JOHANNESBURG Nov 7 African debt has
increasingly captured the attention of global bond investors
lured by the promise of high yields and diversification.
That interest will now be tested as dedicated African bond
funds are emerging for the first time to provide exposure to one
of the world's few remaining growth engines.
Investec Asset Management launched an Africa Fixed Income
Opportunities Fund in July, which will invest in hard and local
currency debt markets such as Nigeria, Uganda and South Africa.
Frontier market investment boutiques Silk Invest and Insparo
Asset Management are planning to launch African debt funds in
2014. A similar offering by pan-African lender Ecobank,
which created an African domestic bond index in 2011, should
also be ready early next year.
Africa's appeal to investors lies in its strong growth,
improving macroeconomic fundamentals including lower inflation
and debt levels, and its low correlation to financial markets in
the developed world.
The specialist funds are an important step in the
continent's evolution from niche asset class to mainstream
investment destination, analysts say. But it still has a long
way to go and many markets, particularly in sub-Saharan Africa,
need to implement reforms to improve liquidity and transparency
and broaden their local investor base.
"It's important for these capital markets to develop so they
can attract outside funds. Once frontier market investors are
engaged, behind them come institutional investors that start to
dip their toe in the water and that's really where the big, real
money is," said Angus Downie, head of economic research at
"We've seen that in Asia so we can expect to see that
happening in Africa."
Ecobank plans to launch a sub-Saharan African local currency
bond fund after some investors had expressed interest in getting
similar annual returns of 12-14 percent as shown by its Middle
Africa bond index, Downie said.
Nigeria, Ghana and Kenya are among the seven countries
included in the index.
The African Development Bank is also producing an index
which will be the precursor to an African domestic bond fund.
BORROWING FOR INFRASTRUCTURE
Local and international bond issuance by African sovereigns
is expected to accelerate given their need to fund investments
in infrastructure, which the AfDB estimates will cost around $90
Africa's stock of outstanding international debt securities
more than tripled over the last decade to $72.8 billion at the
end of 2012, according to the Bank of International Settlements,
but just 14 out of 54 African countries have issued Eurobonds.
Debut issuers expected to tap international capital markets in
the next few years include Kenya, Ethiopia and Cameroon.
Domestic bond markets in countries such as Ghana, Kenya and
Uganda have drawn in foreign investors, while Nigeria's
inclusion in JP Morgan's GBI-EM bond index last year has led to
significant offshore inflows into its debt market, the
continent's second most liquid after South Africa.
Silk Invest's fund will invest in local currency bonds in at
least ten countries screened for market access and liquidity,
said Stephen Charangwa, a portfolio manager at the firm.
Total outstanding debt in African local currency bond
markets is now in excess of $400 billion. In some countries,
total outstanding debt grew between 15 and 25 percent on an
annualized basis from 2008 to 2012, which means markets are
becoming deeper, he said.
"Investors are mainly concerned about liquidity," Charangwa
said. "A diversified portfolio is possible because you now have
fairly deep local bond markets like Nigeria and Egypt
complementing South Africa, with Kenya and Ghana also providing
With the exception of South Africa, foreign participation is
still limited so African markets also offer diversification.
"In a world that's increasingly been dominated by events in
the U.S., the African universe is very much less correlated to
these global events such that the currencies and rates are not
as volatile," said Charangwa.
In order to boost liquidity, authorities need to ensure that
primary dealers, usually banks, are well-capitalised, which in
some countries may mean consolidating the banking system, said
Samir Gadio, emerging markets strategist at Standard Bank.
While some markets have healthy local investor
participation, others will need to diversify their domestic
investor base beyond their state-owned pension funds, he added.
"The more foreign interest you have, the more interaction
you're going to have between foreign investors and those
policymakers and the more the latter will be under pressure to
carry out these reforms," he said.
(Reporting by Tosin Sulaiman; Editing by Ron Askew)