of succeeding and in a big way to justify it.
Mugabe said the imminent raising of interest rates in the United States will have an effect everywhere, but it will be higher in more liquid markets where there is more foreign investment.
Christie Viljoen, a senior economist at NKC African Economics, said that, by being less integrated into the global market system, most African countries are less vulnerable to shocks on stock markets.
“One saving grace that was observed during the global financial crisis is the lack of interconnectedness between African and global financial market.”
He added that African economic health is intricately linked to international commodity prices, which are in a slump further exacerbated by a strengthening dollar.
De Hart said the commodity price slump and adverse global developments have definitely exposed the continent’s vulnerability because a number of countries are still heavily dependent on primary industries for generating fiscal and foreign exchange revenues.
The case can also be made that some countries did not do enough to diversify their respective economies or build up sufficient fiscal and external buffers over the past few years.
“The continent still presents various opportunities despite the current difficult economic climate, and a number of African countries are still expected to expand rapidly over the medium term,” said De Hart.
Onyema said Africa’s allure remains if one looks at population – it is one of the youngest in the world and has a rapidly growing middle class. Because of this, potential market-demand businesses are still willing to make investments, as returns can be quite handsome.
According to De Hart, where countries are hit particularly hard by lower commodity prices or the slowdown in China, they will, to some extent, be forced to prioritise some crucial reforms – improving the business environment, strengthening legislation and institutions, deepening financial systems and curbing corruption – that have been sorely lacking in recent years.
“Countries that are successful in this regard stand to benefit immensely over the medium to long term,” he said.
Power drought
An El Niño-induced drought is expected to take its toll on agriculture throughout Africa, from cashews in Tanzania to wheat in Ethiopia.
But drought has a far larger effect on household wellbeing than on economies as a whole, said Christie Viljoen, a senior economist at NKC African Economics. “While large volumes of Africans are dependent on farming for their livelihoods, it is very rare for an entire economy to be critically dependent on agriculture for its growth,” he said.
But the drought could have an additional negative effect on the economies of countries such as Zambia and Zimbabwe, which are dependent on water for power generation.
The Kariba Dam, which provides hydropower for both nations, is almost empty and causing extended periods of load-shedding, some as long as 18 hours in Zimbabwe.
On Monday, a power cut in Zimbabwe reportedly affected the supply of a major hospital. It is estimated its power generation will halve by early next year, and energy tariff hikes are expected.
In Zambia, the power crisis spurred the energy and water development minister to threaten to cancel concessions for mini-hydropower projects that have been dormant. She extended a deadline of November 30 this year for four companies to begin the implementation of renewable projects.
Merged stock exchanges elicit interest
Regional integration for African stock exchanges was a popular topic at the African Securities Exchanges Association’s (Asea) annual conference, which took place in Johannesburg this week.
Oscar Onyema, the president of Asea, said often exchanges don’t have enough critical mass to warrant the necessary infrastructure, and some African exchanges have only two listings.
Brian Mugabe, at Imara SP Reid, said: “Smaller exchanges don’t generate enough to justify the brokerage we see.”
Onyema added that a more regional approach “could service the market in a more efficient way”.
He offered the BVRM as an example, which acts as an exchange for eight West African countries, listing 32 companies. “It could drive a deeper pool of liquidity and therefore a more compelling story to raise capital on African exchange platforms.”
But, speaking at the Aesa conference on Tuesday, Donna Oosthuyse, the director of capital markets at the JSE, said experience of integration of markets was with those already deep and liquid in their own right and don’t provide an example for what could be done in a decidedly different scenario in Africa.
“We need to focus on developing local markets before we can integrate them,” she said, noting good work is already being done to bring greater pools of liquidity to the markets through pension reform and incentives for saving.
Bert Chanetsa, a deputy executive officer of the Financial Services Board, said, regrettably, one of the issues on the continent is the perception of a loss of sovereignty. “We need to work to try and address that fear,” he said.