Interview: Razia Khan
To what extent will the US tapering of the quantitative easing (QE) programme affect Africa as an investment destination?
RAZIA KHAN: The consensus is that it will only affect the more liquid African markets – those that have seen a considerable increase in foreign investment – and only in the very short term, if at all. We are now well into the tapering of the QE programme. Long-term US yields are at low levels and risk appetite is still strong, with flows into emerging markets continuing. Should US Treasury yields increase, perhaps in anticipation of eventual tightening of policy by the US Federal Reserve, then more liquid emerging markets like South Africa are likely to experience short-term volatility. Frontier markets in sub-Saharan Africa (SSA) that have seen greater levels of foreign investor interest, such as Nigeria, might also be susceptible to short-term volatility.
In contrast, Kenya’s debt markets have not seen a great concentration of foreign investor participation. Ownership of Kenyan bonds by foreigners is relatively small (about 5% of total issuance) and concentrated in the infrastructure bonds, where withholding tax does not apply. For this reason, we think Kenya will be relatively immune to any global volatility.
The more important reason for the relative insulation of African markets, however, is that long-term fundamentals continue to look favourable. QE tapering is a short-term adjustment that does not take away from the long-term positives in Africa. Therefore, there is little reason to anticipate that Africa as an investment destination will be fundamentally impacted by QE tapering or even Fed tightening. Returns on investment in Africa are still sufficiently compelling to withstand the pressure of eventually higher US Treasury yields.
What impact will Kenya’s sovereign bond have on foreign investors’ appetite for Africa’s bond markets?
KHAN: For a long time there was relatively little issuance of sovereign bonds in Africa, suggesting that early issuers enjoyed stronger demand for their debt simply because supply was limited. With plans for more African countries to issue external debt, this is gradually changing, and pricing of future eurobonds may not be as attractive. The departure from unconventional monetary easing in developed economies will also have an impact on the pricing of Africa’s external debt.
Despite this, however, Kenya still represents something of a unique credit in SSA. Most sovereign issuers to date have been commodity-rich economies, dependent on a single resource for most of their foreign exchange earnings. Kenya represents a different credit; it has a diversified economy. There is a long history of private sector-driven growth, reflected in the country’s more favourable revenue mobilisation ratios. Kenya stands to benefit from any weakness in the price of oil in coming years, until it becomes an oil-producer itself. Its levels of financial inclusion mean that the drivers of future growth are promising, and very different to other SSA peers. For all these reasons, demand for Kenya’s recent debut eurobond was very robust, securing bids worth $8.8bn – more than four times the amount the treasury had been looking to secure.
To what extent is Kenya – and the wider frontier market of East Africa – vulnerable to hot money flows?
KHAN: Relative to other SSA regions, East Africa is seen as more immune to investor outflows. Tanzania has not yet opened up to foreign portfolio investment, although it has plans to do so. Uganda sees some level of interest in its fixed income market, but the flows are seen as more long term (focused on its transition to an oil producer), and therefore reasonably sticky. Despite having a fairly liberalised foreign exchange regime, Kenya has not actively encouraged foreign investor participation in its debt markets. A withholding tax applies, except in the case of domestic infrastructure bonds, and real yields on debt have been less attractive than elsewhere. So relatively speaking, Kenya – and East Africa in general – are not seen as particularly susceptible to a reversal of hot money flows.
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