Africa’s capital markets on steady development to finance growth
Written by 17 juin 2019on
PwC’s Africa Capital Markets Watch is an annual report focusing on the equity and debt capital markets in Africa. Since we launched the maiden edition in 2014, we have sought to provide insight on equity and debt capital markets activity on African exchanges and by African companies globally. The 2018 edition, released in March 2019, is our fifth publication.
Benchmarked to GDP, Africa’s capital markets are relatively under developed
Capital markets are the largest source of financing in several economies, including the United States and United Kingdom where the market capitalization-to-GDP ratio is well over 100%. They also provide investment opportunities for pension funds, among many other investors. In Africa however, the capital markets of various economies remain largely under developed, plagued by low liquidity, poor infrastructure, and as highlighted in our report, no new listings in several years. A report by the World Bank notes that six of the fastest growing economies in 2018 are in Africa; Ghana (8.3%), Ethiopia (8.2%), Cote d’Ivoire (7.2%), Djibouti (7%), Senegal (6.9%) and Tanzania (6.8%). The question remains, are the capital markets playing an active and primary role in financing this growth?
The weak state of several of Africa’s capital markets can be garnered from indicators such as the savings-to-GDP and market capitalization-to-GDP ratios. A market capitalization-to-GDP ratio of between 75% and 90% reflects a capital market that is representative of its broader economy. Other than South Africa, the market capitalization-to-GDP ratio of most African markets trends below 30%. As indicated in Figure 1 below, Nigeria, one of the largest economies in Africa, had a market capitalization-to-GDP ratio of only 9.9% in 2017, the lowest amongst other emerging markets such as South Africa (352.9%), Malaysia (144.8%), and India (89.7%). This suggests that several capital markets in Africa are significantly underpenetrated and are therefore not playing an active role in contributing to private sector growth. Although I don’t want to sound myopic in suggesting that the state of capital markets alone are to blame. Several factors drive this, such as the structure of the economy. For example, in Nigeria, the Nigerian National Bureau of Statistics states that about 40% of GDP is from the informal sector, with agriculture being a significant segment. It’ll be quite a task to ask a sole trader to list his business on the Nigerian Stock Exchange. Innovative thinking is required to develop instruments and establish institutions that can be a conduit to having certain key segments of the economy access to the capital markets.
Similarly, the pension assets-to-GDP ratio in multiple African countries is below the benchmark of 60% as indicated in Figure 2. The low level of savings, which can be attributed to a large unbanked population, among many other factors, is primarily invested in the public sector and a few private sector players.
The picture is however not completely bleak. As noted further below, some significant improvements have been made in the past few years to further develop Africa’s capital markets.
Figure 1: Market capitalization-to-GDP ratio of select countries in 2017
Figure 2: Pension assets-to-GDP ratio of select countries in 2017
An average of $11 billion has been raised in Africa’s equity capital markets over the past five years
As stated in our report, in the last five years, between 2014 and 2018, the total value raised through initial public offerings (IPOs) by African companies was $10.7 billion, of which $0.4 billion was raised outside of Africa, and $2.3 billion through dual listings on an African and non-African exchange. The value of further offers (FOs), i.e. existing listed companies tapping the market for additional funds, from the 413 deals recorded in the last five years stood at $44.7 billion. To put this in context, according to the World Bank, remittances to sub-Sahara Africa (not all of Africa) in 2018 was $39.2 billion. More money was sent to sub-Sahara Africa through remittances in one year, 2018, than raised through IPOs in Africa in five years. Similarly, according to UNCTAD, foreign direct investment into Africa in 2018 was approximately $40 billion.
Figure 3: Africa ECM activity (2014 – 2018)
Between 2014 and 2018, over $5.9 billion, representing 57% the combined value of Africa IPOs, was raised from 43 IPOs on the JSE, the largest bourse in Africa with a market capitalization of nearly $1 trillion. During the same period, the Egyptian Exchange (EGX) came second after the JSE with 17 issuances valued at $1.6 billion. South Africa, which may be on account of being a more mature economy, continues to dominate in terms of African equity capital markets activity, with the EGX coming at a distant second.
African sovereign issuances continue to dominate the debt capital markets
African representation on the international debt capital markets is dominated by sovereign issuances. As noted in our report, between 2014 and 2018, of the 437 international bond transactions valued at $140.3 billion, sovereign bonds accounted for 51.5% of the total value raised.
