INTO AFRICA Special Edition by Capital Markets in Africa

A TIPPING POINT

CORONAVIRUS SHOCK SUBSAHARAN

AFRIC A’S PUBLIC FINANCE

TURNING AN ECONOMIC DOWNTURN INTO AN OPPORTUNITY

COVID19 IN AFRIC A: LOOKING BEYOND THE DOOM AND GLOOM

CORPORATE FINANCE

LANDSC APE IN THE NEW NORMAL

INFRASTRUC TURE FINANCING USING PORTFOLIO INSURANCE

AFRIC A’S TOURISM INDUSTRY FOR RESILIENCE GROW TH

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CORONAVIRUS SHOCK COMPOUNDS

SUB-SAHARAN AFRICA’S PUBLIC FINANCE

CHALLENGES

The coronavirus pandemic shock is having a severe adverse impact on SSA economies and government debt burdens are rising at a faster pace and to a higher level than for other EMs, heightening the risk of widespread debt distress across the region.

Median real GDP for Fitch-rated SSA sovereigns will fall by 2.1% in 2020, the ﬁrst contraction in decades. Our forecast of 4% growth in 2021 is barely above trend growth.

As a result, we forecast the median budget deﬁcit to widen to 7.4% in 2020, a record high in the modern era, from 4.9% in 2019. The combination of lower GDP, wider budget deﬁcits and currency depreciation will trigger a jump in the median government debt ratio by 14pp to 71% of GDP at end-2020.

This shock compounds a marked secular deterioration in SSA public ﬁnances that has been running for a decade. The median of government debt/GDP for the 19 Fitch-rated SSA sovereigns increased to 57% at end-2019 from 26% in 2012, and Fitch forecasts it to reach 71% at end-2020. In comparison, we forecast the median for other EM to increase to 57% of GDP at end-2020, from 36% in 2008.

Two of the 19 Fitch-rated sovereigns have recently defaulted: Mozambique in 2016 and the Republic of Congo in 2016 and 2017. We believe further sovereign defaults are probable. Fitch rates Zambia at ‘CC’, while Gabon, Mozambique and Republic of Congo are rated at ‘CCC’, and a further 13 in the single ‘B’ range.

Widening primary budget deficits (before interest payments) have been the largest contributor to rising government debt/GDP. Debt will continue to rise without substantial fiscal consolidation. Moreover, the GDP growth rate has declined since 2014 while the average real interest rate on debt has risen since 2017, partly reflecting a decline in the share of borrowing that is on concessional terms, as countries stepped up borrowing from the Eurobond market.

There is a strong incentive for SSA governments to borrow to ﬁnance development, because each dollar of money spent judiciously on health, education or infrastructure can have a huge impact. But easy access to ﬁnance and political pressures can create less benign rationales to borrow.

Africa Economy: A Tipping Point | 6

It was therefore no surprise that SSA sovereigns used space on balance sheets to increase borrowing following the Highly Indebted Poor Countries (HIPC) initiative launched in 1996 and that debt ratios have risen over the past decade.

The post-HIPC initiative window of opportunity appears to have largely closed for many countries as debt has risen to levels associated with heightened risk of debt distress. Countries will need to adapt development models that are less dependent on accumulation of non-concessionary debt or accept a slowdown in the pace of GDP growth.

Between the outbreak of the pandemic and 17 June, the IMF approved USD8 billion of emergency support to Fitch-rated SSA sovereigns under its Rapid Credit Facility and Rapid Financing Instrument (totalling USD8.0 billion) and atastrophe Containment and Relief Trust (USD48 million). This provides valuable ﬁscal and external ﬁnancing to help the countries respond to the coronavirus shock and provide a breathing space for subsequent policy adjustment. But it is moderate at 0.9% of 2020 GDP of the 13 recipient countries.

The G20 DSSI has agreed to suspend bilateral debt service payments from 1 May to end-2020 (potentially extended to 2021) for 77 low-income economies. This includes 15 Fitch-rated sovereigns in SSA, with scheduled debt service payments of USD10.9 billion (1.2% of GDP of the eligible countries). The G20, IMF and World Bank have also called on private-sector creditors to participate, although that is not a condition for bilateral debt relief.

Participation in the DSSI provides countries with ‘flow’ relief on debt service in 2020 (and potentially in 2021), which reduces their fiscal and external financing needs and/or allows them to re-direct spending to health and social priorities. However, the challenges facing many SSA sovereigns are related to not only liquidity. The DSSI reschedules debt service payments rather than reduces it, so does not address the debt stock and medium-term public debt sustainability risks.

As Fitch’s Issuer Default Ratings only apply to debt to the private sector, participation in the DSSI and receiving debt relief from public-sector bilateral creditors would not constitute a default. Although a broader private-sector moratorium on debt service could qualify as a default, no country has said they intend to ask for one, and it is not currently sufﬁciently likely to affect ratings.

Ed Parker, Head of EMEA Sovereign Ratings, Fitch Ratings

FACTORS IMPACTING THE DEVELOPMENT OF INFRASTRUCTURE IN AFRICA

By Tonny Tugee, Managing Director, SEACOM East Africa

The world is eager to do business with Africa but finds it difficult to access African markets because of poor infrastructure Without a doubt, Africa is one of the world’s fastest-growing economic hubs. Crucial to this rate of development is the ability to meet the demand for key infrastructure. At the end of last year, a World Bank conomic update reported that Kenya has seen its Information and ommunications Technology (ICT) sector grow at an average of 10.8% annually since 2016, becoming a significant source of economic development and job creation with spillover effects in almost every sector of the economy.

While this is hugely encouraging news for Kenyans, it also raises questions about the factors which might impact the ongoing positive trajectory of infrastructure development, both in Kenya and the rest of the continent.

Fixed-line networks

In 2019, Kenya invested US$59 million in the Djibouti Africa Regional Express (DARE) submarine ﬁbre-optic cable system, which reached the shores of Mombasa during March this year. The others include SEACOM, East African Marine System (TEAMS), Eastern African Submarine Cable System (EASsy) and Lion2 systems. According to Njoroge Nani Mungai, Chairman of Kenya’s Communications Authority, the investment demonstrates the government’s desire to improve Kenya’s position as a regional IT hub. It is also aimed at guaranteeing both companies and individuals’ access to a faster, more secure, and more reliable Internet connection. Revenues generated by the digital economy should reach US$23,000 billion by 2025, thanks to investments 6.7 times higher than those in other sectors.

In addition, terrestrial ﬁbre networks have continued to expand, offering more connectivity options and better network redundancy – great news for land-locked countries. However, according to MainOne’s CEO, Funke Opeke, these remain underutilised due to high prices and a failure to establish an enabling environment.

Mobile network coverage

Telecommunications has continued to register positive growth, with increased uptake and usage of mobile phone services. High-bandwidth Internet infrastructure has become more widely available, while the rollout of 4G infrastructure by the MNOs has already led to substantial growth in subscriptions to data and Internet services. With the expansion of ﬁbre-optic infrastructure across the country, more homes will be connected to better-quality, higher-speed broadband services, which will be extended to the rural areas.. Consequently, the increase in mobile network coverage has led to a decline in ﬁxed-line networks related to voice calls. Alternative solutions need to be considered to ensure a stable Internet connection

throughout Kenya to bridge the rural and urban digital development divide.

Poor infrastructure

The world is eager to do business with Africa but finds it difficult to access African markets because of poor infrastructure. Greater economic activity, enhanced efficiency and increased competitiveness are hampered by inadequate transport, communication, water, and power infrastructure. The World Bank economic update, mentioned earlier, highlighted challenges relating to the inadequate power supply, transport networks and communication systems as crucial to ensuring ongoing connectivity, and continental economic development. It found that the poor state of infrastructure in sub-Saharan Africa reduced national economic growth by two percentage points every year and cut business productivity by as much as 40%.

It is estimated that about US$93 billion is needed annually over the next decade to overhaul subSaharan African infrastructure. About two-thirds or $60 billion of that is needed for entirely new infrastructure and $30 billion for the maintenance of existing infrastructure. Only about $25 billion annually is being spent on capital expenditure, leaving a substantial shortfall that must be ﬁnanced.

Economic potential

The economic climate of Kenya will determine access to the tools needed to build the relevant infrastructure. According to André Pottas, Deloitte’s Corporate Finance Advisory Leader for sub-Saharan Africa, this translates into exciting opportunities for global investors who need to look past the traditional Western view of Africa as a homogeneous block and undertake the detailed research required to understand the nuances and unique opportunities of each region and each individual country.

The key to unlocking Kenya

With governments across the continent committing billions of dollars to infrastructure, Africa is at the start of a 20 to 30-year infrastructure development boom. Fortunately, we have access to a global network of exports, which we need to be utilising optimally to ensure a stable infrastructure, both digital and physical.

However, in preparation for the boom, the only way for Africa’s infrastructure backlogs to be cleared and to unlock connectivity and communications in Kenya is through globally competitive, growth-oriented, mobile, and digital technology businesses. It is imperative to establish partnerships with trusted private sector players who already cater to the local and international communications market with reliable connectivity solutions.

Africa Economy: A Tipping Point | 7

A FOCUS ON AFRICA: TURNING AN ECONOMIC DOWNTURN INTO AN OPPORTUNITY

COVID-19 has splintered the world economy, exposing social responsibility and governance fault lines across continents. The substantial shifts in society, its institutions and individuals during the pandemic have introduced major uncertainties into our familiar structures, and upended assumptions of what is true and stable.

While no sector or industry can be recession-proof, the pandemic-driven action currently underway in many African countries contains the seeds of a large-scale reimagination of Africa’s economic structure, policy and political variables and reform, service delivery systems, and social contract. The pandemic is accelerating trends such as digitisation, arket consolidation, and regional cooperation, and it is creating important new opportunitiesfor example, to boost local manufacturing, accelerate digital transformation, transform Africa’s healthcare system with a focus on resilience and equity, formalise small businesses, and upgrade urban infrastructure.

Re-think supply chains

The sudden and simultaneous interaction of global supply and demand side shocks, combined with policy reactions to the pandemic, have greatly depressed the continent’s access to critical products. However, the pandemic could lead to a reshaped and more resilient manufacturing sectorafter a difﬁcult recovery - if governments and businesses tackle long-standing barriers to industrialisation and cooperate to seize new opportunities.

In the immediate term, COVID-19 is driving countries across the continent to enact procurement incentives such as prioritising and incentivising the procurement of locally produced medical products and devices, providing advanced market commitments, and establishing pooled procurement mechanisms. According to the McKinsey Global Institute, this opportunity will contribute circa USD1.5 billion to the continent’s manufacturing output in 2020. Over the next ﬁve years, a serious push to reduce reliance on global supply chains could add an initial USD10–20 billion to the continent’s manufacturing output if 5 to 10 percent of imported intermediate goods are produced on the continent.

The African Continental Free Trade Agreement (once fully implemented and operational) will undoubtedly play an important role in enabling market access by reducing tariff and non-tariff barriers, and harmonising trade-related

regulations and customs control. In the long-term, key players in the manufacturing sector should take advantage of opportunities in intra-African trade and the global supply-chain realignments spurred by the pandemic.

Accelerate Africa’s digital transformation

Before the pandemic, Africa was in the midst of a far-reaching digital transformation. For example, the continent has seen the world’s fastest rate of new broadband connections (the second-largest internet user population after China) in recent years, while mobile data trafﬁc was previously forecast to increase sevenfold between 2017 and 2022.

Despite the progress, there are clear winners and losers emerging in virtual marketplaces amid the pandemic. Several sectors and industries poised for swift growth in digitisation following the pandemic include new information and communication technologies, education, healthcare, public sector, ﬁnance, and retail trade.

e-Commerce and virtual marketplaces

The sudden disruption of economic activity presented by the pandemic means businesses as well as the government need to rethink their strategies and modus operandi, with the demand for face-to-face services, non-essential goods and leisure providers being heavily curtailed.

Anecdotal evidence suggests that African businesses have begun pivoting towards the provision of essential goods and services by leveraging off virtual marketplaces. In South Africa, Zulzi, an

Itumeleng Mukhovha, Corporate M&A Attorney, Writer and Community Activist

Africa Economy: A Tipping Point | 8

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on-demand delivery grocery platform, has partnered with major retailers including Woolworths, Pick n Pay, Spar, Clicks and Dis-Chem to deliver essential goods to consumers during the country’s lockdown.

Similarly, Nigeria’s Jumia, which has over 4 million customers in 14 African countries, has partnered with vendors to use its ePayment and last-mile delivery capabilities to offer contactless delivery of food and other necessities to all areas, including remote and rural locations. Jumia is betting that online sales will grow from 1 percent of total retail sales in Africa today to as much as 15 percent in 10 years.

Public services and trade processes

Although trade and public services across the continent continue to experience a slow adaptation to technological innovations such as data analytics, artiﬁcial intelligence and automation, there are a few governments that are leveraging the basics of digitised signatures and documents to reduce the friction and delays in trade processes.

A good case in point is the Trademark East Africa’s (TMEA) introduction of various trade-related initiatives that have resulted in tangible reductions in the time and cost of trading within the East African region. The management of transit operations along the Northern Corridors traversing Uganda, Rwanda, Burundi, the Democratic Republic of Congo and South Sudan was, for a long time done via a convoy system characterised by paper-based controls, transit log sheets, physical escorts, high administrative costs, transit check points and poor information sharing between partner countries.

The recent implementation of electronic cargo tracking along the Northern Corridors has shortened transit times from Mombasa to Kampala from 11 days to 4 days. Meanwhile, the automation and digitisation of the customs management process in Uganda has led to 75 percent reduction in transit and clearance times, as well as a ﬁnancial saving of USD56 million.

TMEA is currently building on these digitisation results to facilitate trade during the pandemic and beyond it.

Virtual classrooms

Traditional classroom learning has taken a backseat in the face of the pandemic, resulting in an acceleration in the adoption of e-learning as schools attempt to minimise interruptions to the school year. Several education innovators have developed new, promising solutions to enable students to continue learning while at home.

Tanzania’s Ubongo recently launched its Ubongo Toolkits platform, a large library of quality, Africanmade early learning

materials and educational resources for children aged 0 to 14. This platform covers various topics from early numeracy, preliteracy, and social and emotional skills to engineering, science and technology. Meanwhile, Kenya’s Eneza Education has partnered with Safaricom to offer a government-accredited curriculum designed and reﬁned for feature phones. If these virtual classrooms take hold across African countries searching for solutions to scale quality education, they will spur a widespread use of digital tools in the classroom and remote learning in a post-COVID-19 world.

Transform African healthcare systems for resilience and equity

A quarter of the global disease burden weighs on Africa, but only 3 percent of the world’s health workers are based on the continent and the share of the world’s health expenditure for Africa is below 1 percent. Health systems frequently have to rely on non-proﬁt organisations and external donors to fund and provide services for the largest underserved patient population in the world.

Thus, any African government’s healthcare investment plans should focus on improving the quality and availability of healthcare services by increasing the quantity and quality of the health workforce, ensuring availability and rational use of essential health commodities, upgrading equipment and health information management systems, improving the construction, distribution and maintenance of healthcare infrastructure.

Scale up Africa’s infrastructure investments

On average, countries in sub-Saharan Africa have invested 20 percent of the regional gross domestic product (GDP) per annum between 2010 and 2017, and North African countries about 22.8 percent, in key infrastructure classes, including energy, road and rail transportation. The continent’s two largest economies, Nigeria and South Africa, have underperformed, with investment ratios of 15 percent and 19.6 percent of the GDP, respectively, over the same period. The infrastructure investment over this period has been largely funded by traditional Ofﬁcial Development Assistance, Organization for Economic Co-operation and Development investors, and non-OECD countries, including China, India, and the Gulf countries, with China by far the largest national player. The World Bank estimates that sub-Saharan Africa’s GDP per capita growth could increase by 1.7 percentage points per annum if the region were to close the infrastructure gap (in terms of both quantity and quality) relative to the developing world median. Therefore, investments in infrastructure and capital projects are required to diversify African economies, promote private sector activity and industrialisation, increase business conﬁdence, support digitisation, and ensure enough jobs are created for the 12 million young people entering Africa’s labour force each year.

