Building support for sub-Saharan Africa credit investment

There has always been a debate with investors as to whether an internationally based portfolio will generate more Alpha than a locally based portfolio. In the past this has been a relatively simple decision. However, with the current economic instability in the Eurozone, mainly driven by Greece, local portfolios are gaining in prominence.

The African credit market remains resilient in the midst of global bond uncertainty, with seven of the nine sub-Saharan African nations outperforming the Bloomberg Emerging Market Sovereign Bond Index since April 2015.

The current weakening in dollar debt has resulted from record low yields in Asia and Europe, as well as the US Federal Reserve’s plans to hike interest rates. While African debt has not been unaffected, growth prospects on the continent remain attractive to investors.

Attractive growth

Investors are always on the lookout for pockets of excellence where alpha is almost guaranteed. For a long time now, developing markets have been outperforming developed markets. Advanced economies have generated 48.9% of global Gross Domestic Product (GDP) in 2015, whilst emerging and developing economies have contributed 51.5%.

Growth is expected to remain supportive of African credit for the rest of the year. This is despite weaker commodity prices, as consumer demand and foreign investment continue to sustain sub-Saharan Africa (SSA) GDP, and thus creditworthiness.

In the local currency credit markets the US dollar strength will, however, weigh on investment, prompting regional central bank governments to keep exchange rates attractive.

Manageable debt

Debt on the continent remains at manageable levels. Most SSA sovereign debt ratios averaged about 35.1% of GDP in 2014. For the most part, fiscal deficits come as a result of factors such as narrow revenue bases, rising wage and current account expenditure pressures, increasing debt servicing levels, moderating export prices and high subsidies. Although large infrastructure programmes will likely also pose a drag on revenue, they are expected to boost medium-term growth prospects.

However, this will depend on when they are completed. The challenges that Eskom faces with its Medupi project are well known and the project has been ravaged by long delays in the past. Hopefully Eskom can work past this and we can finally see a stable electrical grid which will aid in infrastructure build projects.

Multilateral support for SSA countries, in addition, is investment supportive. This is because of organisations such as the International Monetary Fund, World Bank and African Development Bank viewing these country prospects as positive in terms of economic development potential.

Political stability

After the past few years where there were national uprisings in Egypt and Libya, which both turned violent, politically, elections continue to look a lot less volatile in the coming years. This again bodes well for the continent’s future prospects as related stability reduces the risk of a default. Having said that, the possibility of succession complications, attempts to seize power by force, social protest and security threats will remain a consideration, albeit significantly diminished.

A lot of this will depend on the global macro outlook and to a lesser extent on South Africa, which is the dominant economy in the region. South Africa has to contend with service delivery issues which could turn into a political nightmare if not managed properly. A lot will depend on the 2016 municipal elections where the ANC has been losing significant ground in Gauteng. If it loses this traditional stronghold, people will question their hold on power.

Indexed investors are the biggest driver of inflows to the continent, and an effective gauge of market sentiment in terms of SSA investment. Indexed emerging market investors are indeed very interested in Africa, with overweight positions on the continent paying testament to that fact.