African countries have tapped into global capital markets with much enthusiasm, as evidenced by the 16 debut sovereign Eurobond issuances in the past six years. While this has rewarded the issuing countries and international investors greatly, there is still a significant opportunity to be unlocked with the development of domestic bond markets on the continent, Investec Asset Management believes.
Today marks the 20th Anniversary of the establishment of the Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI). The deepening of domestic capital markets is one of the themes that will be discussed at this year’s MEFMI gathering. The annual forum begins today in Washington DC and will yet again bring together some of Africa’s top professionals in macroeconomic management.
“As a long-time investor on the continent, we support MEFMI in their goals of encouraging improved economic and financial management,” says Hendrik du Toit, CEO of Investec Asset Management.
Investec Asset Management was founded in South Africa and manages more than $123 billion of assets worldwide on behalf of clients, including approximately $41 billion in Africa. The firm has been a partner of MEFMI since 2012, providing technical expertise and formulating comprehensive investment policies and strategies for foreign exchange reserves management.
Antoon de Klerk, portfolio manager at Investec Asset Management, is one of the speakers at the forum and will discuss the developments in sovereign bond issuance on the continent. According to De Klerk, the growth of African Eurobonds has been such that the asset class has moved from a niche area to mainstream, as international investors have increasingly capitalised on the improving macroeconomic conditions and diversification benefits that these bonds offer. “African sovereigns have taken advantage of the lower dollar interest rates that these sources of funding have afforded them.”
However, De Klerk believes this is not a long-term solution. “Tactically, issuing Eurodollar bonds in the current low interest rate environment was a great opportunity for African countries. However, due to inevitable currency mismatch – and the consequent risks to sovereign balance sheets – Eurobonds are not the structural solution to Africa’s critical need for affordable capital.”
He is a strong believer in the growth of the domestic bond markets in Africa. “There are currently only 15 investable local currency bond markets in Africa and this is where the real opportunity lies. This is a good way for investors to get exposure to the underlying growth fundamentals of a country,” say De Klerk. In contrast to this, Eurobonds are influenced by the dollar and developments in the global economy.
He accedes that challenges remain, but notes that there have been many improvements on this front. These issues are part of what MEFMI aims to address in bringing together stakeholders in economics and finance, he says.
“Having invested in Africa for more than 15 years, we know that on-the-ground knowledge is one of the greatest challenges. Our team travels extensively to gain a greater understanding about the economic environment and the factors that drive each market, since information is not easily disseminated. With a proper understanding of the investment opportunity and risks, the rewards can be significant in this largely untapped asset class,” believes De Klerk.
He believes one of the greatest challenges to attracting this source of financing is the development of functioning domestic bond markets. “What ultimately solves the structural need for development capital is the lowering of domestic interest rates.”
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