Economy: A Tipping Point

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In order to scale up infrastructure investments, African governments will need to substantially scale up resources, reform institutional and policy frameworks to meet some requirements, work towards political stability, and ensure a continuous pipeline of bankable projects and certainty of the envisaged future cash ﬂows.

Conclusion

COVID-19 has exposed signiﬁcant structural shortfalls in Africa’s development architecture, and if these shortfalls are not addressed, the continent will experience a reversal in the development gains already achieved. Therefore, African countries need to integrate a long-term

perspective into the current recovery efforts by continuing to promote access to technology and infrastructure, good governance and regional integration, with a view of increasing productive capacities and creating the foundation for equitable and sustainable economic transformation.

This will require policy and political variables and reform, as well as a series of structural factors such as competitive industries, infrastructure, transport costs and the stock of skilled human capital. While the continent has a hard road ahead as it looks to recover, it also has the opportunity to create a recovery that features a more inclusive economy, more competitive industries and more resilient services.

FOREIGN DIRECT INVESTMENT (FDI) INFLOW BEGINS

Ghana has recorded total investments of US$869.47 million, with total FDI value amounting to US$785.62 million between January to June 2020 as FDI inﬂow showed rare strength in the ﬁnal moments of the second quarter of the year, undeterred by the Covid-19 pandemic.

The total FDI of US$785.62 million represents investment recorded by the Ghana Investment Promotion Center (GIPC) and the Petroleum Commission.Worldwide, the United Nations Conference on Trade and Development (UNCTAD) has estimated that the Covid-19 pandemic to send global FDI plunging by about 40 percent - driving the total value of FDI below US$1 trillion for the first time since 2005. However, in spite of a sluggish start in the first quarter of 2020 and a worrying slump in the beginning of the second quarter due to severe lockdown measures to contain the spread of the corona virus, FDI to Ghana have begun to rebound resulting in a notable increase in FDI inflow for the first half of the year.

At the GIPC, a total of 69 projects with a total estimated value of US$688.74 million was recorded by the end of June 2020. Of this, the total FDI component amounted to US$627.52 million while local component accounted for an estimated US$61.22 million.

The FDI value of US$627.52 million was a considerable increase of about 409.10 percent from last year’s FDI value of US$123.26 million recorded within the same period (Jan-Jun 2019), depicting a strong performance irrespective of the global pandemic.

Out of the 69 projects recorded, the services sector registered a majority of 25 projects followed by the manufacturing and export trade sector with 21 and 11 projects respectively. With regards to value, general trading recorded the highest amount of US$246.05 million. This was tailed closely by the mining exploration sector with US$231.02 million having sealed some major investments such as the Chirano Gold mine project for the exploration of minerals. The manufacturing sector also saw signiﬁcant investments valued at US$170.67 million on the back of some notable ventures such as a deal by Matrix industries for the manufacture of paper and aluminium products as well as the Rainbow Paints Limited project which is a joint venture between Ghana and Kenya for the manufacturing of paints and related products.

Geographically, the spread of the projects cuts across 6 regions namely, Greater Accra, Central, Eastern, Ashanti and Volta

regions with most projects registered in the Greater Accra enclave. Together, the 69 projects are expected to make signiﬁcant contribution to job creation in the country. Per estimations, a total of 14,614 jobs are expected to be created when the projects are fully opera tional. Out of this, 14,052 of the jobs representing 96.15 % will be for Ghanaians whilst the remainder of 562 jobs which represents 3.85% will be taken up by foreigners.

Meanwhile, additional equity totalling US$11.56 million was re-invested by existing companies within the ﬁrst half of the year, while a total of GHC1,365.26 million was recorded as investments from 28 wholly owned Ghanaian businesses.

In this regard, the GIPC remains cautiously optimistic about the ﬂow of FDI to Ghana, as we move forward. That notwithstanding, the Center will continue to assiduously pursue worthwhile investments for economic development as well as support government initiatives such as the COVID-19 Alleviation and Revitalisation of Enterprises Support (CARES) Programme to help bolster the Ghanaian economy towards a recovery and remain resilient pre and post pandemic.

COVID-19 IN AFRICA: LOOKING

BEYOND THE DOOM AND GLOOM

By Robert Besseling, Executive Director, EXX-Africa Mauritius

The onset of the coronavirus in Africa has not reached the calamitous public health crisis that many analysts had initially forecast, even though there are ongoing debates over the accuracy of statistics, limited testing capacity, and important regional variations. But most analysts agree that COVID-19 has not yet fully hit the world’s most vulnerable continent and the next few months will be critical for many African countries as they deal with the pandemic.

In the meantime, the economic repercussions of lockdowns, smaller global trade flows, and supply chain disruptions are causing a more significant backlash that imperils political stability and economic resilience in some of the poorest countries on Earth. Africa’s external and fiscal buffers are therefore still being substantially eroded. The stimulus measures made by sub-Saharan African governments are, at 3.4 percent of GDP on average, easily the lowest in the world.

Economic recovery by 2021?

African finance ministers remain confident of an economic recovery next year and are putting in place stimulus measures and cutting taxes, which are further deepening budget deficits across the region. In East Africa, the June budgets included an array of tax waivers, direct cash handouts, and cheap credit to businesses. Kenya has even allocated USD 2 billion for political legacy projects, including massive new infrastructure ventures. Such appropriations are usually unfunded, while African governments pledge to raise domestic revenue generation despite having some of the worst tax collection records in the world and a history of years of unmet tax revenue targets. Trade and income tax revenues are also set to fall due to the global pandemic, supply chain disruption, and reduced African trading volumes which are unlikely to recover by year end.

The IMF and World Bank will revise their economic forecasts for Africa, with recessions in the major markets of South Africa and Nigeria set to be even deeper and longer than initially anticipated at the start of the pandemic. The Bretton Woods institutions will also downplay optimistic expectations of an economic recovery next year, as demand for African resources remains subdued and foreign investment dwindles. But some more diversiﬁed and reformed economies in West and East Africa vwill maintain impressive growth rates and remain well-positioned to compete for investments in renewable energy, digital technology,

healthcare, and other key sectors.

EXX Africa’s COVID-19 country risk vulnerability model forecasts that unstable states such as Sudan and DRC, as well as fragile economies like Sierra Leone, are most exposed to the longer-term implications of the pandemic. Countries such as Benin and Senegal consistently come out at the top of this resilience index. The fourth quarter of 2020 will also be ﬁlled with controversial elections from Guinea in the west to Tanzania in the east that will proceed despite fears of renewed coronavirus infections. The ﬁrst polls will take place in Ghana and Côte d'Ivoire, where election-related violence is already brewing.

Debt relief for Africa

Multilateral institutions have taken the lead in supporting Africa’s response to the crisis, by quickly releasing funds for public healthcare and economic stimulus. Long-time sceptics of the Bretton Woods institutions, such as South Africa and Nigeria, have readily accepted IMF ﬁnancial assistance, although such aid comes with few structural adjustment and transparency conditions.

Other major economies like Egypt have returned to a formal programme with the Fund, which does include such conditionalities and will resume market-based reforms.

International efforts to alleviate Africa’s debt burden have remained uncoordinated, contradictory, and often uncommitted, as forecast in a series of reports by EXX Africa since the start of the pandemic. The major multilaterals, especially the IMF, World Bank, African development Bank, and others, have taken the lead in approving emergency ﬁnancing. The IMF alone has committed almost USD 11 billion in emergency ﬁnancing and debt relief for sub-Saharan Africa and USD 9 billion for North African countries, especially Egypt. In addition to the Fund’s USD 20 billion total funding for Africa, the World Bank, AfDB, and G-20 countries have made separate sizable commitments.

Africa Economy: A Tipping Point | 11

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However, sub-Saharan Africa alone will require USD 110 billion this year – some reports say that another USD 44 billion will be needed to match a ﬁnancing shortfall to avoid an economic and humanitarian calamity.

The G-20 is likely to extend and expand its debt service suspension initiative for emerging markets. This initiative, which can save African countries some USD 6.58 billion in interest payments due this year on Paris Club loans, is now likely to be extended into 2021. The biggest beneﬁciary will be Angola, whose debt-laden economy already stands to save USD 2.6 billion in interest this year and whose ongoing IMF facility has already been increased. Kenya, Ethiopia, Ghana, and Côte d'Ivoire also stand to save hundreds of millions in precious foreign exchange on debt servicing, although eventual loan repayment plans still seem unclear.

Any debt relief extension will almost certainly come too late for Zambia. Africa’s second largest copper exporter is set to trigger the continent’s ﬁrst pandemic-related default event on a global bond interest payment due by the middle of the month. Eurobond holders have been less forgiving than the Paris Club, while several commercial creditors are already considering calling in sovereign guarantees in Zambia. Other defaults will follow, possibly in Republic of Congo, Chad, and possibly Angola.

A restructuring of Chinese debt and improved collaboration between commercial, bilateral, and concessional lenders would mitigate such alarming sovereign risk scenarios.

However, the G-20 debt service suspension initiative will not be sufﬁcient to stave off a wave of defaults on interest and capital repayments towards the end of 2020 and beyond. Countries like Zambia and Republic of Congo are set to join long-time arrears offenders, such as Zimbabwe, Eritrea, and Sudan, as state revenues dry up and local currencies collapse. To avoid such a scenario, much broader debt relief will be required to encompass commercial creditors and China, although such a prospect seems unlikely in current conditions.

Fresh opportunities on the horizon

Looking beyond the doom and gloom, for some smaller and more diversiﬁed markets that have long embraced foreign investment and reform, such as Senegal, Benin, and Rwanda, the economic impact of the pandemic will be limited and a

Africa Economy: A Tipping Point | 12

swift recovery remains probable in 2021. The crisis has also created fresh investment opportunities for some sectors, such as renewable energy and public healthcare investment, which have long been desperately needed on a continent that thrives on coal and oil, with often mediocre public health infrastructure. Foreign investors will ﬁnd ample return on such projects and governments need to collaborate to ensure political risks are mitigated.

Africa’s largest economies with lacklustre economies and entrenched interests will also need to move towards reform. South Africa’s debtburdened state-owned enterprises require a shake-up, while Nigeria needs to proceed with oil sector restructuring before issuing more production licenses. The key question is whether Africa’s disparate states can collaborate on battling the coronavirus, embrace economic reforms, and boost intra-regional trade by reigniting the process towards creating the world’s largest free trade zone. Perhaps, the current crisis offers the most valuable opportunity to reshape Africa for generations to come.

The crisis has created fresh investment opportunities in sectors, such as renewable energy and public healthcare, which have long been desperately needed...

EXX Africa, a specialist intelligence consultancy originally headquartered in Johannesburg, has undergone a transformation. It is now known as Pangea-Risk and has expanded its coverage beyond Africa to include the Middle East. This rebranding reﬂects their commitment to providing commercially relevant and actionable forecasts on country risk

Pangea-Risk is incorporated in Mauritius as Executive Africa Consulting Limited. Their focus lies in offering intelligence advisory services, helping clients navigate risks and identify new business opportunities across 68 African and Middle Eastern countries.

“The

Crisis has created fresh investment opportunities in sectors, such as renewable energy and public healthcare, which have long been desperately needed...”

Contributor’s Proﬁle

Robert Besseling founded EXX AFRICA in 2015, after pursuing a decade-long career in political risk forecasting at industry-leading companies such as London-based Exclusive Analysis and NYSE-listed IHS Global. At EXX AFRICA, Robert leads a team of partners and contributing analysts to produce commercially relevant and actionable analysis on African political, security, and economic risk.

AFRICA: CORPORATE FINANCE LANDSCAPE IN THE “NEW NORMAL”

By Deborah Carmichael, Executive, Banking and Finance, ENSafrica South Africa

The Covid-19 virus has caused shock waves to ripple across the global economy. And, as is the way of the world, those countries which were already economically vulnerable, were always going to be the hardest hit by it. Lockdowns (of varying degrees) have, quite simply, broken many already struggling economies. Africa’s economic outlook has radically worsened. Poverty is also expected to increase by 2% across Africa with 26 million people falling under the poverty line, erasing ﬁve years of progress in poverty reduction. Today, there remains considerable uncertainty around the pathway of the pandemic, the means and speed of any economic recovery and what structural changes –particularly to the globalisation of trade and capital – it will bring in the longer-term.

The International Monetary Fund (IMF) expects growth across the African continent to collapse to a negative 1.6%. 2020 will, without a doubt, be the worst year since records began in 1970 for the continent's economic growth.

So where does that leave Africa on the Corporate Finance front and what complexion will corporate ﬁnance on the continent take?

There is no doubt that the conditions created by COVID-19 have caused SME’s a number of challenging situations. In many cases the lockdowns and work cessation requirements of governments across the continent for workers and industries other than for essential services have affected the ability of many entities to continue to meet existing contractual obligations of the businesses they run. Unsurprisingly, business disruptions have been accompanied by a strong decline in revenue and proﬁtability. These conditions present opportunities for cash ﬂush investors. These opportunities will most likely take the form of bargain basement offers involving distressed sales as most of these entities will simply be looking to new acquirers as a means of survival.

In South Africa alone, in a pre-COVID world, corporates were already struggling signiﬁcantly with a contracting economy and a series of knocks occasioned by credit ratings downgrades. A report by SME South Africa (2018) highlighted that only 6% of small to medium enterprises (SME’s) in South Africa (which make up the bulk of corporate South Africa) received government funding and only 9% had sourced funding from private sources. Additionally, the majority of private funding focused on mature businesses with around 90 percent of funding going to businesses that are more than ﬁve years old. What is likely to change in a

post-COVID world, is the hunger for accessible, low interest funding and so, in the short term, for those corporates that do survive, we are probably going to see them making use of government aided funding and making use of payment reliefs (such as UIF and PAYEs in South Africa).

Obtaining traditional bank funding had also become more difficult in recent years as international banks retreated from the continent after new regulatory standards increased the costs and capital consumption of operations in noninvestment-grade countries. The result has been that the financing gap into Africa widened significantly as it become more difficult for Africa to rely on traditional forms of bank funding to cater to its needs. The international banks which did stay are probably going to need to stay invigorated and help reorganise African debt. In South Africa, banks and financial institutions have already played a fundamental role in trying to achieve this, including through the suspension of loan repayments or the reworking of principal repayments; the provision of resources and communication tools to clients; interest and fee waivers; relief loans; and pre-approved or expedited loan approvals. Some South African banks are providing instant shortterm deferral on credit products for up to three months and another is offering a similar programme for SMEs with a turnover of less than R20 million. Bank and institutional funding will continue to be a feature of corporate finance in Africa in the long term. It is traditional, accessible, stable and certain even with the conditions it comes with.

“Some South African banks are providing instant short-term deferral on credit products for up to three months and another is offering to SMEs with a turnover of less than R20 million. Bank and institutional funding will continue to be a feature of corporate finance in Africa in the long term."

In addition to traditional sources of bank and institutional funding, Africa has been learning to help itself with the emergence of the stock exchange, bond markets, and equity markets. In 1990, there were only ﬁve stock markets. Today, there are 29 stock xchanges for 38 countries, including two regional ones. Africa has been

Africa Economy: A Tipping Point | 13

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harnessing its own potential and improving the state of the continent’s economy. Its ﬁnancial markets have gained more access to the global standards of service. However, a lot of reforms are still needed in order to improve their ompetitiveness. Weak policies have for a long-time hampered investor, both local and international, from participating in the capital markets. African countries need to facilitate liquidity in the markets through policy initiatives that attract local investors. From this point, it can enable development in ﬁnancial products and increased asset acquisition. Ultimately, it will lead to market capitalization.

Well-regulated markets facilitate transparency, transparency in turn, builds investor conﬁdence. The hope is that the challenges of 2020 will force regulators in each of the jurisdictions in which these markets already exist to align policies with global best practice to attract new investment and investors into the African markets. We will need to see a movement away from the “high-risk” moniker attached to African investment for real investment to occur. This change of perception will already have statistical support. In 2016, Moody’s released a report showing that the rate of project-ﬁnance defaults in Africa between 1983 and 2015 was the second-lowest in the world at just 2.7%.