Global investors continue to exhibit strong appetite for African eurobonds due to the relatively high yields offered, improving macroeconomic management, and geopolitical stability. According to Dealogic, eurobond transactions by African countries peaked to a five-year high in 2018 with $26.2 billion raised. Egypt, Nigeria, and Angola were the three largest issuers in 2018 with combined proceeds of $15.4 billion, representing more than half of African sovereign eurobonds in 2018. Meanwhile, the African Development Bank (AfDB) and the African Export-Import Bank were the only two multilateral agencies that issued non-local currency supranational debt in 2018.
Corporates, on the other hand, raised $6 billion in the international debt markets in 2018, a decrease of 9% from $6.5 billion raised in 2017. South African debt issuers such as FirstRand Bank, Investec and Sasol were among the companies that dominated the international corporate debt market in 2018, accounting for 54.4% of the total issuance.
Based on available data, local currency bond issuances totaled $9.4 billion between 2014 and 2018 and were dominated by South African, Nigerian, and Moroccan issuers. The local currency debt market in Africa is estimated to be larger than reported. However, availability of comprehensive data remains elusive.
What’s next for Africa’s capital markets
Domestically, we expect the low volume of activity that characterized the African equity capital markets in 2018 to persist in 2019, with a few individually large transactions based on the pipeline of anticipated local and cross-border transactions. Even though the data is elusive, we are observing increased corporate local currency bond transactions as several sovereigns are tapering domestic issuances.
In the international market, despite predictions of rate hikes in the US and Europe, we believe that high-yielding international debt issues from Africa, especially sovereign issuances, will continue to appeal to global investors. Although there have been concerns raised by various institutions, including the International Monetary Fund, on the growing debt levels of various African countries. As stated earlier, in the equity capital markets, we are seeing an increasing trend towards blended finance where African corporates pursue dual listings involving domestic African and foreign exchanges. We expect this trend to continue, albeit low volumes.
Finally, a lot of effort is going into further developing Africa’s capital markets.
- Certain jurisdictions have benefited from the introduction of innovative financial products and institutions. For example, institutions such as the African Local Currency Bond Fund, GuarantCo, and InfraCredit in Nigeria, have facilitated the introduction of new issuers in various African corporate bond markets by either acting as anchor or “back-stop” investors, or providing guarantees. In Nigeria, the Chapel Hill Infrastructure Debt Fund has enabled certain corporates to indirectly access a new source of capital through the capital market. We hope to see similar initiatives in the equity capital markets.
- Certain exchanges in Africa have introduced programmes, such as London Stock Exchange Group’s ELITE programme at the BRVM and Casablanca Stock Exchange, to drive capacity building and prepare companies that are considering a listing. Preparation is key to successfully going and staying public.
- Several governments have exited from state-owned enterprises through the capital markets, contributing to increasing the depth of their respective markets. For example, the government of Egypt announced the sale of its interests in 23 state-owned companies through the EGX. The privatization exercise in Cote d’Ivoire has seen entities like Sucrivoire, a sugar-producing company, and NSIA Banque CI, list on the BRVM in 2016 and 2017, respectively. The last IPO on the Rwanda Stock Exchange in 2017 was as a result of the sale of the government’s 19.81% stake in I&M Bank Rwanda Limited.
- Companies in certain key sectors are being mandated, or strongly encouraged, to list their shares on their respective exchanges in order to drive local participation in successful private sector growth, and similar to privatizations, increase the market capitalization of the respective markets. In Tanzania, the government has enacted laws requiring telecommunication companies to list their shares within three years of acquiring their operating licenses. In other territories such as Ghana and Nigeria, telecommunications companies have completed a listing.
- Some of Africa’s larger economies, such as Angola and Ethiopia, have announced efforts to open their market to global investors. Ethiopia, for example, has announced plans to open a stock exchange by 2020.
- Initiatives such as the African Exchanges Linkage Project by the African Securities Exchanges Association and the African Development Bank are targeted to addressing liquidity concerns while promoting collaboration across various African markets.
While the potential inherent in Africa’s capital markets remains largely untapped, several programmes aimed at driving market reform, liquidity, integration, and technical development are already showing results. With the success of these efforts, there is no doubt that Africa’s capital markets will play a pivotal role in funding its economic growth.