Debt capital markets in Africa remain resilient, displaying innovation in response to challenging regional and global environments. A review of the continent’s activity in debt capital markets reveals continued growth in issuance, including the evolution of new asset classes. These positive trends speak well to both the resilience and future growth prospects of Africa’s debt capital markets.
Debt capital markets across Africa’s sub-regions have remained robust despite the macroeconomic and political challenges presented, “indicating their growing maturity and depth – along with their ability to develop solutions in the face of volatility and change,” says Zoya Sisulu, Head, Debt Capital Markets South Africa, at Standard Bank – parent of Stanbic Bank Botswana.
In Kenya, for example, structural challenges, including two banks placed under statutory management in 2016, saw investors move out of corporate bonds to the perceived safety of government paper and tier one banks. Similarly, in response to local growth concerns and increased political uncertainty in South Africa, issuance in the country’s debt capital markets was largely focused on high quality deals on well-known credit, given the increased risk aversion.
As sentiment improved in the course of the year, liquidity increased significantly and even saw some compression in spreads. The depth of the South African market also attracted a number of non-South African domiciled issuers seeking to access the local bond market through inward listings. These included institutions such as the International Finance Corporation raising ZAR bonds for local project funding and the Republic of Namibia raising a sovereign ZAR-denominated bond for ongoing deployment in the country’s infrastructure development programme.
In West Africa, Nigeria’s debt capital markets were characterised by volatility driven by increased inflation, high interest rates and low liquidity arising from a drop in global oil prices and depreciation of the Naira. In response, the value of bonds issued in Nigeria in 2016 dropped by 20% – to US$2.9 billion, compared with US$3.7 billion in 2015.
A significant corporate issuance, in one of Africa’s largest economies on the other hand, saw Stanbic IBTC Capital Limited assist Lafarge Africa PLC to raise NGN 60 billion (US$190 million) in the Nigerian debt capital markets. This was a landmark issue in Nigeria as it represents, “the largest bond issuance by a corporate in the country – successfully raised in a particularly challenging liquidity and interest rate environment,” says Kobby Bentsi-Enchill, Standard Bank’s Head of Debt Capital Markets for West Africa.
Despite pervasive macro challenges, “Africa’s smaller more diversified economies continued to show an increase in corporate issuance,” says Ms Sisulu. For example, Tanzania’s National Microfinance Bank Plc issued a US$19 million three-year senior and unsecured fixed rate retail bond taking advantage of the substantial liquidity with retail investors. In Namibia and Zambia, issuance continued to be driven by the financial sector.
A highlight in the Namibian market was the International Finance Corporation’s debut bond, pricing at par to the government curve. Also, despite a volatile interest rate environment in Mozambique the US$ 4.4 million Bayport transaction marked the first corporate issuance in the country. Changing regulation was also a common theme across the African debt capital markets landscape this year, and will continue to define responses going forward.
Opportunities around interest rate capping, for example, could see innovation in Kenya’s debt capital markets as corporates seek to hold loans in bond format. This is especially so in Kenya’s financial services sector where, “banks will need to get smarter about increasing returns on their loan books and repackaging structures will likely get them rate flexibility that is required to properly assign risk to counterparties,” says Wegoki Mugeni, Head, Debt Capital Markets East Africa for Standard Bank. Regulatory changes around capital requirements in Uganda and Tanzania are also expected to drive opportunity in these two markets.
Similarly, in South Africa, banks have been key drivers of issuance volumes in response to the implementation of Basel III regulations, much of this historically focused on Senior and Tier ll funding. Further developments in this sector include Alternative Tier 1 Capital. Alternative Tier 1 notes are a key instrument in regulators' post-crisis bail-out regime. They seek to impose principal losses on creditors during firm-level financial distress. “The idea is that this should happen outside the normal bankruptcy process, and, in theory, without recourse to the public purse,” explains Ms Sisulu.
In Nigeria, regulation has driven the growth of the country’s debt capital markets over the last decade. “Regulatory changes, including pension fund reforms, have seen significant growth in assets under management as pension funds benefit from increased participation from pension fund contributors,” says Mr Bentsi-Enchill.