Alternative sources of funds willing to invest in alternative instruments in economies other than Europe and the US, have also been accumulating. PwC expects the value of assets held worldwide by pension funds, insurance companies, sovereign wealth funds, and high-net-worth individuals to rise from $115 trillion in 2012 to $195 trillion by 2020. This number is probably still accurate (ratably)

despite COVID. The developing world is always an attractive investment for its higher return on investment. Coupled with a concerted effort by Africa’s regulators to align regulatory models to international best practice – despite the COVID hits –hopefully, Africa can start the process to close its funding gap requirements internally before looking outward.

Contributor’s Proﬁle

Deborah Carmichael is an Executive at ENSafrica in the Banking and Finance department. She specialises in complex regulatory matters in the banking and ﬁnancial services sector, including collective investment schemes, exchange control, derivatives, securities lending and over-the-counter trading.

She has acted for the International Swaps and Derivatives Association, the International Capital Market Association, the Securities Lending and Repo Committee and the Capital Adequacy Working Group on issues requiring derivatives and securities lending legal counsel. In addition, Deborah has acted for pension funds, insurance companies and other regulated ﬁnancial services institutions.

Deborah’s experience also includes development finance, debt restructuring, workouts and transactions refinancing involving derivative instruments. She is the author of numerous articles on finance and South African investment related matters, and co-authored the South African Legislation Guide for South Africa in the IFLR1000 2010 Guide to the World's Leading Advisors.

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SCALING UP INFRASTRUCTURE FINANCING USING PORTFOLIO INSURANCE WRAPS AS A BALANCE SHEET OPTIMIZATION TOOL

By Syndications Team, Africa Finance Corporation

With more than US$100billion of infrastructure needs in Africa, as estimated by the African Development Bank, the need for infrastructure and development lending continues to be even more critical year on year. With this signiﬁcant mandate in mind, it has become imperative for Multilateral Development Banks (MDBs) and other Development Finance Institutions (DFIs) to provide innovative and structured solutions to optimize their balance sheets and to leverage their existing resources to meet their main objective of addressing the huge infrastructure needs on the continent.

Over the years, the halo effect provided by MDBs and DFIs through their preferred creditor status in their member countries, has played a critical role in helping to catalyze and mobilize private sector capital to fund development projects especially through risk mitigation products, syndications, other pooled funding structures, structuring and advisory services. Although MDBs and DFIs continue to play a key role in granting direct concessional and non-concessional funding to ﬁnance projects, this alone will not be enough to ﬁll the huge infrastructure needs in the continent. Thus, the need for private sector funding.To complement the traditional mobilization

products and structures that MDBs and DFIs have developed over the years, there have been calls by the G20, as articulated in the 2015 G20 MDB Action Plan, for MDBs to optimize their balance sheets as a way to alleviate the capital constraints faced by MBDs and DFIs. This article sheds light on some of the structures that MDBs and DFIs can employ to achieve balance sheet optimization, along with the beneﬁts that these structures can bring to MDBs and DFIs to help them in achieving their developmental goals.

Portfolio Insurance wraps can be used in achieving balance sheet optimization where by a referenced pool of portfolio asset is securitized and credit enhanced. The type of loans or assets covered are typically pre-deﬁned in the insurance agreement between insurer(s) and the insured. Under this structure the insurers’ investment grade credit-rating is used as a substitute for the weighted average credit rating of the underlying assets in the portfolio thus, enhancing the portfolio’s credit rating and releasing headroom in the balance sheet of the insured entity, which will accordingly enable the entity to increase its lending activities. Risk sharing is at the core of portfolio insurance

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wraps and there are many ways by which both insurers and the insured entity can share the risk of the underlying assets in the portfolio.

Excess of loss insurance cover is one of the ways of risk sharing in a portfolio insurance wrap. In this structure, a mezzanine risk layer of the portfolio is shifted to the insurer(s). The insured agrees to take or retain an agreed amount of ﬁrst loss arising from defaults in the underlying assets. Once this threshold of ﬁrst loss is exceeded the insurer(s) provide a risk protection for the mezzanine layer in the portfolio and the insured retains the risk of a senior layer above the mezzanine protected tranche.

Quota Share is another common and straight forward way of risk sharing in a portfolio insurance wrap structure where insurers provide insurance cover for an agreed percentage of losses arising as a result of default under any asset across the entire underlying portfolio. While the two structures previously discussed could be considered as common structures, it is possible to structure various bespoke wraps which combine both structures or apply one or both across different layers of the portfolio in order to have a more balanced risk allocation between the insurers and the insured.

In addition to the aforementioned types of risk protection structures which are mainly structured on an unfunded basis and are primarily provided by the private insurance market, the African Development Bank’s (AfDB) Room2 Run transaction is another example of an innovative synthetic securitization structure which was developed between AfDB, as the MDB, and private sector investors on a funded basis with a cash collateral arrangement to cover for losses in the portfolio above the ﬁrst loss layer. Room2 Run was structured as a synthetic securitization which transfers the mezzanine credit risk on a portfolio of loans from AfDB’s non-sovereign lending book to mezzanine investors.

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On the surface structuring such balance sheet optimization structures might look like a very simple and straight forward process, however, in reality the process requires two way transparency between the insurer(s) and the insured. It requires extensive negotiations and analysis to achieve the risk optimization and return expectations for both parties. In addition, it is worth mentioning that the process typically would involve an extensive analysis and modelling of the underlying portfolio to determine key parameters such as the expected loss, credit risk rating, attachment points for the securitization and expected economic capital relief to be achieved. These are all necessary in evaluating and agreeing on a ﬁnal structure that would meet all parties’ objectives.

US$100bn

infrastructure needs in Africa, estimated by the African Development Bank

Despite some of these complexities, it is worth exploring such innovative structures due to their direct and indirect benefits. Balance sheet optimization, using one or more of the aforementioned structures, can be a catalyst in helping MDBs and DFIs in achieving their developmental goals. The portfolio’s lower risk profile could lead to and uplift in credit rating of the institution by credit rating agencies, potential reduction in funding costs, alleviation of capital constraints, and increased headroom in their balance sheets which will contribute to additional lending activities. Another key benefit for MDBs or DFIs is that although the credit risk of the underling projects are passed on to the insurer(s), these insurance wraps allow MDBs and DFIs to continue to maintain their relationships with the borrowers and remain the lender of record and same is beneficial to the insurer(s) who also benefit from the strong relationship between the lender of record and the borrowers.

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NEW NORMAL FOR TRADE STRUCTURING IN AFRICA

By Novan Maharahaje, Head of Capital Markets Services at Ocorian in Mauritius

Covid-19 has brought a number of disruptions in cross border investments and trade - which entail a complete rethinking of how business and trade are being conducted and with whom. Business as usual, with historical trading partners and corridors (often established during the colonial era), is no longer an option. Traditional partners have, overnight, resorted to extreme protectionist measures, with many countries imposing export restrictions on medical equipment, pharmaceuticals and personal protective equipment, and some countries even restricting food exports.

In Africa, the pandemic has also served as a reality check about food security, health infrastructure and the manufacturing deﬁcit resulting in an excessive dependence on imports for basic necessities.

With the disruption in global trade and the fall in commodity prices, the pandemic has also triggered USD liquidity shortages in many African economies and increased volatility of their major currencies. This could prove a major deterrent to intra-African trade, as it's a known fact that the bulk of world trade is denominated in USD, and that letter of credits are also often priced in the same currency. Hence, African trade ﬂows are hugely dependent on and vulnerable to correspondent relationships. With the crisis, we have seen major international banks scaling back or even withdrawing trade credit lines into Africa as part of their de-risking process.

Further, many regional and local banks are retaining capital, in preparation for a probable second and follow-on waves.

Fortunately, the continent's leading development ﬁnance institutions, such as the Afreximbank and the AfDB have put in place comprehensive economic and ﬁnancial support and guarantee mechanisms, such as the USD 3bn Pandemic Trade Impact Mitigation Facility by the former and the Trade Facilitation Program by the latter, with a view to supporting trade (of critical Covid-19 supplies, food and agricultural inputs), assisting local banks to meet trade payments falling due and stabilising foreign exchange resources of member states - with the ultimate objective to avoid the pandemic turning to a political and economic crisis. On the global stage, many governments are turning to their export credit agencies ("ECAs") to support exporters to cover their costs of inputs for production and manufacturing. This is a trend that we are likely to see more and more in Africa.

Further, the Pan-African Payment and Settlement System ("PAPSS") currently in pilot phase, could become a game-changer by relieving Africa from its over-reliance on hard currencies for regional trading. Per the Afreximbank, the PAPSS will provide a centralized payment market infrastructure for processing, clearing and settling of intraAfrican trade and commerce payments.

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By magnifying the deficiencies and inefficiencies of cross-border trading in Africa, the pandemic has reiterated the importance of the African Continental Free Trade Area ("AfCFTA"), signed by 54 of the 55 African Union nations but ratified by only 31 as of date. The AfCFTA would constitute the largest new trading bloc in the world, with access to 1.3 billion people and will allow member states to draw on economies of scale to boost industrial production and manufacturing output. Hopefully the crisis will act as a catalyst for its full implementation by all member states.

After-pandemic strategies and policies will target the development of regional value chains and building local manufacturing capacities. Other emerging trends arising from the pandemic include acceleration of digital adoption and ecommerce; and virtual marketing and communication channels.

Investments in the short term will target pharmaceutical and medical equipment industries, as a matter of priority. In the medium term, the focus will be the acceleration of Africa’s industrial development. We are also likely to witness the emergence of regional hubs serving the whole continent: e.g. Mauritius and Rwanda for banking and ﬁnancial services; Ethiopia and South Africa for aviation and logistics; South Africa, Egypt and the Maghreb countries for pharmaceutical industries; Ghana, Ivory Coast, South Africa and Kenya for food transformation and import substitution.

In the new normal, non-bank lenders, DFI's and ECA are expected to play more prominent roles in addressing Africa's unmet trade ﬁnance gap, while regional and pan-African banks would continue to support their large corporate clients with good credit standing. The transition towards digitisation of trade documentation and digital trading platforms will be accelerated as more and more legal hurdles are removed.

At Ocorian, we firmly believe that structured trade finance will have an even more important role to play in the post Covid-19 era, as the dynamics of trade finance will evolve towards local currency financing, risk mitigation and de-risking strategies (leveraging the different support/products offered by DFI's, ECA and insurance providers) and compliance with stringent anti-money laundering regulations and customer due diligence requirements.

References and Further Reading:

Further, with travel restrictions and the spectre of further lock-downs looming and potentially limiting physical meetings and on-site visits, access to reliable and credible information remains a critical success factor. Referrals and introductions from trusted partners and networks will be key to address any information gap in terms of preliminary KYC checks and reliability of ﬁnancial information.

“Post Covid-19 will catalyse the shift in manufacturing and trading patterns to lay the foundations of an integrated African market, with technology as an enabler and supported by a vibrant capital market.”

Post Covid-19 will catalyse the shift in manufacturing and trading patterns to lay the foundations of an integrated African market, with technology as an enabler and supported by a vibrant capital market. At Ocorian Mauritius, we have been privileged to have as clients and partners, both African corpo rates requiring access to capital markets and capital providers looking for quality transactions. This places us in a unique position to understand the critical success factors and market dynamics of trade and investment ﬂows in Africa.

Contributor’s Proﬁle:

Novan Maharahaje is a seasoned professional with over 15 years of transactional experience in corporate, project and trade ﬁnance.

He heads up Capital Market Services at Ocorian, where he is responsible for carrying independent valuations and offering deal structuring and transaction services to our clients.

Novan has accumulated signiﬁcant exposure to various industries in Africa and Asia, including oil and gas, banking, insurance, micro-ﬁnance, agribusiness, ICT, real estate and hospitality.

Prior to joining Ocorian, he worked as a manager in the corporate ﬁnance team at PwC. Novan is bilingual in English and French.

Trade Finance in Africa: Trends Over the Past Decade and Opportunities Ahead (September 2020) by the African Development Bank (AfDB) and the African Export-Import Bank (Afreximbank).

Trade Finance in Times of Crisis - Responses from Export Credit Agencies (May 2020) by The Organisation for Economic Co-operation and Development (OECD). Rethinking Trade and Finance: 2012 by International Chamber of Commerce: Paris. Worldwide currency usage and trends (2015) by Lim, J. H., Masquelier, D., Raymaekers, W., & Thorsen, A. https://www.theafricareport.com/29466/afcfta-covid-19-is-a-hiccup-in-delay-says-afreximbanks-president/ https://www.africancfta.org/ https://au.int/en/cfta

THE ALTERNATIVE POCKETS: COVID-19 PANDEMIC AND DIGITALIZATION

By Enock Rukarwa, Research & Investment Analyst, FBC Securities Botswana

he Covid-19 pandemic which originated in Wuhan Province in China has ravaged the whole world through morbidity and mortality notwithstanding the socio-economic implications of the pandemic on global economies. Supply chains have been disrupted by this global pandemic as countries close their borders and effected lockdowns in a bid to contain the ailment. These disruptions are creating wide range of impacts on companies and some have entered into ﬁnancial distress.

Covid-19 crisis has also exposed major vulnerabilities in company operations and supply chains linked to conditions of work and disaster preparedness. The government has taken extraordinary steps trying to contain the epidemic such as general conﬁnements and large scale shutdowns of economic activity as well as issuing aid and recovery packages to support struggling companies and workers. Many listed and private companies have also stepped up to contribute to the containment effort and to soften the economic blow of workers and supply chains.

The virus strain is causing ﬁnancial distress and liquidity problems for many companies as a result of reduction and cancellation of businesses. This has impacted workers, whose income and livelihoods are at risk. While some companies have been able to shield their workforce and chose to keep paying employees albeit suspension of operations, many companies have had to lay off workers or reduce working hours.

Many businesses struggle to identify the right balance of measures and safeguards to protect workers from being exposed or spreading the virus. In the face of unprecedented changes and impacts on companies own operations and their own supply chains, enterprises have adopted a variety of responses, many actively putting resources logistics, skill an innovative approaches at the service of ﬁght against the pandemic.

Adaptation, post covid-19 & digitalization

Coronavirus is a humanitarian crisis that continues to take a tragic toll of people’s lives. It is also acting as a catalyst for change economically, socially and at corporate level on a scale not seen since wartime.

The scale of change and speed at which it’s happening is shinning a bright light on the fact that companies are facing once in a generation shift. The challenging economic outlook and continued uncertainty is forcing investors to contemplate some difﬁcult choices. Some are pulling in, making cuts and focusing on riding out the storm.

Others however are taking decisive action to make sure that when the crisis ends they’ll be stronger than they are today.

Enduring the pandemic, businesses need to safeguard and de-risk their operations for continuity and enterprise growth post Covid-19. Devising response that is rapid and robust to maintain continuity is of paramount importance. Organisations are increasingly using platforms that support analytics, artiﬁcial intelligence and machine learning alongside greater automation to drive digital experiences that help their operations to gain insights and become more intelligent.

The world is now operating in a post–digital era, with digital technologies a basic expectation of consumers and businesses alike. Sustained business continuity and success will come to rely increasingly on more human focused experiences and continually adapting to the latest technologies.

For many companies, the only option is to accelerate digital transformation. This implies moving from active experimentation to active scale up supported by on-going testing and continuous improvement.

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The disruptions of Covid-19 have underscored the crucial role of technology, from supporting remote working to scaling digital channels for surging customers. Despite the outstanding accomplishments in managing the technology response to the crisis, the many setbacks have highlighted systemic weaknesses.

Successful companies are looking beyond linear value chains and industry boundaries to create dynamic value map. They use technology to encourage collaboration and create shared value in broader digital ecosystems. The recent transformation of workforce is a crucial step forward for digital transformation. Organizations that have enhanced their IT capabilities and remotely engaged their employees are in a much better position to not only service the unparalleled circumstances but to overcome the short and long term challenges that will inevitably follow.

