Investments Flourish in Sub-Saharan Africa
Improved international perceptions of the sub-Saharan region has seen portfolio investments into the region increase fourteen-fold between 2003 and 2006 and continuing to increase in 2007 and early parts of 2008. This comes with the possibility of an alternative pan-African board being created on the South African JSE exchange.
This growth in foreign investor activity is due to sub-Saharan Africa’s macroeconomic performance, debt relief, the global commodity boom, improved governance situation and political stability.
Liberalisation of foreign exchange markets and the lifting of restrictions on investors encouraged the entry of foreign investors who, over time, moved from investments in government debt instruments into equities, corporate debt and money market instruments.
While a significant portion of total portfolio investment targeted at South Africa, there has also been a notable increase in investment flows into countries like Nigeria, Ghana, Kenya, Zambia, Botswana and Uganda. There is, to an extent, a noticeable shift in investment flow from South Africa to markets such as Nigeria, Zambia and Kenya.
Another significant trend has been the growth in the number of pan-African funds. Most of the pan-African funds were established primarily to satisfy the demand for sub-Saharan Africa exposure by foreign investors. However, local institutions in sub-Saharan countries such as Ghana and Kenya have also established pan-African funds to satisfy the demand of local investors for pan-African exposure.
The establishment of pan-African funds and growing foreign investor activity has attracted the attention of the JSE, which has announced its intention of creating a pan-African board to attract sub-Saharan companies outside South Africa to list on the board.
The domestic savings industry and corresponding investor activity across the sub-Saharan markets has also increased rapidly over the past few years. This has been driven largely by the introduction of pension fund legislation in most markets which has led to the establishment and growth of the local private pension fund industries. To a small extent the development of unit trust funds in the local markets has also contributed to the growth of investment activity in the various markets.
The rapid increase of portfolio investments by international investors along with a growing domestic savings industry has inevitably led to strains on the capacity and infrastructure of the financial markets of countries in the sub-Saharan region.
While some countries had responded to the challenge by improving capacity and increasing infrastructure, notwithstanding this, they have in general struggled to absorb the scale of investment despite an increase in central bank issuance of government debt and a general increase in capital raising initiatives of local and international companies.
Liquidity in financial markets remains a challenge, although this situation will improve as more markets move to address the liquidity problem by stimulating trading activity through the introduction of automated trading systems and the development of central securities depositories.
To support increased investment flows to the region, financial markets have evolved. Many markets have implemented automated trading systems and established central securities depositories. There has been a general trend with respect to the government debt market whereby the central banks have licensed and appointed primary dealers to facilitate trades on behalf of investors in both the primary and secondary market and also act as market makers. This has been very positive for the activity and liquidity of the government debt markets, particularly in markets such as Nigeria and Ghana.
International broker dealers have established execution arrangements with local brokers to support their client trading activity in sub-Saharan markets. A number of South African brokers are considering similar arrangements to support their local and international client base. South African-based asset managers on the other hand have established a presence in other sub-Saharan markets on the back of a growing appetite by pension funds and retail investors. This has been accompanied by local banks establishing custody capabilities to serve the growing domestic and foreign investor demand.
Although there had been a marked improvement in terms of capacity and infrastructure in sub-Saharan Africa, there remains room for further improvement. There is a need for governments to finance infrastructure development and they will continue to issue debt to finance this development. As long as high GDP growth continues in the region, there will be opportunity for local companies to grow and raise capital. As further assets are created in the key markets of Nigeria, Kenya, Uganda, Zambia, Angola and potentially the DRC, this will provide the countries with further capacity to absorb investment funds from both international and domestic investors.
More complex financial instruments such as derivatives will find a market, as financial markets develop and grow and this will impact service providers and utilities in the market. More financial markets will move away from trading and settlement in physical form and will migrate to a dematerialised environment across all trading instruments.
In order to cope with the growth in investment activity, I suggest that service providers and utilities in the capital markets will continue to improve technology and market processes/policies. This will create a more robust and seamless environment to facilitate investments and will in turn contribute positively to the liquidity of the market.
The number of service providers is expected to increase as local and international investor activity grows. This will result in depth and therefore choices of service providers in the markets over time. Hopefully, this will lead to increased competition and further improvements in the markets.
Major changes in financial markets beyond South Africa could also occur through the development of regional exchanges, as well as the JSE’s planned pan-African board, leading to a significant shift in trading activity to these from local markets.
This article is based on a previous article that appeared in ‘Standard Bank Brings Africa to SIBOS’.