Specifically, in 2012, the Federal Government of Nigeria exempted bonds from withholding tax on interest income, making investments in bonds more attractive. In addition, assets under management of pension funds increased from US$9.5 billion in 2012 to US$19 billion in September 2016. That said, corporate bond issuances in Nigeria still only accounted for just over 7% of total issuances in 2015 and 2016 with the Federal Government of Nigeria remaining the primary issuer of bonds.
Nigeria’s commercial paper market has grown significantly since the first commercial paper issuance by Stanbic IBTC Bank PLC in 2012. Cumulative commercial paper issuance from 2012 to September 2016 amounted to over US$20 billion, with a number of corporates accessing the commercial paper market for short term funding this year.
Looking forward to 2017, government and banks are expected to be the biggest drivers of new debt capital market activity in Africa going forward. “In Kenya, for example, Standard Bank expects requirements for longer term, local currency denominated financing structures for power, infrastructure and utilities projects to drive growth in the capital markets,” says Ms Mugeni. “Additionally, market changes such as introduction of over the counter trading for fixed income securities should increase secondary market liquidity something which has been conspicuously absent for corporate paper.”
Similarly, in Uganda, Standard Bank expects increased debt capital market activity as private sector investors look to raise longer term funding to service government infrastructure investment. Over the longer term, Standard Bank also expects infrastructure build programmes, as well as major capital projects in water and energy, to drive innovation and activity in South Africa’s capital markets. “There has been much discussion in the market around facilitating the development of the project bond market given the massive infrastructure requirement in the country – particularly in the water and renewable energy sectors,” says Ms Sisulu.
In summary, Africa’s rapidly growing and deepening debt capital markets have met the challenges of 2016 with both resilience and innovation. “Standard Bank remains optimistic that Africa’s debt capital markets will continue to deliver the capital that drives Africa’s growth,” says Ms Sisulu.
Marcian Concepts have been contracted by Selibe Phikwe Economic Unit (SPEDU) in a P230 million project to raise the town from its ghost status. The project is in the design and building phase of building an industrial hub for Phikwe; putting together an infrastructure in Bolelanoto and Senwelo industrial sites.
This project comes as a life-raft for Selibe Phikwe, a town which was turned into a ghost town when the area’s economic mainstay, BCL mine, closed four years ago. In that catastrophe, 5000 people lost their livelihoods as the town’s life sunk into a gloomy horizon. Businesses were closed and some migrated to better places as industrial places and malls became almost empty.
However, SPEDU has now started plans to breathe life into the town. Information reaching this publication is that Marcian Concepts is now on the ground at Bolelanoto and Senwelo and works have commenced. Marcian as a contractor already promises to hire Phikwe locals only, even subcontract only companies from the area as a way to empower the place’s economy.
The procurement method for the tender is Open Domestic bidding which means Joint Ventures with foreign companies is not allowed. According to Marcian Concepts General Manager, Andre Strydom, in an interview with this publication, the project will come with 150 to 200 jobs. The project is expected to take 15 months at a tune of P230 531 402. 76. Marcian will put together construction of roadworks, storm-water drains, water reticulation, street lighting and telecommunication infrastructure. This tender was flouted last year August, but was awarded in June this year. This project is seen as the beginning of Phikwe’s revival and investors will be targeted to the area after the town has worn the ghost city status for almost half a decade.
The International Monetary Fund (IMF) has slashed its outlook the world economy projecting a significantly deeper recession and slower recovery than it anticipated just two months ago.
On Wednesday when delivering its World Economic Outlook report titled “A long difficult Ascent” the Washington Based global lender said it now expects global gross domestic product to shrink 4.9% this year, more than the 3% predicted in April. For 2021, IMF experts have projected growth of 5.4%, down from 5.8%. “We are projecting a somewhat less severe though still deep recession in 2020, relative to our June forecast,” said Gita Gopinath Economic Counsellor and Director of Research.
The struggle of humanity is now how to dribble past the ‘Great Pandemic’ in order to salvage a lean economic score. Botswana is already working on dwindling fiscal accounts, budget deficit, threatened foreign reserves and the GDP data that is screaming recession.