While it should be recognized that the immediate beneﬁts of digital interventions may vary between sectors and ﬁrms, the adaption of digital solutions

can generally help businesses tap new revenue streams, reduce overheads and eliminate pain points.

Zoom, a video conferencing app developed in USA has quickly become an essential tool for businesses. It boasts roughly 200 mln daily active users and has quickly surpassed rival solutions produced during the pandemic.

Engaging with customers

One of the core challenges for virtually all businesses during the pandemic is remaining engaged with customers and acquiring new ones. Many consumer facing stocks and a number of B2B businesses now have Facebook pages with which they present brands, products and services. In addition, usage of platforms like instagram, where products can be featured visually is on the rise.

Digitalisation challenges

The beneﬁts of digitalisation are clear and the rapidity and scale, with which many digital solutions can be rolled out further, support their adoption. However policy makers should remain cognizant of the complex challenges that are on the other side of the digital coin. These include cybercrime, data privacy, online isinformation, asymmetric market power, platform dominance, persistent digital divide and infrastructure related issues.

Threats of cybercrime and data privacy are both clear and present danger and a nebulous fear stoking the anxieties of businesses and individuals alike. Prior to the pandemic, reports of hacking incidents and data leaks were already abundant.

With covid-19 containment measures and signiﬁcant increases in the adaption of digital tools, such incidences are likely to increase further.

COVID-19 PANDEMIC EFFECT ON THE MAURITIUS ECONOMY & BUSINESS

By Bhavik Desai, Head of Research, AXYS Stockbroking Mauritius

Rarely since being a mono-crop economy has Mauritius encountered as many simultaneous “hits” on its diversified economy from multiple sides. First a crippling health crisis (pandemic) afflicted its economy exacerbating woes within select industries. Second, the European Union (EU) placed Mauritius on its list of ‘High Risk Third Countries’ due to its shortcomings in 5 out of 40 criteria determined by the the Financial Action Task Force. Third, some of its most pristine lagoons along the south-eastern coast were impacted by the spilling of about 1kt of bunker oil and other fluids from a wrecked dry bulk carrier that ran aground on the barrier reef. Prior to the MV Wakashio disaster, Statistics Mauritius had expected the Mauritian Gross Domestic Product in 2020 to shrink by historic proportions (-13%) – our first recession in four decades – to 2016 levels. Since the start of 2020, the Stock Exchange of Mauritius (SEM) has plunged by ~30% which is worse than the S&P Pan Africa’s -24%, and the MSCI Frontier’s -12%. In fact, the SEM is among the 20 worst performing markets in 2020 according to Bloomberg. There fore, the answer to the key question “whether or not opportunities can be found in the depressed Mauritian market?” remains murky due to limited forward visibility.

Financial Services

Banks have never been better capitalised nor have they ever had as strong liquidity buffers than at the start of 2020 when Basel III requirements came into full effect. Since the start of the pandemic, the Bank of Mauritius (BoM), the central bank, has relaxed credit impairment guidelines, postponed the full-implementation of Basel III, offered US Dollar (USD) swap lines to banks, been gradually supplying USD out of reserves to commercial banks, granted moratoriums on loan and interest repayments to both households and businesses until the end of 2020. In addition to the above, the BoM has set-up the “Mauritius Investment Corporation” (MIC) which is the entity offering “quasiequity” funding to large corporates, and has made one-off monetary injections to support Government’s SME funding schemes, as well as other Wage, Self-Employed, and Wakashio-related assistance schemes.

The resultant effect is that job losses have been rather limited thus far, with several parts of the economy placed under IV. Although Moody’s downgraded its Mauritian outlook, in its banking sector comment, Moody’s stated that “a protracted period of low oil and commodity prices raises asset risk for many of them [banks]” yet nonetheless they believe that several of the measures discussed above would “mitigate coronavirus’ negative effects on banks”.

In a nutshell, banks have been rather shielded from the effects of the pandemic with loans provisioning of the order of ~2.5% of Risk Weighted Assets observed thus far. At this stage it is unclear whether this level is sufficient or insufficient. The picture will only become clearer towards the end of Q4 once borders are partially re-opened on Oct 1st, and the quantum of aid to be provided to businesses is disclosed which would in turn offer a better understanding of the state of households. While it does seem that the market has adequately priced these down-side risks with a 30% drop during 2020, it does appear that the worst is yet to come. We therefore do not expect banks nor consumer finance firms to pay out dividends in order to conserve capital throughout 2020, and would therefore suggest caution if seeking to invest in financial companies except perhaps for Insurers whose rather un-cyclical natured business is likely to offer limited downsides. On the contrary, the decrease in road accidents and sports (or other) injuries during confinement could even result in higher profitability.

Hospitality

Beach Resorts, Hotels, Travel Operators as well as all the ancillary service providers (including food & logistics providers) are all poised to experience their worst year on record. To say that the hospitality industry is the worst affected would be an understatement. The Mauritian Government has chosen to re-open borders on Oct 1st to any visitors willing to spend 14-days in quarantine at a cost of between MUR 40k and 50k per person. Meanwhile, the hospitality industry will continue to receive state wage assistance and will be eligible for other forms of quasi-equity or low interest funding to sustain cash flows. Thus, while it seems like the industry will benefit from state support until borders are fully reopened, it is unclear which fraction of the ~1.4M annual visitors will come visit in 2021. It is nonetheless encouraging to note that while the emergence of a 2nd wave of infections in Europe is deterring travel, the demand for Sun-Sea-Sand destination remains strong in 2021. Further, some parts of the south-eastern coastline will remain restricted areas with sea-based activities prohibited for the foreseeable future following the disastrous oil spill. Fortunately, there are few resorts along that part of the island thus limiting further damage, although excursionists and local fishermen will continue to struggle. It should therefore not come as a surprise to discover that the Travel & Leisure stocks recorded the steepest drop on the SEM and are largely hovering at near All-Time lows. Yet again given the low visibility for this sector, we would advise caution if investing in hotels.

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Agriculture

An unintended consequence of the pandemicinduced slump in oil prices which in turn dragged down (?? Did it? What is the correlation?) demand for biofuels was the impact on sugar prices. Thus, while the picture seemed rather promising at the start of the year for sugarcane growers and millers, it is now less promising. Although ‘Crop 2020’ proceeds are expected to be lower than originally forecast, they are nonetheless expected to be 10%-20% higher than for Crop 2019. Consequently, sugarcane-reliant conglomerates are among those least affected by all of the current economic woes. Further, given the low interest and dividend environment making ﬁnancial investments less attractive, Mauritians are turning to bare land as an investment alternative. Sugar conglomerates who own massive land banks are therefore well positioned to beneﬁt from such a spike in demand. Given that sugar conglomerates have lost 21% in combined market cap. since the start of 2020 and are trading at multi-year lows and substantial discounts to Net Asset Value, these companies could offer some of the most attractive opportunities at this stage.

Trade

We expect a protracted slowdown in demand for luxury goods or expensive items, household materials {e.g. tiles}, and cars among others as households re-assess their spending. This stems from a reduction in disposable income, higher prices of imported goods following the Rupee’s depreciation, and a preference to save during uncertain times. This phenomenon is also expected to extend to general retail and grocery spending due not only to a shift in consumer behaviour, but also because on average tourists makes up ~8% of the island’s population at any point in time, which implies that food and beverages consumption will drop by 10%-20%. In spite of these headwinds, consumer companies have constituted an excellent value preserve on the SEM having not lost any value since the start of 2020. Thus, as a value preserve, consumer stocks would be worthy of consideration.

Real Estate

With consumption lower than during pre-Covid times, it is likely that shopkeepers would either delay or skip rental payments. Further, following the ‘Work-from-Home’ experiment, we expect employers to change their office layouts/plans. Subsequently, downwards pressures on rental yields and in turn on investment properties are to be expected in the medium term, especially after existing property developments are completed. In terms of residential property developments aimed at an international clientele, we expect a drying-up of leads due to the global economic context; however, local investors are increasingly turning towards bare-land as value preserve due to the current low-interest and low-dividend environment,. Thus, while we would advise caution on commercial real estate and developments, some companies could see a short-term bump in income from sale of land. In conclusion, it would be safe to say that Mauritius is currently experiencing its worst economic crisis in a generation. The performance of its stock exchange, which is in the bottom 15th percentile globally appears to reflect that. While the outlook remains murky at this stage, equities are trading at their lowest in years thus potentially offering an interesting entry-point for medium-to-long term investors. As for short term picks, non-cyclical businesses remain the ones with the most appeal. AXYS Stockbroking Ltd is a financial services group that provides capital investment, stockbroking, and fund strategies. They focus on building lasting relationships with clients, offering expert advice and tailored solutions. Their services cater to high net worth individuals, corporate entities, and institutions.

AXYS provides stockbroking services, allowing clients to trade stocks and securities in the ﬁnancial markets. Their expertise and perspectives on the global market enable meticulous asset analysis, mid-to-long term forecasts, and timely strategic investments. AXYS manages selected funds, including:- • Axiom Equity Fund (AEF): A blended investment strategy combining growth and value stocks with sound fundamentals and sustainable growth-driven strategies. • Axiom Yield Fund: Designed to provide regular income and outperform average savings rates by maximizing risk-adjusted returns.

Contributor’s Proﬁle:

Bhavik Desai is the Head of Research at AXYS Stockbroking Ltd and joined AXYS in early 2010 to drive innovative local equity research and valuations. He has introduced scientiﬁc rigour and logic to the process, and will guide you in your investment decision making process. He will also assist you with securities trading. Prior to joining AXYS, Bhavik worked on the implementation andmonitoring of corporate strategies at SAP Labs LLC in California. Bhavik holds a Double Bachelors in Arts in Physics and Astrophysics from the University of California, Berkeley.

2020: PROVEN RESILIENCE OF MOROCCAN ECONOMY

By BMCE Capital Research Morocco

After the recent events due to the Covid-19 pandemic, the year 2020 seems to be heading towards a major social and economic crisis. The effects of the CORONAVIRUS appear more impacting than initially feared thus calling into question, and for several countries, the progress and development gains made in recent years.

For its part, Morocco is severely affected by the repercussions of this pandemic with expectations of a recession of nearly 6% accompanied by worsening macroeconomic imbalances. To deal with this situation from the outset, the authorities tried as best as they could to put in place a series of measures and nets to prevent the risks of a further deterioration in the economic and social conditions of the country.

Rather successful mission, but faced with the persistence of the health crisis even several months after the end of the confinement, a large-scale recovery plan of MAD 120bn is being scaffolded. In detail, MAD 45bn will be devoted to investment and MAD 75bn will be reserved for access to financing, guaranteed by the State for the benefit of all Moroccan companies, including very small businesses.

A strategic investment fund should take in charge the ﬁrst component, in particular to support direct State investment in infrastructure projects, through public-private partnerships (PPP) and State participation, knowing that for its ndowment in resources, it is planned to be ﬁnanced to the tune of MAD 15bn from the public budget and for MAD 30bn to be mobilized from national and international institutions.

The guaranteed ﬁnancing to be given by the State aim to maintain the activity of companies in difﬁculty and the employment level, in parallel with the extension, until the end of 2020, of other measures of support, in particular deferrals of repayment of bank maturities and compensation for employees in affected sectors.

This effort in terms of guarantees is already reflected in the volumes of loans initially given under DAMANE OXYGENE (MAD 16.5bn) and those approved under DAMANE RELANCE, of which the level would have exceeded MAD 21bn at the end of August. This is what would have contributed to the dynamics of the loan distribution machine, as evidenced by the 5.8% increase to MAD 946.1bn of the total accumulated outstanding over the first 7 months of the year. While this device has proven to be very necessary, it seems, however, difficult to maintain over time, given budgetary constraints in a context of dwindling resources, particularly fiscal resources in connection with the general decline in business activity. Finding which probably guided

the choices of the Prime Minister in its orientations announced in the framing letter relating to the 2021 draft Finance Bill, as the room for maneuver appears narrow and the imperatives of returning to the present balances.

This framework letter thus hopes that the draft of the next Finance Bill will focus on

(i) the compliance with the commitments of the State budget, made within the framework of social dialogue,

(ii) the implementation of regionalization and

(iii) the continuation of the commodity subsidy.Its objective is to generate a 5.4% GDP growth, taking into account a butane gas price of USD 350 per ton and a 70m quintal cereal harvest.

In view of the difficult economic situation, the rationalization of spending is a priority, with the aim of reducing the budget deficit to nearly -5%. The country's growing financing needs are also forcing it to increase its debt level, given that the ceiling for external financing for 2020 has been revised upward by MAD 29bn.

As such, an issue of EUR 1bn has been successfully achieved at the end of September, reﬂecting the foreign investor’s conﬁdence thanks to the Moroccan economics resilience.

The complexity of the situation can also be read in the execution of the Finance Bill at the end of July 2020, showing a deterioration of the budget deﬁcit to MAD -41.9bn following in particular the contrac tion of tax revenues and ordinary ones, while the special fund for the management of the COVID-19 pandemic sees its resources of MAD 33.7bn dwindling to cover the MAD 24.7bn of expenses incurred.

Even if the situation seems delicate with a severe test in 2020, the proactivity in the decisions taken both upstream and during the COVID-19 crisis should make it possible to conﬁrm the resilience of the Moroccan economy with an expected rebound in 2021.

BMCE Capital Global Research is a sell-side research and analysis ﬁrm in Morocco. Their services cover various ﬁnancial markets, including equity, interest rates, foreign exchange, and commodities in Morocco, Tunisia, and West Africa. They provide clients and prospects with tools to make informed investment decisions through objective processing of information and prospective analysis of the entire Moroccan stock market.

Africa Economy: A Tipping Point | 23

FEATURED ARTICLE INTO AFRICA

The call for domestic ﬁnancing has therefore increased signiﬁcantly to MAD 38bn for the month of July 2020 alone against MAD 29.3bn a year earlier. This led to a +7.7% increase in outstanding domestic debt to MAD 603.9bn in y-t-d.

For our part and while awaiting for more details on the economic aggregates in Q2 and on the 2021. Even if the situation seems delicate with a severe test in 2020, the proactivity in the decisions taken both upstream and during the COVID-19 crisis should make it possible to conﬁrm the resilience of the Moroccan economy with an expected rebound in 2021.

Mapping of opportunities & Threats of Moroccan economy

HOW EGYPT BANKS ON RENEWABLES TO MEET EXPECTED SURGE OF ENERGY DEMAND

By Tou k Khitous, Business Development Manager for North Africa, Wärtsilä Energy Business

o meet its soaring demand for energy, Egypt is turning to renewable sources. Its targets, if accomplished, will see it become a pioneer in the African energy landscape. But are the plans realistic?

Egypt’s population has now passed 100 million. As one of the most populous and fastest-growing nations on the African continent, providing electricity to all its citizens is a matter of priority for the Egyptian government.

To ensure continuous security and stability of energy supply, Egypt has launched an energy diversiﬁcation strategy, known as the 2035 Integrated Sustainable Energy Strategy (ISES), which aims to step up the development of renewable energy and energy efﬁciency in the country.

Egypt aims to produce 20% of its electricity using renewable sources by 2022 and 42% by 2035. For the second target, the goal is for wind to provide 14%, hydropower 2%, and solar 25%.

Ambition driven by necessity

This is a hugely ambitious energy plan, but it is one that is necessary for Egypt to ﬂourish. In particular, the country wants to diversify its mix of power sources. Egypt has introduced nuclear power and it is also developing a few megaprojects that will bring a massive amount of gas into its energy mix.

This is in stark contrast to 2014, when, due to electricity shortages, Egypt was forced to introduce more coal into its energy mix in order to lower its dependence on imported gas. Rising demands, the falling costs of renewable energy, and the discovery of new natural gas sources have allowed Egypt to both diversify its energy mix and become an exporter of gas.

