financing through the Capital market

The capital market has emerged as a crucial and viable alternative to traditional sources of development financing in Africa and a means of sustaining its current growth momentum –mostly described as commodity driven. This has been viewed as unconventional and mainly driven by the US Quantitative Easing programme which moved many investors into unexplored havens—including Africa—for better returns.
Indeed, the number of international bond issuances by sub-Saharan African countries in recent years—mainly in the aftermath of the 2008 crisis has doubled those issued within 2006-2007 according to the Brookings Institute’s Foresight Africa 2014 report, and more countries have tapped the international capital markets in the post-crisis era and yet more countries due to join according to market intelligence.
However, as the US begins to implement exit strategies to leave the QE era vis-à-vis the Fed’s tapering programme, fears are that investors will move from Africa into more secured investment opportunities in the US which may squeeze capital out of the continent. Hence the need for the continent to seek wider opportunities in the capital markets and the emerging realities in the Eurozone presents a new and timely window of opportunity for the continent.
Inflation in the Eurozone dropped to 0.5% from a previous 0.7% in May 2014 which triggered an expansionary policy response from the European Central Bank. The ECB, in move to reverse the continuous deflation of the EU economy further relaxed monetary policy to -0.1% overnight rates and a 0.15% normal rate from 0.25% along with an announcement of a QE of €400bn (£325bn) package of cheap funding for banks on condition that it is use for lending outside the financial sector.
However as interest rates run negative and more money is created into the economy, the excess liquidity will most likely lead to a similar outcome of the US post-crisis interventions that made investment in Africa and other emerging markets more rewarding.
To generate capital and maintain its growth, more African countries will need to tap into the European markets to lessen the impact of the US tapering programme as on the continent’s bond issuance. This could help in improving credit ratings of most countries through competition. Furthermore, in case of investor pull-outs from the continent, as the case might be in the wake of the tapering programme, the present Eurozone developments gives an opportunity to ameliorate the consequences on countries’ capital generation ability to sustain their current growth impetus. It is an opportune moment for African countries, both new and old to the capital market, to equally diversify sources of development financing to propel growth and catch up in development.
However African countries will need to continue to build public institutions and improve on governance to gain investor confidence, improve credit ratings and reduce risks premiums paid on investment. Countries like Nigeria, Rwanda and Mozambique according to Brookings Institute, all went to market with below-investment grade sovereign ratings which normally drive rates high because higher risks are incorporated in prices.
With prudent macroeconomic management and fiscal discipline, Africa can ride on the shoulders of advanced economies to build and sustain its present growth through the capital market. This will require countries also managing public debt levels to earn better ratings. For instance Zambia’s recent downgrade due to the country’s high deficit levels and plummeting currency saw the copper producer pay higher returns on its Eurobonds between 8.75 percent and 8.875 percent compared to its 2012 issue yield of 5. 5.375 percent. Public debts and weakening currency derail investor confidence and increase risks premiums to be paid by the country hence African countries must consider investing capital into growth-driven sectors to help them face out debts.
Additionally, development of the capital market in Africa is crucial to draw investment to the continent and though it remains one of the investment opportunities in Africa for the private sector strong government collaboration will be needed to develop it. Indeed, this can move Africa’s growth into greater trajectories.
Solomon Anzagra-Geneva