Latest data by think tank and renowned rating agency, Moody’s Investor Service, is that Botswana’s fiscal status is on the red and it is mostly because of its mineral-dependency garment and tourism-related taxation. Botswana decided to close borders as one of the containment measures of Covid-19; trade and travellers have been locked out of the country. Moody’s also acknowledges that closing borders by countries like Botswana results in the collapse of tourism which will also indirectly weigh on revenue through lower import duties, VAT receipts and other taxes.
Latest economic data shows that Gross Domestic Product (GDP) for the second quarter of 2020 with a decrease of 27 percent. One of the factors that led to contraction of the local economy is the suspension of air travel occasioned by COVID-19 containment measures impacted on the number of tourists entering through the country’s borders and hence affecting the output of the hotels and restaurants industry. This will also be weighed down by, according to Moody’s, emerging markets which will see government losing average revenue worth 2.1 percentage points (pps) of GDP in 2020, exceeding the 1.0 pps loss in advanced economies (AEs).
“Fiscal revenue in emerging markets is particularly vulnerable to this current crisis because of concentrated revenue structures and less sophisticated tax administrations than those in AEs. Oil exporters will see the largest falls but revenue volatility is a common feature of their credit profiles historically,” says Moody’s. The domino effects of containment measures could be seen cracking all sectors of the local economy as taxes from outside were locked out by the closure of borders hence dwindling tax revenue.
Moody’s has placed Botswana among oil importers, small, tourism-reliant economies which will see the largest fall in revenue. Botswana is in the top 10 of that pecking order where Moody’s pointed out recently that other resource-rich countries like Botswana (A2 negative) will also face a large drop in fiscal revenue.
This situation of countries’ revenue on the red is going to stay stubborn for a long run. Moody’s predicts that the spending pressures faced by governments across the globe are unlikely to ease in the short term, particularly because this crisis has emphasized the social role governments perform in areas like healthcare and labour markets.
For countries like Botswana, these spending pressures are generally exacerbated by a range of other factors like a higher interest burden, infrastructure deficiencies, weaker broader public sector, higher subsidies, lower incomes and more precarious employment. As a result, most of the burden for any fiscal consolidation is likely to fall on the revenue side, says Moody’s.
Moody’s then moves to the revenue spin of taxation. The rating agency looked at the likelihood and probability of sovereigns to raise up revenue by increasing tax to offset what was lost in mineral revenue and tourism-related tax revenue. Moody’s said the capacity to raise tax revenue distinguishes governments from other debt issuers. “In theory, governments can change a given tax system as they wish, subject to the relevant legislative process and within the constraints of international law. In practice, however, there are material constraints,” says Moody’s.
‘‘The coronavirus crisis will lead to long-lasting revenue losses for emerging market sovereigns because their ability to implement and enforce effective revenue-raising measures in response will be an important credit driver over the next few years because of their sizeable spending pressures and the subdued recovery in the global economy we expect next year.’’
According to Moody’s, together with a rise in stimulus and healthcare spending related to the crisis, the think tank expects this drop in revenue will trigger a sizeable fiscal deterioration across emerging market sovereigns. Most countries, including Botswana, are under pressure of widening their tax bases, Moody’s says that this will be challenging. “Even if governments reversed or do not extend tax-easing measures implemented in 2020 to support the economy through the coronavirus shock, which would be politically challenging, this would only provide a modest boost to revenue, especially as these measures were relatively modest in most emerging markets,” says Moody’s.
Botswana has been seen internationally as a ‘tax ease’ country and its taxes are seen as lower when compared to its regional counterparts. This country’s name has also been mentioned in various international investigative journalism tax evasion reports. In recent years there was a division of opinions over whether this country can stretch its tax base. But like other sovereigns who have tried but struggled to increase or even maintain their tax intake before the crisis, Botswana will face additional challenges, according to Moody’s.
“Additional measures to reduce tax evasion and cutting tax expenditure should support the recovery in government revenue, albeit from low levels,” advised Moody’s. Botswana’s tax revenue to the percentage of the GDP was 27 percent in 2008, dropped to 23 percent in 2010 to 23 percent before rising to 27 percent again in 2012. In years 2013 and 2014 the percentage went to 25 percent before it took a slip to decline in respective years of 2015 up to now where it is at 19.8 percent.