Furthermore, environmental concerns over the generation and use of coal have reinforced this ecological approach. Egypt has signed up to the United Nations Framework Convention on Climate Change (UNFCCC), meaning that it has no option but to reduce its dependence on fossil fuels.

The spill-over effect

Tapping into renewable energy will beneﬁt Egypt in ways more than one. It will enhance the country's economic growth and bring revenues in foreign currency. The increased usage of renewable energy is expected to lead to exporting fossil fuels or using them in other areas domestically, such as industrial production.

The transition to renewable energy sources is also expected to help local businesses in Egypt, since the cost of electricity is an essential factor for business owners. While solar power and sustainable electricity are not widely available in the country yet, there is merit in Egypt's

plan to tap into renewable energy sources in the long run. More factories will lean towards sustainable renewable energy sources if it is economical, due to the cost of production and increasing price of electricity.

Need of the hour

But to leverage the beneﬁts of the transition to renewable energy, Egypt needs to overcome a few infrastructural and geographic hurdles.

A report by the International Renewable Energy Agency (IRENA) provides a comprehensive assessment and recommendations for primary measures that Egypt must consider to achieve the goals set out in ISES. The report points out the need to update Egypt’s electric power sector strategies to reﬂect the growing cost advantages and other beneﬁts of renewable energy. It also focuses on reforming the existing market framework to improve the economic feasibility of projects.

Additionally, the country is very much split in two by the fabled river Nile, with many regions in the south still not connected to the national grid. Egypt is very keen to invest in the tourism sector along the Red Sea, meaning there is a need for not only infrastructure but also the power to supply to these regions.

Egypt’s situation has changed a lot since 2011. Nowadays, the issue is distribution rather than consumption. Egypt has a tradition of setting its energy distribution vertically. This has a rather negative impact on how the energy is consumed, but this can change since we are starting to see more industries coming into the country as Egypt is encouraging private sector participation.

What lies ahead?

Between 2022 and 2027, Egypt plans to install an additional thermal power plant and two clean coal technology power plants. These initiatives are expected to exceed the nation’s peak power and electricity demands.

Of the renewable energy targets for 2022, both solar and wind are considered achievable. In particular, the Benban Solar Complex project, which is considered one of the largest solar PV power plant projects in the world, and has a total installed capacity of 1.8 GW, is foreseen to come online alongside a number of utility-scale wind farm projects in Gulf of Suez.

Egypt certainly has a lot of unanswered questions at present, but it does seem to be on the right track. Three big parts –gas, sea turbines and renewables – need to play their part going forward. Egypt has no choice; it must invest in renewables. The sector at the moment only makes up around 2% of the energy mix, but these announcements could rise it to 20% – this is almost a revolution.

Africa Economy: A Tipping Point | 25

AFRICA’S TOURISM INDUSTRY FOR RESILIENCE AND SUSTAINABLE GROWTH

By Itumeleng Mukhovha, Corporate M&A Attorney, Writer and Community Activist

Despite the signiﬁcant impact of the COVID-19 pandemic on the global tourism industry, there are new grounds and opportunities for African countries to rethink and rebuild tourism for resilience and sustainable growth. However, several conditions need to be in place for African countries to pursue tourism as a dynamic development growth option in a post-COVID-19 world. These conditions include, valuing and communicating cultural richness, enabling intra-African travel, addressing climate change, and investing in infrastructure.

Value and communicate cultural and natural richness

While tourism in Africa is mainly driven by natural tourism, there is ample room for improvement in protecting, valuing and communicating cultural richness. Considering Africa’s size and its rich cultural and natural resources, the 67 million tourists visiting the continent in 2018 is still low, compared to other parts of the world. For Africa to make a statement in global tourism and have a fair share in the global tourism market, African operators must begin to emphasise cultural tourism which includes, the continent’s rich history and heritage, monuments, artifacts, handicrafts, artworks, cuisine, natural endowments, and recreational spects such as festivals, songs, dances, folktales and myths.

237,000

Additional international visitor's attracted to Ghana

Ghana’s launch of the Year of the Return initiative in 2019 is a good case in point. The Year of the Return was a fresh impetus to memorialise the liberation from slavery, afford Africans living in the diaspora the opportunity to trace their ancestry and have spiritual pilgrimages to the countries of their origin, unite Africans living on the continent and in the diaspora, and ultimately, bolster the country’s tourism industry. According to Ghana’s Minister of Tourism, Barbra Oteng Gyasi, the Year of the Return, attracted an additional 237,000 international visitors (with a signiﬁcant increase in visitors from the United Kingdom and United States of America), and injected USD1.9 billion into Ghana’s economy.

Enable intra-African travel

Despite sustained economic growth over the past decade, Africa has not seen the same kind of income increases enjoyed by Asian households. As a consequence, only a fraction of African people can afford to travel within the continent.

Africa Economy: A Tipping Point | 26

While tourism in Europe and more, speciﬁcally, Asia has been fuelled by intra-regional travel, available data reveals that, on average, African tourists spend a tenth of what an overseas tourist would spend on the continent. This is due to the lack of intra-regional openness, air connectivity costs, very strict visa policies and regulatory frameworks.

Despite African countries’ quest for unity, economic and social development, political integration, and free movement of Africans within the continent, visa policies are still very restrictive, especially in West Africa. But thanks to slow and incremental progress, that is beginning to change for African travellers. According to the Africa Development Bank’s Visa Openness 2019 report, for the ﬁrst time Africans have travel access to 51

percent of the continent. Moving forward, championing visa openness across Africa will help to capitalise on the gains to be realised from the implementation of the African Continental Free Trade Area and the Protocol on the Free Movement of Persons.

Another impediment to intra-African travel is that there are limited commercial flights from one region to another and when they do exist, they are prohibitively expensive. Although most African countries have endorsed and ratified the Yamoussoukro Declaration 1988 to create a conducive environment for the development of intra-African travel and international air services, more than thirty years later, air travel remains inefficient throughout the continent. In addition, the International Air Transport Association reveals that Africa’s aircraft hull-loss accident rate is more than 6 times higher than those in Asia and Latin America, and more than 12 times higher than those in Europe and North America.

The beneﬁts of positive policy changes and the liberalisation of the air transport industry are well known. In Ethiopia, for example, relaxing visa restrictions while improving ﬂight connectivity and forming strategic alliances has seen Addis Ababa transform into a regional transport hub, even overtaking Dubai as the world’s gateway to Africa. This has resulted in Ethiopia becoming Africa’s fastest growing travel country, growing 48.6 percent which translates to USD7.4 billion in 2018, according to the Jumia Hospitality 2019 report.

FEATURED ARTICLE INTO AFRICA

Scale up infrastructure development

Much of the prevailing scepticism around African tourism as a development vehicle stems from a legacy of market failure, and inadequate transport, communication, water and electricity infrastructure.

Notably, the continent’s airport infrastructure deﬁned by a weak domestic airline industry and a lack of airport density greatly undermines local economies’ ability to facilitate tourist and business travel, which are already hampered by the vast size and geographical barriers in Africa. Road infrastructure is also notoriously poor in much of Africa, so it does not compensate for the inadequacy of internal airport infrastructure. However, both Namibia and South Africa are examples of destinations that, through consistent investment in infrastructure are now able to attract a large number of self-drive tourists.

In addition to poor airport and road infrastructure in many African countries, other fundamental constraints to tourism in Africa are water and electricity infrastructure, and access to ﬁnance and land. For example, the cost to develop a hotel in sub-Saharan Africa is greater than in other parts of the world. Hotel development costs in Nigeria, Angola, Mozambique, Ghana, Zimbabwe can be more signiﬁcant than other parts of sub-Saharan Africa due to market imperfections, the increased need to develop infrastructure, and high import duties.

As with other development options, the long-term and sustainable growth of Africa’s tourism industry is intrinsically linked to infrastructure development. Without this infrastructure, Africa’s tourism industry will not reach the growth levels expected or required. The underpinning principle of prioritisation is to ensure that infrastructure investment takes place in a way which maximises the sustainable contribution of tourism to African economies.

“… Ethiopia has become Africa’s fastest growing travel country, growing 48.6 percent which translates to USD7.4 billion in 2018…”

Address climate change

The effects of climate change are causing changes in the ecosystems and natural resources needed to sustain the tourism industry. KPMG’s 2008 assessment of the regulatory, physical, reputational and litigation risks of climate change posed to 18 major economic industries versus their level of preparedness found tourism to be one of the industries least prepared for the risks and opportunities posed by climate change. Climate change impacts that affect tourism in African countries include, beach erosion, saline intrusion, droughts, rising sea levels, desertification, deforestation, biodiversity loss, habitat loss, flash floods and landslides, coral-reef bleaching, less productive fisheries and agricultural systems.

Addressing climate change is a prerequisite to sustainable development and therefore a germane to advancing sustainable tourism. Any retreat from engagement with climate change issues by the tourism industry will be detrimental.

To militate against climate change, African governments and policymakers must begin to formulate mitigation and adaptation policies and strategies which will ensure that the tourism industry remains sustainable. The mitigation and adaptation strategies must include, the development of alternative energy sources, reforestation of mangroves and the protection of soft coastal reefs, the implementation of tourism development plans within the framework of ntegrated Coastal Zone Management processes and spatial planning, the integration of climate-change factors into regulatory frameworks for tourism development such as Environmental Impact Assessment for tourism infrastructure and establishments, and substitution of practices that account for greenhouse gas emissions.

Conclusion

African tourism is predominantly a private sector activity, but without governments’ political support at the highest levels, the formulation of strategic public investment, a distinctive promotion and marketing strategy, a sensible coordination amongst different stakeholders, an enabling business environment, and effective policies to address climate change and liberalise intra-African travel, it remains vulnerable to adverse environmental, socio-cultural and economic impacts. Therefore, to achieve its tourism potential and in turn, energise economies, the continent will have to address a number of existing constraints which include, but are not limited to, market failures, low levels of tourism skills, climate change, restrictions on intra-African travel, the lack of safety and security and high crime, visa requirements, inadequate infrastructure, and bureaucratic red tape.

Africa Economy: A Tipping Point | 27

ALTERNATIVE LENDERS

MUSTN’T BE FROZEN OUT DURING THE COVID-19 CRISIS

By Douglas Grant, Director of Conister Finance & Leasing Limited

Dhere are around 5.9 million small and medium sized enterprises (SMEs, or any business with fewer than 250 employees) in the UK according to the Department for Business, Innovation & Skills. Seen to be the backbone of any healthy economy, they drive growth, create a group of skilled and semi-skilled workers, generate competition and encourage innovation across a range of industries, as well as supporting future industrial and business expansion in the country. They keep the business sector energised, generating a healthy ﬂow of new skills and ideas.

Since 2008, alternative lenders have risen in prominence, working alongside larger more traditional clearing banks, offering a funnel of vital liquidity through tailored and flexible lending solutions to SMEs. Today there are significant amounts of private capital (often referred to as dry powder) waiting to be invested in resilient SMEs and the market share of clearing banks has fallen significantly in a far more diversified lending sector. In the last 12 years, banks have also become much better capitalised than during the Global Financial Crisis. Previously businesses could service debt from remaining cash flows with little or no capital for investment which resulted in a zombie status for many UK SME borrowers. Today, the environment is very different although this trend has not disappeared. In fact, as a result of Covid-19, it is estimated the trend could develop further given the potential that businesses may build up £100 billion of debt1 by next March.

The UK Government has been quick to back sectors post Covid-19 that are resilient to recessions and market volatility, providing ﬁnancial security and protection through initiatives such as the bounce-back loans scheme. This is where alternative lenders that understand the very basic needs of specialist SMEs, often in their lending infancy and operating in sectors such as infrastructure, technology and renewables, can provide the additional support and natural lending progression alongside the larger clearing banks. Alternative lenders understand the characteristics of specialist SMEs and with the ﬂexibility they offer, empower their staff to make judgement calls on capital requirements.

The economy though is facing a double dip recession that could last well into late 2021 and it will need these resilient sectors to be protected with their existence guaranteed. Many clearing banks are working tirelessly to process emergency loan applications but with pressures piling up – for example from within their mortgage lending divisions - a lot of SMEs will become unsustainable, with some estimates predicting 780,0001 insolvent SMEs.

Africa Economy: A Tipping Point | 28

It was concerning therefore to see that alternative lenders are potentially unlikely to receive much financing from the Bank of England to deliver emergency government loans. It is crucial that clearing banks pass on finance from the Bank of England to alternative lenders and find a way to make it work on commercial terms. SMEs must have a tripartite level of support from Government, alternative and traditional lenders working together in these difficult times.

As traditional banks deal with the impact of Covid19 around their balance sheets, it is likely that they will have to pause financing discussions around succession and growth financing as well as recapitalisations, in order to redirect resources to addressing an enormous influx of CBILS applications from capital-starved SMEs. Those resilient SMEs who have weathered the pandemic best in their sector will be able to benefit from the potential acquisition opportunities to increase their market share and will need capital to carry this out. Alternative lenders have the know-how and flexibility to help process this type of financing quickly and effectively. Without legacy loan books and unencumbered by CBILS applications coupled with high levels of dry powder, alternative lenders working together with clearing banks can help to execute rapid credit decisions on flexible terms.

The UK business sector as a whole needs both more ﬁnancial support for the alternative lending sector which is working together with traditional banks but also more sustainable initiatives to support SMEs in more resilient sectors from the Bank of England as we come to terms with an increasingly capital hungry economy – an issue that necessitates urgent attention.

Conister Bank is an independent bank, named after Conister Rock in Douglas Bay. It was established in the Isle of Man in 1935 as Conister Trust and in 2009 Changed it’s name to Conister Bank.

Conister Bank offers both Personal and Commercial Banking, Providing a wide variety of ﬁnancial products and services, including taking deposits and the provision of credit facilities and asset ﬁnance.

Conister Bank is wholly owned by Manx Financial Group who has subsidiaries engaged in suite of ﬁnancial services based in the isle of Man and the UK.

THE ROLE OF

EXPORT DIVERSIFICATION

FOR ECONOMIC GROWTH AND EMPLOYMENT CREATION IN AFRICA

By Ibrahim Abdullahi Zeidy, Chief Executive O cer of the COMESA Monetary Institute

Introduction

Export growth plays an important role in the economy due to its effect on trade growth and economic growth. Therefore, the sustainability of export growth rate is an eligible target for any country. The globalization phenomenon and openness to trade under uncertain circumstances, for example, the global financial crisis in the late 2008, may introduce ncertainties and fluctuations in the export earnings which discourage the investment opportunities. Discouraging investment opportunities leads to instability in export growth which reflects negatively to economic growth. Most research has established that export diversification is the effective remedy for these uncertainties due to its pivotal role in avoiding the shortfalls in export concentration. Most African countries in recent years, has been therefore, making efforts to diversify their economies to processing and manufacturing sectors. In addition to reducing the dependence on few commodities whose prices fluctuates in the international market, diversification into other sectors, especially those more intensive in technology, is prone to trigger knowledge spill overs from the exposure to international markets, management and marketing practices and production processes.

The real test of the AfCFTA will be how quickly African countries can accelerate export diversiﬁcation and product sophistication and make trade more inclusive. AfCFTA is expected to enable African countries to break into new African markets as they both diversify by export destination and type of goods produced.

The objective of this paper is to discuss major determinants and challenges of export diversification and to propose export diversification and employment strategies for Africa. strategies for Africa." It will also discuss Experiences in National Economic Diversification in Africa and offer some Lessons from Export Diversification and Employment Strategies of Emerging Markets.

This paper is organized as follows. Section one provides brief Empirical review of the relationship between export diversification, employment and economic growth. Section two discusses major determinants. Section three discusses challenges of export diversification. Section four, provides overview of export diversification efforts of selected African countries. Section five briefly discusses lessons on export diversification and employment strategies of emerging market. Finally policy recommendations will be made.

