JOHANNESBURG – The Public Investment Corporation’s document in the disclosure of the entity’s unlisted investments as required by the standing committee on public accounts dated March 31, 2018, summarised the popular impediments why investors and specifically local investors shy away from investing beyond South Africa’s borders in Africa.
They include poor governance, political instability, corruption and poor infrastructure to access markets.
That’s only half the story though. Financial markets are always or most of the time right, and specifically the bond market players. My analysis shows that the 10-year government bond yields of selected African countries are highly correlated with their sovereign risk ratings, as determined by Standard & Poor’s and Fitch.
Of the 13 countries analysed only Botswana, Mauritius and Morocco made the investment grade. Inflation and political stability, as measured by the World Bank’s Political Stability Index, are major factors in determining a country’s sovereign risk.
Botswana, Mauritius, Namibia, Ghana and Zambia have higher political stability ratings than South Africa, while Egypt, Ethiopia and Nigeria have the worst among the 13 countries.
That only tells half the story though.
Real bond yield – bond yields adjusted for inflation – indicates that Tanzania, Uganda, Ghana and Zambia have much higher real-bond yields than the rest of Africa, while the real-bond yields’ countries such as Kenya, Ivory Coast, Nigeria and Egypt with lower political stability ratings and weaker credit ratings than South Africa are nearly half of that of South Africa.
What it says is that lenders are prepared to accept lower inflation-adjusted rates than they would in South Africa’s case. Why? With zero economic growth and the world’s second worst employment situation, South Africa is the worst-performing economy among the selected African economies. On the West African coast Ghana and Ivory Coast are booming, but the former’s growth may be stymied by its debt burden to its GDP ratio of 77 percent.
The biggest prospect for growth in Africa in future is in the East and Central Africa region on the back of China’s One Belt One Road (Obor) Strategy, and specifically The Maritime Silk Road, where three economic passages will be knitted together through a chain of sea ports from the South China Sea to Africa that will direct trade to and from China. A massive infrastructure project is under way.
The Lamu Port South Sudan Ethiopia Transport (LAPPSET) Corridor will link Kenya with Ethiopia, Uganda and South Sudan and involves railways, highways, a crude oil pipeline and fibre-optic cables connecting those countries. The project also includes airports, resort cities, an oil refinery and a 32-berth port in Lamu (Kenya).
The impact of the Maritime Silk Road and Obor is vast. According to a World Bank study Kenya, Tanzania, Uganda, Rwanda and Mauritius will be among the top 20 countries experiencing decreases in trade costs while Tanzania, Mauritius and Kenya will be among the top 10 countries that will experience the largest shipping time-savings with China.
A study by Suprabha Baniya, Nadia Rocha, Michele Ruta – Trade Effects of the New Silk Road in July 2018, found that Sub-Saharan Africa will increase their exports by between 5.1 and 6.6 percent. Kenya and Tanzania are expected to increase total trade by more than 40 percent, respectively. Djibouti by more than 20 percent and Egypt by more than 10 percent. The World Bank estimates that real income for the economies in the Belt and Road Initiative could increase their real income by between 1.2 and 3.4 percent.
The Africa Renewal information programme produced by the Africa Section of the UN Department of Global Communications, said once completed the LAPSSET railway will connect to West Africa’s Douala-Lagos-Cotonou-Abidjan Corridor, running through Cameroon, Nigeria, Benin, Togo, Ghana and Ivory Coast.
Some countries and markets in Africa should not be sniffed at. Opportunities abound.
Ryk de Klerk is an independent analyst-at-large. Contact [email protected] His views expressed above are his own. You should consult your broker and/or investment adviser for advice.