Empirical Review of the Relationship between Export Diversiﬁcation Employment and Economic Growth

A major implication of classical theories of trade is that African countries would specialize in exporting commodities in which they enjoyed comparative advantage and import manufactured goods. However, one of the early studies on the subject by Michaely (1958) challenged the classical view. His study provided support for export diversification based on the finding that economies with more diversified export structure were more developed in terms of income per capita. The study also found that export diversification yielded greater support for stablising export earnings in the longer run, with favourable implication for employ ment. This result was later corroborated by Ghosh and Ostry (1994) and Bleany and Greenway (2001). More recently, Mathee and Naude (2008) has provided empirical; evidence to buttress the need for African countries to diversify their exports. Subjective evidence suggests that almost there are no current developed countries with extremely high level of export concentration (Agosin, Alvarez and Bravo - Ortega (2009). Brenton, Newfarmer and Walkenhorst (2007) argued that export diversification makes countries to be less susceptible to adverse terms of trade shocks by stabilizing export revenues. As a result, it becomes easier to channel positive terms of trade shocks into growth, knowledge spill-overs and increasing return to scale, creating learning opportunities principal to new forms of comparative advantage. C. Mudenda, I. Choga and C. Chigamba, (2014) examined the role of export diversification on economic Growth in South Africa. Results of the study reveal that export diversification and trade openness are positively related to economic growth.

Major Determinants of Export Diversiﬁcation

Prominent among determinants which have been investigated include human capital, exchange rate, geographical location, investment, terms of trade, population and governance factors.

Human Capital: The level of qualifications of the workforce and the efforts made in education have a relevant influence on the capability of a country to diversify, innovate, upgrade to high technology, in production of quality and sophistication of exports and also in promoting product differentiation. Production of new products requires research and development. Human knowledge is important in the research of new, efficient and affordable production method.

Africa Economy: A Tipping Point | 29

INTO AFRICA

Investment: Acquiring new markets for products entails need to expand and diversify exports to high value markets in the industrialised countries. Part of the strategy is to put in place policies that attract more foreign direct investment (FDI) in order to facilitate more technology transfer. This needs to improve business regulations and governance environment for business. FDI was found to be a factor to speed up export diversification in countries that devoted significant amount of investment in education, health, and infrastructure as these will in turn create a better conducive atmosphere for FDI inflows. Domestic private sector investment diversification strategy also helps in shifting the composition of exports from primary products, to manufactured products.

Geographical location: Remoteness increases export concentration. Parteka and Tamberi (2008) using a sample of developed and developing countries found that transport costs discourage export diversiﬁcation. A lower distance to the main world markets, access to the sea and overall transport costs, determine the ease with which a nation can increase the variety of products exported to the world market.

Terms of Trade: Theoretical and empirical literature suggests that failure to sustain industries with important internal and external economies of scale, and positive externalities of agglomeration of economic activity might limit African continent’s efforts towards a more diversified exports. This suggests that efforts towards a regional integration, by increasing the economic size in which Africa business companies can operate, might play an important role to successful export diversification. Elhiraika et al, (2014) Binti (2011) argues that economic integration in East Asian Countries has led to faster export diversification in the region. Again regional integration could facilitate commercial activities through reforming trade through improved customs rocedures and cross-border entrepreneurship and trade.

Population: When the population of a country increases in terms of variety of consumers, this will lead to increased production of more diverse products that attend to the need of varied users/consumers. Further, the size of a countries economy, i.e. population, education, health, infrastructure and income per capita are crucial factors that can be used as factor inputs in the manufacture of diversiﬁed products.

Exchange Rate: Exchange rate volatility, especially the over valuation of currency can discourage diversiﬁcation by increasing the prices of exports and undermining the competitiveness of the export sector.

Challenges of Export Diversiﬁcation

Challenges for Export Diversification are classified in the literature into challenges due to domestic factors; policies and institutional arrangements; and to external factors. Challenges due to domestic factors include: training and quality of labour force; gaps in infrastructure and other logistics; access to and cost of finance; product quality; technology acquisition and adoption; marketing and cost of production.

Africa Economy: A Tipping Point | 30

Policy and institutional factors include among others, tariffs, ﬁscal policy; exchange rate policy; monetary policy; access to and cost of ﬁnance; legal enforcement of laws; and lack of appropriate business environment etc.. External factors include among others, meeting international standards, entry barriers to international market; access to information on external market; and cost of operating in foreign markets.

Experiences in National Economic Diversiﬁcation in Africa

The continents four most advanced economies, namely Egypt, Morocco, South Africa and Tunisia are already broadly diversiﬁed. Manufacturing and services together total 83%of their combined GDP. Domestic consumption is the largest contributor to growth in these countries. Cameroun, Ghana, Kenya, Mozambique, Senegal , Tanzania, Uganda and Zambia are some of the transition economies which have began diversifying their sources of growth. Kenya for example increasingly export manufactured goods particularly to other African countries. Expanding intra-Africa trade will be one key factor to the future growth of countries which are in transition to diversify their economies. Speedy implementation of AfCFTA will particularly enhance the diversiﬁcation of African countries economies.

Lessons from Export Diversiﬁcation and Employment Strategies of Emerging Markets

There are a number of countries that have made significant progress on export diversification over the years and have reaped the benefits of its positive effect on employment and growth. Some of these countries for example South Korea was either on the same socio-economic development level with most African countries a few decades ago. South Korea had export structures similar to Africa’s in the early 1960s. However, the country had experienced profound transformation of its export structure and base, with manufactures and other high value exports dominating its export basket as far back as early 1980s . Key policy measures adopted by South Korea for promotion and diversification of exports were exchange rate unification and devaluation, tax exemption as an incentive to encourage production of a wide variety of commodities for exports, financing through preferential credit schemes, cash subsidy and subsidy for the use of public utilities which were provided to export ers, export -import links scheme to increase knowledge and awareness of export opportunities through Korea Trade Promotion Corporation (KOTRA) established in 1964. As a result, according to World Bank’s World Development Indicators database, South Korea ranks consistently in the top ten exporting countries in the world for many years. It has also maintained very low unemployment rates that averaged 2.5% between 1991 and 2016. The country easily and successfully weathered the storm of the Asian financial crisis because it has developed strong capacity for rapid export response and adjustment.

The COMESA Monetary Institute CMI undertakes all technical activities to enhance the Monetary cooperation Programme. The COMESA Fund protocol was adopted in 2002 for Co-operation, Compensation and Development.

SPECIAL FEATURE INTO AFRICA

Brazil is another emerging country which successfully diversified its exports. Financial instruments were the main tools used to promote export diversification. Credit and export credit insurance are the two key instruments that the country had widely employed in this respect. Advance payment under foreign exchange contract is another important financial support provided to encourage exporters. The National Bank for Economic and Social Development, popularly known as BNDES, has also been extensively used as an export financing channel to promote export diversification in Brazil. Strong institutional support and investment in R&D were also used to support export diversification. Today Brazil ranks as the 21st largest export economy in the world

Policy Recommendations The key to ensure the iversification of exports is to ensure that a conducive environment is reated in order to minimize the risk of undertaking relatively productive long term investment for it is such investment that is likely to yield export diversification for sustained growth and employment creation in Africa and LDCs. The following are key policy recommendations for different stakeholders on what needs to be done to improve export diversification particularly in Africa and LDCs with positive implication for employment:

a) National Policy makers should develop the following:

(i) A capable, accountable, developmental and transformational state which is conducive to private sector participation in promoting export diversiﬁcation.

(ii) Strategic national and regional infrastructure by formulating best infrastructure policies that will lower costs of doing business and promote globally competitive exports. These will attract domestic and foreign investment to various sectors for expanding production for commodities for exports. Since many African countries are not big enough, one possible way to handle this challenge is for African countries to collectively promote regional infrastructure, in order to reduce business risks, uncertainties, and export costs. Such cooperation could also contribute to expanding regional markets and deepening regional integration

(iii) Innovative financing schemes to provide finance for export oriented firms such as direct credit incentives, and selective subsidies that target export-oriented firms. Priority should be given to potentially new export sectors that hold high promise for expanding the export horizon of African countries in particular and LDCs in general. Such subsidies should be structured in such a way that they do not encourage rentseeking behaviors but rather benefit working capital

(iv) Developing an integrated African economies into the global value chain(GVS). Africa’s share in GVS remains the lowest among all the developing regions of the world. A relatively moreconvenient starting point is with regional value chain integration as a stepping stone.

(v) Strengthen the institutional and regulatory framework.

(vi) Support SMEs to access export markets.

(vii) Initiate industrial development policies that are capable of facilitating vertical and horizontal export diversiﬁcation.

(viii) Investing in human capital.

b) Continental, regional and sub-regional Institutions should undertake the following:

(i) Take the lead in coordinating regional infrastructure development;

(ii) Assist member countries to initiate continental export diversiﬁcation policy;

(iii) Promote trade facilitation;

(iv) Explore innovative financing options that could compliment the traditional export diversification financing instruments, such as structured financing;

c) Private sector businesses should undertake the following:

(i) Take full advantage of export promoting incentives provided by government.

((ii) Initiate public-private-partnership(PPP) export diversiﬁcation projects and infrastructure ﬁnancing;

d) Development partners should undertake the following:

(i) Use ODA to build export promoting and diversifying capabilities;

(ii) Finding ways in which to relieve LDCs from WTO rules which constrain these countries such as TRIMS and TRIPS agreements.

Africa Economy: A Tipping Point

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Feranmi Akodu

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REFORMS WITHIN THE FUND MANAGEMENT SECTOR IN GHANA

By Nana Akua Pokua Asafu-Adjei

Introduction

Investment in Ghana continues to rise. This is in line with the government’s vision for Ghana to become an International Financial Services Centre. In light of this vision, the Securities and Exchange Commission of Ghana (“SEC”), the regulator of the securities market in Ghana, is putting measures in place to reform the securities industry, particularly, fund management in Ghana.

The Enactment of the Securities Industry Act

The Securities Industry Act, 2016 (Act 929) (the “Current Securities Industry Act”) which repealed the Securities Industry Act, 1993 (P.N.D.C.L.333) was considered revolutionary when it was passed. It made provision for the regulation of new regimes within the securities markets such as private equity and venture capital funds, hedge funds, derivatives and commodity exchanges, and credit rating agencies which were not featured in the repealed Act.

The Current Securities Industry Act also streamlines the core functions and operations of market operators within the securities industry. One such provision is distinguishing an investment adviser from a fund manager. Under the repealed Act, an investment adviser was able to operate as both an investment adviser – a person who advises on securities, and a fund manager – a person who manages a portfolio of securities to ensure return on investment.

The separation of the roles in the Current Securities Industry Act takes away the undue burden on an

investment manager of maintaining a higher liquid capital and allows the investment adviser to focus on its advisory function. A fund manager now also focuses on investing the client’s funds. This has ensured checks and balances and has created much-needed comfort for investors.

Monitoring and Supervision

The SEC has increased its monitoring activities of market operators, particularly of fund managers. The Current Securities Industry Act empowers the SEC a lot more. The additional powers include the power to direct that books be produced for inspection, the power to question persons and search any premises that the SEC may require and to issue directives and circulars on operations. In exercising these powers, the SEC, in April 2019, suspended the licences of 5 market operators.

An unpermitted activity which the SEC has had to curb is fund managers offering ﬁxed term investments and guaranteed returns to clients, a function which is reserved for banks and specialised deposit taking institutions. In efforts to nip this non-permissible activity in the bud, SEC has issued stern warnings to fund managers to desist from such activities or risk having their licences being cancelled.

Streamlining Operations

In March 2019, the SEC announced the introduction of new asset management regulations which are yet to be released. With emerging risks in the fund management sector such as the inability of fund managers to honour redemption

, Associate ENSafrica Ghana

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requests on fixed deposits issued and an increasing incidence of related party investments (with firms investing as much as 65% of their funds under Management into related parties), the asset management regulations are expected to cover corporate governance, provide guidelines on investment and financial resources to ensure properly capitalised asset management firms, and increase the minimum capital requirements for firms operating in the capital market. The SEC is also expected to strengthen its supervision and enforcement powers to ensure that fund managers deliver on their mandate to the investing public.

Despite the potential to strengthen the enforcement of the Securities Industry Act, the new asset management regulations may restrict the operations of fund management in Ghana by only protecting the integrity of the market to a limited extent.

Increasing number of fund managers

The total number of licensed fund managers operating in Ghana has significantly increased from about 51 in 2010 to about 150 in 2018. This growth is manifested in the figures: The value of funds managed in Ghana has grown from under GHS1 billion (approximately US$189 million) in 2010 to approximately GHS 34 billion (approximately US$6.4 billion) as at March 2018. This trend has obviously led to an increase in the number of fund managers over the years which means that there is a need for a corresponding strengthening in the SEC’s supervision of these fund managers. However, considering SEC’s current limited oversight capabilities, it has been suggested that a temporary cap be placed on the number of licensed fund managers until the SEC is sufficiently resourced to be able to monitor the increasing number of operators.

Increasing Stated Capital and Liquid Capital Requirements

There is speculation that the SEC intends to increase the stated capital requirement from GHS100,000 (approximately US$19,000) to a proposed amount of GHS5 million (approximately US$940,000) with a proposed liquidity capital of GHS1,875,000 (approximately US$354,000). With existing limitations on the SEC’s enforcement capabilities, questions have been raised as to the purpose of the increase. The expectation is that the SEC will focus on strengthening its capabilities instead of merely raising capital requirements periodically. Without proper enforcement mechanisms in place, an increase in the minimum capital requirement is not likely to achieve the desired effect and increase the risk of fund managers undertaking unpermitted activities such as guaranteeing returns in order to increase their revenue.

Conclusion

Overall, the proposed changes could present new challenges for asset management companies as the changes could restrict the opportunity for large capital inﬂows.

It has been suggested that the SEC needs to do more to exercise its duty of care to investors. As investors demand solutions to failed investments, the onus is on the SEC to be more attentive to the activity of asset managers and responsive in addressing the concerns of investors. Hopefully, the asset management guidelines to be introduced will strengthen the SEC’s surveillance capabilities over the securities market allowing it to hold operators to higher standards.

Finally, beyond regulation, fund managers should be encouraged to be more proactive and prudent in handling investors’ funds. Funds are long-term investments and investors should not view them as ATMs or cash in bank savings account to meet their immediate ﬁnancial needs. Management and monitoring of liquidity is a very important aspect of the role of the fund manager who must keep lines of communication with its clients open. Monitoring tools include a regular liquidity analysis to ensure that assets continue to match investors’ requirements. It is also important to stress test funds’ holdings to ensure that there is enough liquidity in a range of possible scenarios.

With over 600 specialist practitioners, ENS is Africa’s largest law ﬁrm and has the capacity to deliver on your business requirements across all major industries and the African continent. They are able to leverage their resources to deliver legal solutions that suit your pricing preferences and timeframes.

ENS has developed a large knowledge base of resources and a deep understanding of local nuances and ways of doing business. They have practical experience working on the ground and direct access to high-end, professional contacts across the continent, assuring clients of consistent quality and world-class service. They have practitioners who are qualiﬁed to practise English law and French law and have extensive experience in the legal codes of OHADA used in West and Central Africa.

Nana Akua Asafu-Adjei is an associate at ENSafrica, Ghana. She has acted for local and international clients in a range of industries, including ﬁnancial institutions and those in the food and beverage industry.

Nana Akua’s experience includes advising clients on a number of M&A, as well as on commodities exchange transactions.

In addition, she is experienced in advising on matters relating to dispute resolution, employment, intellectual property, ﬁnancing law and corporate governance.

Contributor’s Proﬁle

REGULATOR MOVES TO SHARPEN SUSTAINABILITY FOCUS OF SA RETIREMENT FUNDS

By Deirdre Phillips, Partner, Bowmans South Africa

As international attention on climate change and sustainable development intensify, ﬁnancial systems worldwide are being reformed to focus more strongly on sustainability and build environmental, social and governance (ESG) factors into decision making. While South Africa’s retirement fund industry has for many years been legally required to consider ESG factors in their investments, they are now being asked to increase the transparency of their ESG disclosure and reporting.

The industry regulator, the Financial Sector Conduct Authority (FSCA), recently released a guidance notice that calls on boards of retirement funds to disclose how their investment philosophies and objectives seek to ensure the sustainability of assets and investments. This should be detailed in each fund’s investment policy statement, which should, in turn, be shared with members so that they can see how the fund approaches sustainability, speciﬁcally around ESG, in its investments.

Such disclosures appear to be voluntary at this point, in that funds are merely ‘encouraged’ to comply, but there are hints that this could change in the future. In a communique that accompanied the release of its guidance notice on 14 June 2019, the Authority said it had taken note that various stakeholders had called for more ‘intrusive’ requirements, while others had called for some flexibility and several had emphasised the importance of applying similar sustainability principles across other sectors, specifically in the asset management sector. ‘The FSCA takes note of these submissions and agrees that the requirements relating to sustainability, including disclosure and reporting of issues surrounding sustainability, require further refinement,’ the Authority said. ‘The FSCA will,

therefore, continue to work on reﬁning the regulatory framework insofar as it relates to issues of sustainability...’. This could potentially lead to more detailed and reﬁned disclosure and reporting requirements.

For the time being, however, the boards of funds are being ‘encouraged’ to adopt the practices described in the Authority’s guidance notice, titled ‘Sustainability of investments and assets in the context of a retirement fund’s investment policy statement’.

ESG and funds’ investment policy statements

The purpose of the June 2019 guidance notice is to guide boards on how to comply with existing regulations on their investment policy statements and the obligation to consider ESG factors before investing in an asset.

Regulation 28 of the Pension Funds Act, 1956 limits the extent to which funds subject to the PFA may invest in certain categories of assets. Regulation 28(2)(b) provides that every fund must have an investment policy statement and Regulation 28(2)(c)(ix) requires the board, before making an investment in and while invested in an asset, to consider any factor that may materially affect the sustainable long-term performance of the assets. Such factors should include those of an environmental, social and governance character. Thus, boards are already obligated to consider ESG factors before making an investment and while being invested in an asset. What the new guidance notice does is set out the FSCA’s expectations of what boards of funds should be disclosed in their investment policy statements.

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First, a fund’s investment policy statement should describe its general investment philosophy and objectives in relation to sustainability. This should include describing the extent to which it has considered ESG factors – which in the South African context, in relation to South African assets, includes broad-based black economic empowerment. Details that should be included are when the investment policy statement was approved and by whom, how often it will be reviewed, and how it intends to monitor and evaluate the ongoing sustainability of the asset.

Second, where a fund holds assets that ‘limit the application of ESG factors’, its investment policy statement should explain how this limitation is to the advantage of both the fund and its membership. If this limitation is not to their advantage, the investment policy statement should set out remedial action that the fund has taken or intends to take to rectify the position. Where no remedial action has been taken or considered, then the fund should give the reasons for this.

Apart from encouraging funds to disclose their approach to ESG, the guidance notice recommends that they share their investment policy statements with their members. A fund can do this by providing copies of its statement to members on request – at no cost – and by posting a copy on the fund’s website. Funds are also encouraged to make a copy of their investment policy statements available to stakeholders, such as participating employers and unions, once a year. In this way, members will be able to see what, if any, ESG factors were considered in making a certain investment. All of these are in the interest of transparency, accountability and the fair treatment of fund members, the guidance notice says.

Reporting on sustainability

Another important element of the latest guidance notice is that it encourages boards of funds to report in their annual financial statements on the extent to which their investment policy statements reflect the matters covered. This should include details of any significant changes to its investment policy tatement in the year reported on. It would also be ‘prudent’, the guidance notice says, to include a note in the annual financial statements confirming that every fund member who requested a copy of the policy statement did, in fact, receive one. Similarly, it recommends that funds report on the assets and asset classes held in relation to sustainable investment, as well as the value of these assets.

It will be interesting to see how retirement funds respond to the FSCA’s guidance on what they should be disclosing and reporting on when it comes to investment sustainability and what they are doing to take ESG measures into account. While the contents of the latest guidance notice have been pointedly phrased as ‘guidance’ and encouragement, funds would probably be prudent to follow this guidance as closely as possible, disclosing more rather than less. After all, the Authority has already indicated that more detailed and reﬁned disclosure and reporting requirements could be in the ofﬁng.

“South Africa’s retirement fund industry has for many years been legally required to consider ESG factors in their investments, they are now being asked to increase the transparency of their ESG disclosure and reporting.”

Deirdre Phillips is a partner in Bowmans’ Johannesburg office Banking and Financial Services Regulatory Practice. She has significant knowledge and experience in all aspects of pension law, medical schemes and employee benefits law, having specialised in pensions and employee benefits since 2009. Deirdre provides legal opinions and training to retirement funds, their boards, principal offices, administrators and other providers of products and services to retirement funds. She also advises employers on their rights and obligations in relation to occupational retirement funds to which their members or employees belong. She has an LLB degree from North-West University and a Certificate in Pensions Law from the University of the Witwatersrand.

Contributor’s Proﬁle

INTO AFRICA

DATABANK TO BE DOMINANT INVESTMENT BANK IN GHANA, BIGGER PRESENCE IN OTHER AFRICAN COUNTRIES

CAPMARKETSAFRICA: Firstly, let’s talk about you. Please tell our readers more about your background and what motivated your choice of career path?

KOJO ADDAE-MENSAH: My ﬁrst degree was in Economics and then I did an MBA in Finance, all at the University of Ghana. That was where I developed my interest in investment banking. After school, I started out my career at Databank in 1998. I spent only 2 years there as the capital market activities were not vibrant enough. I then moved to Standard Chartered, where I worked for almost 10 years, did 2 years at Barclays Bank, another 2 years at GCB bank and then I got the call that brought me back to Databank to lead the Group.

CAPMARKETSAFRICA: Let’s ﬁnd out a little more about DATABANK GROUP. What led to the creation of DATABANK?

KOJO ADDAE-MENSAH: The founders of Databank, which includes the current Minister of Finance, Ken Ofori-Atta worked on wall street for a while and had the vision to establish a capital market in Ghana. In 1990, Ken was instrumental in the development of the Ghana Stock Exchange and Databank was set up as Ghana’s premier Investment Bank. It has evolved as the capital market has developed and as the laws and regulations have been reviewed.

CAPMARKETSAFRICA: Okay, what does DATABANK do? Which areas of ﬁnancial services is it engaged in? What category of clientele and any major recent or upcoming transactions?

KOJO ADDAE-MENSAH: The Group comprises three subsidiaries. Through Databank Asset Management Services Limited (DAMSEL), we manage a range of mutual funds, pension funds, institutional funds (including corporate, endowment and beneﬁt funds) as well as customized portfolios for our high-net-worth clients. DAMSEL manages funds for close to 300,000 institutional and retail clients, with total assets under management of GHC 4.81 billion (US$ 916 million). Databank Brokerage

Limited (DBL) trades stocks and ﬁxed-income instruments for private clients, governments, and corporations. DBL is a leader on Ghana’s primary market in the broker-dealer category having raised about GHC 1 billion (US$ 190 million) for Government of Ghana in medium-to-long term debt securities on the Ghana Fixed Income Market (GFIM). DBL holds a dominant market share of stock market activities (49% as at March 31, 2019) on the Ghana Stock Exchange. The third subsidiary is Databank Financial Services Limited, which is the parent.

CAPMARKETSAFRICA: It is obvious, that politics affects the financial sector a great deal. What strategic plans do you have in place to maximize profitability as well as enhance shareholders’ value? And where do you see DATABANK in five years from now, please?

KOJO ADDAE-MENSAH, GROUP CEO, DATABANK GROUP GHANA

EXCLUSIVE INTERVIEW INTO AFRICA

KOJO ADDAE-MENSAH: The extent to which politics would affect the ﬁnancial sector, and by extension Databank, would be the impact of government’s decisions on the disposable income of Ghanaians, which is what people bring to us to invest. Databank will turn 30 years in 2020 and, as such, has operated through different political regimes. Our client base consists of Ghanaians who are loyal to the varied political parties. However, that really has no bearing on our business as our commitment is to manage all funds that we receive and generate the best returns we can for our clients in a sustainable manner, irrespective of which political party is in power.

In the next five years, I would like to see two things. First, I would like to see Databank as the dominant investment bank in Ghana – not just in assets under management, but in our ability to reach individuals in every corner of Ghana. Currently, most of the investment banks have concentrated their business in Accra, and in a few cases expanded to Takoradi and Kumasi. However, Ghana has 16 regions and over 29 million people. If we truly intend to deliver on our mission of helping ALL Ghanaians achieve financial independence, then we MUST necessarily have a presence in every region. Until recently, we were in 8 out of 10 regions, with a total of 19 locations across these regions. However, with the addition of 6 new regions in 2018, it means we have more work to do. The second thing I would like to see within the next 5 years is for Databank to have a bigger presence in other countries in Africa. While we have a presence in The Gambia currently, the financial services industry in Africa is woefully underserved, and I believe that Databank is wellpositioned in terms of expertise, technology, and product base to make a difference in other African countries.

CAPMARKETSAFRICA: Now, let’s talk on broader issues, but still on ﬁnance. In your view, what are the key areas requiring improvement in order for the Ghanaian wealth management industry to attain its full potential?

KOJO ADDAE-MENSAH: I believe there are three key areas that we need to see improvement if we want our wealth management industry to achieve its full potential. They are Capital market development, Financial inclusion, and Financial sector stability.

(1) Capital market development

There is a serious lack of liquidity in the market. We also see the ability for small trades on the GSE to significantly impact the market cap. For example, earlier this year, a small trade of 100 shares with a value of GHC 75 was able to add over GHC 700 million to the company’s market capitalization and cut GSE’s year-to-date loss from -9.46% to -6.13% in one day. This is a big RED FLAG for the industry. We also need more listed companies. The investment universe is extremely small, which means that in the coming years we will have a huge overconcentration of money flowing into only a few companies, significantly increasing the risk to the

investor should the company develop issues and potentially be delisted. The lack of companies to invest in will ultimately push the majority of funds to government securities, which is not a healthy model for the industry over the long term. We also need more investment products in the mutual fund space to cater to a broader range of investor needs.

(2) Financial inclusion

We need more widespread communication/education –companies and educational efforts tend to be focused in Accra, and at best Takoradi and Kumasi, but are not reaching the other regions. We also need education on the difference between different types of ﬁnancial institutions (e.g., commercial banks, investment banks, microﬁnances, savings, and loans) – all of these companies purport to do investments, but not all are regulated by the SEC or are held to the same standards. We need more systems in place to allow Ghanaians to be able to invest from any corner of the country. I believe technology will be key in achieving this goal. There also must be a focus on making the licensing of sales representatives/investment advisors accessible throughout the country. This is key to growing our industry.

(3) Financial sector stability

I think we need to improve our corporate governance structures and ethics in the market to give the investing public more confidence in what we do. Recently, there has been a spate of closures of commercial banks, microfinances and investment banks – all of which have significantly eroded the confidence on the investing public. It is therefore imperative that the industry regulator, the Securities & Exchange Commission, is well resourced to monitor and drive the growth of the industry and ensure greater transparency and accountability among the players. This will be critical to attracting more investor funds from both local and foreign participants.

CAPMARKETSAFRICA: In a more speciﬁc term, what are the biggest challenges and opportunities you see in the corporate banking sector in Ghana? And in what ways does your corporate banking division assist clients in managing their risk and enhance their revenue?

KOJO ADDAE-MENSAH: Databank is not a commercial bank and so we do not have a corporate banking department. However, the challenge facing that sector in my view is the high level of Non-Performing Loans and the difﬁculty in realizing collateral to pay off the debts. The legal environment in which we operate can be slow and frustrating.

INTO AFRICA

CAPMARKETSAFRICA: Beyond the extractive industries, what makes Ghana an attractive area for investment? And what are some of the issues investors should be aware of when looking to invest in Ghana?

KOJO ADDAE-MENSAH: There are loads of opportunities in Ghana. It is a very safe country with very liberal policies for investors. There are tax incentives, a stable political environment, and an educated hardworking workforce. Infrastructure could be better, but it is still good enough to establish a business. I would recommend a visit to the Ghana Investment Promotion Centre for more information. It is always important to deal with ofﬁcial channels when doing business in Ghana. It can be frustrating sometimes and there is the temptation to use ‘middle’ men, but I will strongly advise against that.

CAPMARKETSAFRICA: How has technology changed the wealth management industry in Ghana — for example, ﬁrms’ use of social media to reach current and prospective clients?

KOJO ADDAE-MENSAH: It has completely changed the landscape, especially for a retailoriented company like ours. We would not have been able to reach the number of clients we have today had it not been the use of technology and the ability for them to transact with us using the various channels we have like our mobile app and the online platform. Additionally, the rapid growth of mobile money as a means for transacting has also redeﬁned the investment landscape in terms of how easy it is to deposit into an investment account and also the frequency and quantum of money that can be deposited. This is especially key for the informal sector, where many people do not have a steady source of income or have the ability to leave their businesses to visit a Databank location to invest.

CAPMARKETSAFRICA: Impact investing and ESG investment are becoming popular globally. Do you feel that your ﬁrm is currently doing enough in the space, please? And also, do you have much presence in these areas?

KOJO ADDAE-MENSAH: No. I am not sure we will ever reach the point that we are doing enough in this space, but I consider Databank to still be at the forefront of impact investing within the investment industry in Ghana. Databank currently has the only ethical mutual fund in Ghana, which does not invest in companies that produce or sell alcoholic beverages, tobacco products or arms and ammunition. Through this Fund, we have also initiated several social responsibility projects that have included renovating the children’s ward at the Korle Bu Burns Unit as well as donating medication and medical supplies to burn victims. Through our Databank Foundation, we do a lot of work in Entrepreneurship, Mental Health and improving literacy in Ghana.

CAPMARKETSAFRICA: To bring the interview to an end, what do you do in your spare time, when not busy managing DATABANK?

KOJO ADDAE-MENSAH: I have two passions outside the office: sports and education. My outside-the-office life is therefore very busy. I play squash 4 times a week and soccer once a week, and then there are times I am a pundit on national TV (e.g., Africa Cup of Nations). I also spend a lot of time helping students. I am a Director of the Changing Lives Endowment Fund – a foundation that I and a few friends started in 2007. We started out helping to pay school fees for bright and needy children at the secondary school level but realized that many of them who graduated still needed financial assistance through tertiary education as well. To date, we have helped over 50 students. I have also undertaken a similar project over the past three years in my hometown of Abetifi to improve JHS results.

CAPMARKETSAFRICA: Thank you very much for granting this interview!

Databank Brokerage Limited (DBL)

Trades stocks and ﬁxed-income instrucments

Works with private clients, governments and corporations leader on Ghana’s primary market in the broker-dealer category

300,000

Institutional and retail clients

4.81bn

total assets under management (US$ 916 mill)

1 bn raised for Government of Ghana in medium-to-long term debt securities (US$ 190 Mill)

49%

DBL holdings on the Ghana Stock Exchange market share of stock market activities (as at March 31, 2019)

30 Age Databank will be in 2020

8 out of 10 regions Databank operates in

total number of locatios across thes regions.

6 new regions added in 2018

KENYA INVESTMENT MANAGEMENT: REGULATORY OVERVIEW

By Rosa Nduati-Mutero, Partner, Anjarwalla & Khanna LLP

Kenneth Kimachia, Associate, Anjarwalla & Khanna LLP

Investment management or portfolio management is the process of managing money.¹ It may be summarised as the analysing, selecting, maintaining, protecting and evaluation of the performance of a collection of securities with the objective of achieving set investment goals. This article gives a high level overview of the regulatory landscape in Kenya with respect to investment management.

More commonly known as asset management in Kenya, investment management is regulated under various laws depending on the specific asset under management. The primary regulatory laws are the Capital Markets Act, the Retirements Benefits Act and the Insurance Act. The respective regulators established under these laws are the Capital Markets Authority (CMA), the Retirements Benefits Authority (RBA) and the Insurance Regulatory Authority (IRA).

These Regulators operate within the conﬁnes of their respective constitutive and subsidiary laws and their own published rules or guidelines.

The CMA

The CMA, among other things regulates asset management in Kenya and supervises capital markets intermediaries. The design of the regulatory framework encourages elf-regulation to the maximum practical extent.

The regulatory functions of the CMA as provided by the Capital Markets Act and the regulations under it include, among others:

• licensing and supervising all the capital markets intermediaries;

• ensuring proper conduct of all its licensees;

• regulating the issuance of capital market products (such as bonds and shares); and

• promoting market development through research on new products and strengthening of market institutions.

It is a requirement of the Capital Markets Act that all capital market intermediaries must obtain approval or licensing from the CMA. The CMA will only grant a licence or approval if the applicant meets the licensing criteria and the CMA is satisﬁed that the applicant is ‘ﬁt and proper’ to carry on the licensed activity. Some of the capital market intermediaries with respect to investment management in Kenya are investment advisers, fund managers, investment banks, collective investment chemes and custodians. Investment advisers and fund managers are market professionals who analyse and research on capital markets securities and advise investors on such securities at a commission.

They also manage portfolios of securities on behalf of clients pursuant to a contract. Investment banks engage in fund management of collective investment schemes and provide portfolio management services.

Collective investment schemes (CIS) include mutual funds, unit trusts, investment trusts and other forms of specialised collective investment schemes such as real estate investment trusts (REITs).

Custodians are licensed under the Banking Act and approved by the CMA to hold custody funds, securities, ﬁnancial instruments or documents of title to assets registered in the name of investors under an investment portfolio. Every investment adviser and fund manager that manages discretionary funds is required to appoint a custodian for the assets of the fund.

The CMA has the power to take disciplinary action against any of its licensees including:

• issuing a public reprimand;

• suspension from trading for a speciﬁed period;

• revoking or imposing restrictions on the licensee’s licence; or

• levying ﬁnancial penalties and reversing of any gain made or loss avoided.

Recent developments

The CMA has stepped up its policing role particularly on insider trading by, among other measures, closely monitoring compliance, pushing through changes in law and taking appropriate action where necessary. In terms of enforcement, the CMA recently imposed a ﬁnancial penalty on a bonds trader for engaging in insider trading with respect to treasury bonds. Further, with respect to trading of shares in an oil marketer, the CMA recently banned two stock broking agents and imposed ﬁnancial penalties on them for engaging in insider trading.

The Retirement Beneﬁts Act (RBA)

The

The RBA

The RBA was established for the regulation and supervision of the establishment and management of the retirement beneﬁts schemes and the promotion and development of the retirement beneﬁts sector.

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The Retirement Benefits Act and its regulations prescribe the registration procedure for managers of retirement benefit schemes. The fund manager of a retirement benefits scheme is required to be appointed by the scheme’s trustees from among licensed fund managers for purposes of the scheme’s investment management activities. Part of the RBA’s mandate, which also covers asset management supervision, includes:

• monitoring and supervision of the operation of the Retirement Beneﬁts Act and retirement beneﬁts schemes ;

• issuing guidelines on the duties and responsibilities of trustees of schemes;

• advising the relevant cabinet secretary on all matters relating to the functions assigned to the RBA and pensions generally.

The RBA has also issued investment guidelines on the maximum percentage of the aggregate market value of the total assets of a retirement beneﬁts scheme or of a pooled fund that can be invested in speciﬁed ways. For instance, managers can only invest up to 30 % of scheme funds in the quoted equity of any one company.

Recent developments in law

The law has recently been amended to remove an early retiring employee’s right to receive payment of 50% of their employer’s contribution (and accrued interest thereon) to the employee’s retirement beneﬁts scheme.

Further, the amendments now mandatorily require occupational retirement beneﬁts scheme rules to provide for the payment of retirement beneﬁts by way of an income drawdown, as an alternative or in addition to the purchase of an annuity for members who have attained retirement age.

The amendments also require umbrella retirement benefits scheme rules to allow scheme members to make additional voluntary contributions to a post-retirement medical fund. The medical fund is required to be a segregated fund and invested according to the investment policy of the fund. Umbrella scheme rules are now also required to provide that where a member is unable to accumulate a sufficient post-retirement medical fund, they may transfer a portion of their benefits to a medical cover provider.

The IRA

The IRA bears a licensing and approval regulatory mandate over insurers and insurance intermediaries. Through its guidelines, it requires insurers to develop an investment management framework supported by an effective and efﬁcient governance mechanism. The IRA also requires the board of an insurer, among other things, to develop and regularly review its investment policy in line with issued guidelines and to ensure that internal control mechanisms are in place and that investment management is handled by competent and experienced persons. The guidelines require that investments be made in a sound and

prudent manner taking into account the IRA’s basic parameters of investment, that is, security, liquidity, diversiﬁcation and return.

Conclusion

As stated above, investment management in Kenya is not governed by one specific law or regulator but by a myriad of rules and regulations which require investment managers to ensure they comply with the requirements of multiple regulators where they deal with various products. The Financial Markets Conduct Bill, 2018 which is still under consideration by Parliament seeks to create an effective financial consumer protection environment through the supervision of the conduct of providers in relation to retail financial customers, all under one supervisory or regulatory roof. The market awaits the impact of this bill as it would, upon enactment, represent a significant change in the regulation of investment management in Kenya.

Contributors’ Proﬁles

Rosa Nduati is a Partner in the Corporate department at Anjarwalla & Khanna LLP. Rosa specialises in corporate M&A, capital markets, corporate governance and employment. Rosa is a frequent speaker at international legal and business conferences and has published various articles on the Companies Act in Kenya. Rosa was rated as one of the region’s “top women under 40” by Business Daily, Kenya’s leading business newspaper. She is also rated as a Leading Lawyer by Chambers Global, IFLR1000 and Legal 500.

Kenneth Kimachia is an Associate in the Corporate epartment at Anjarwalla & Khanna LLP. He specialises in corporate and commercial law, M&A, competition, private equity and legal compliance. He has considerable experience in corporate matters and has advised domestic and international clients on a variety of commercial transactions and regulatory matters.

TURNING OPPORTUNITY INTO REALITY: THE TRENDS AND CHALLENGES OF SYNDICATED LENDING IN AFRICA

By Amelia Slocombe, Managing Director - Head of Legal, Loan Market Association

In the ﬁrst quarter of 2019, the syndicated loan market experienced a 59% dip in African loan volumes (US$7.67bn), as compared to the ﬁrst quarter of 2018: a theme consistent with other emerging and developed markets across EMEA. Of this volume, US$1.5bn was raised solely by Sonangol, indicative of the fact that the market was dominated by a relatively small number of active borrowers. South Africa accounted for the largest proportion of volumes in Africa, with deals totalling US$2.23bn. Kenya, meanwhile, took second place with one US$1.25bn deal, and Egypt third with US$1.15bn1. The key drivers underpinning this trend of historical low issuance may be explained by recent macroeconomic and geopolitical challenges, both across the continent and globally, making underwritten syndicated deals less attractive. Overall, however, whilst the African loan market can be unpredictable, it is largely resilient, and this resilience is expected to continue despite existing pressures. That said, the general slowdown in activity has been xperienced across all sectors and countries worldwide. This is relatively unusual - normally institutions are able to "hedge" their exposures on a geographic/sectoral basis, due to spikes of activity in certain places.

US$107.5bn

In 2014, the fall in commodity prices negatively affected a number of African oil-producing countries, particularly igeria. Since then Africa, economically speaking, has undergone something of a transformation, from being an export-led market to a consumer driven economy, as evidenced by the substantial growth of the middle classes and GDP growth acceleration in countries such as Ethiopia and Ghana. However, whilst business continues to grow (such growth not necessarily translating, however, directly into syndicated loan statistics) and whilst governance may be seen to be improving, there continues to be a large ﬁnancing gap. Recent estimates by the African Development Bank suggested that the continent's infrastructure needs amounted to US$130bn to US$170bn a year, with a ﬁnancing gap in the range of US$67.6bn to US$107.5bn a year. This gap is particularly obvious in countries such as Uganda, Rwanda, Madagascar and Zimbabwe. Rising opulations in Africa, meanwhile, continue to add to these pressures - an estimated 20 million additional jobs are

likely to be required by 2035 in order to sustain the demands of the rapid population growth.

A large proportion of the ﬁnancing gap in Africa may be attributed to the fact that many investors are reluctant to conduct business on the continent, not because of a calculated assessment of actual risk, but on the basis of fears that are not always entirely rational. Whilst a number of loan market practitioners have noted the ongoing rise in the presence of African and international banks actively engaged on the continent (especially in the bigger economies of Nigeria, Kenya, South Africa and Egypt), closing the gap between actual and perceived risks will be key to reducing the ﬁnancing gap going forward.

In reality, investing into Africa is not necessarily as "risky" as people perceive, assuming of course that you truly understand the environment into which you are lending. A 2016 report released by Moody's, for example, noted that project ﬁnance defaults on the continent were amongst the lowest in the world (although it should be noted that the nature of project ﬁnance means that investments are inherently strategic, and this could explain the low default level). Notwithstanding low levels of default, African infrastructure projects are nevertheless faced with umerous challenges that still need to be overcome – primarily underinvestment caused by a lack of government engagement in support of public/private partnerships, a lack of institutional capacity, and a lack of an enabling regulatory environment. Despite these challenges, however, the overarching view is that the market should remain optimistic about the opportunities offered by Africa in an infrastructure context.

Particular challenges

Although little discussed speciﬁcally in the African context, all loan market participants should prepare for the iscontinuation of LIBOR (the interest rate benchmark upon which the majority of syndicated loans into Africa are based) and a transition to alternative near risk-free reference rates ("RFRs") ahead of the end of 2021. As RFRs differ substantively to LIBOR both from a commercial and an operational perspective, and there is not yet an obvious alternative to transition, market participants are urged, via industry associations such as the LMA or otherwise, to keep up to date with progress and to provide feedback to any relevant regulatory consultations. Such feedback will be important in deciding upon a suitable way forward for the syndicated loan market (both new and legacy deals).

Estimated yearly African ﬁnancing gap (African Development Bank)

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Whether participants engage or not, it should be understood that LIBOR discontinuance will have a direct impact on all loan market participants, particularly in Africa where US Dollar lending and long-tenored project ﬁnance transactions are rife.

New opportunities for Africa

Financial technology ("Fintech") is increasingly becoming more sophisticated and user friendly and is seeing widespread adoption in Africa. This is primarily driven by the ownership of mobile phones, which has grown stronomically in Africa in the last seven years as compared with developed markets, which has seen very little change in the same timeframe.

The general consensus is that Africa's Fintech potential is unquestionable, especially given the considerable and continuing growth offered by that market. In addition, the adoption of Fintech across Africa via mobile technology has contributed substantially to giving consumers without bank accounts access to ﬁnancial markets and payment systems for the ﬁrst time. By facilitating data sharing, Fintech has also helped to solve certain issues with respect to proof of identity. Nonetheless, market participants should also be cautious as consumer right issues (which have been largely ignored in Africa to date) are expected to rise in magnitude along with the growing sophistication of Fintech. The issue of consumer protection against the backdrop of a growing data economy age will raise key issues for businesses going forward, and in particular, how they collect, process and disseminate data.

China has been instrumental in facilitating greater availability of Fintech in Africa and is responsible for the majority of African digital infrastructure over the last 10-15 years. Indeed, China has started to emerge as the largest Fintech "hub" and is driving innovation. Chinas 'BAT' group (Baidu, Alibaba and Tencent) are some of the most valuable companies in the world and control messaging and payment channels used by over 1.5bn consumers. Furthermore in 2018, We Chat Pay and M-pesa entered into a deal which is set to transform payment systems in Kenya. China's role in Africa is therefore becoming increasingly inﬂuential, not only in terms of political importance and within the world of infrastructure, but also as the key driving force for future developments in the Fintech space.

Looking to other opportunities, the renewable energy sector has also seen increased focus as environmental concerns become increasingly publicised and firms see the reputational and financial benefits associated with doing "green" business. In turn, this is expected to exacerbate the demand for renewable energy more widely. Equally, greater emphasis on climate change in the future could see even more emphasis on green lending and sustainable finance more broadly.

training events and regulatory and lobbying matters.

Amelia was also responsible for contributing to and editing the LMA's four most recent books: “The Loan Book”, "Developing Loan Markets", "The Real Estate Loan Book" and "20 Years in the Loan Market" (published in 2011, 2013, 2015 and 2016 respectively) and wrote the LMA’s Guide to Regulation.

Prior to joining the LMA, Amelia was a banking and finance solicitor at Pinsent Masons LLP, where she acted for numerous domestic and international corporate banks and a variety of UK and international borrowers, focusing on general syndicated finance, leveraged and investment grade acquisition finance and real estate finance. Amelia also spent time on secondment in the FI, NBFI and Insurance teams at Barclays, where she gained experience of cash management, structured finance products, and clearing and settlement systems.

Amelia is a regular speaker at both LMA and external training events, seminars and conferences, focusing on real estate ﬁnance, private placements and developing markets (speciﬁcally Africa).

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WHAT ARE WE BUILDING? THE NEXT PHASE OF REAL ESTATE FINANCING IN AFRICA

By Selwyn Blieden, Head of Africa Coverage, Commercial Property Finance

For a long time, the most prominent players in the African property sector have been private equity or other institutional investors. It is also true that there has been an obvious gulf between demand and supply in all property sectors (commercial, industrial and residential) across many markets on the continent.

The investment proposition, often-repeated to prospective funders, regulators and local partners, was that by pioneering landmark projects international investment and development teams would go some way to bridge this gulf. But few of those presenting this thesis have shown the success they predicted for themselves and their investors.

Asset realisations have taken longer and have been less proﬁtable than expected. Some institutions have chosen to exit direct African real estate investment entirely. With few exceptions, large South African REITs that expressed broader African ambitions have either closed their African operations or indicated that they intend to do so. Given its uneven performance record, an observer of the market might question the market-theses that seemed to be so alluring only a few years ago.

Despite this, we still believe that there is evidence to show that the African property market has evolved, just not in the way and for the segments previously expected. It is up to investors, ﬁnanciers and other stakeholders to adapt their approaches to pursue the opportunities this market offers.

For the past years we at Absa have been tailoring our business approach to cater for the range of real estate investment activities that we have seen taking place in our target markets. This has meant that we have been monitoring a wider market than that represented by the large multi-jurisdictional players that for some years dominated African property media coverage and were most visible at industry conferences.

Our analysis shows that since the end of 2015 the domestic bank-ﬁnanced commercial property market in our active African jurisdictions (which we identify as Botswana, Zambia, Mozambique, Kenya, Uganda, Tanzania, Mauritius, Seychelles, Ghana and Namibia) has grown in US dollar terms at a compounded rate of 9.5% per annum. This represents an acceleration in growth since the period 2012 to the end of 2015 the same market grew by 8.3% per annum.

This means that since 2012, and even more so since 2015, growth of bank-ﬁnancing to many African property markets has been faster than the growth of the underlying economies in these jurisdictions. Such growth could only have been possible if some combination of the following factors had been in place: the number and size of bankable projects and clients has increased; banks have become increasingly willing to undertake

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property ﬁnance; and/or the currencies in which property loans have been denominated have strengthened.

In all cases the factors mentioned above are positive for the property markets we are targeting: either the broader economies in which they are located are strengthening (as indicated by stronger exchange rates) or the property ﬁnance markets are becoming more active and formalised.

It bears repeating that not all African property markets are alike and data covering multiple markets may often conceal wide-ranging differences between those markets and nuances within markets. In the case of the countries we have been studying, there are two where the bank-ﬁnanced property market has actually declined since 2015. These are Mozambique and Uganda.

In Mozambique’s case the decline (of 8.8% per annum) would be expected given the broader debt-crisis in the country. In Uganda the decline has been an annual 2.1% -less than the decline in the local currency over the period and thus indicating a market that is, at least, growing in local currency terms. The largest property finance market on our list is Kenya which on its own holds about 46% of the total commercial property financing pool within the markets we service. Its commercial property finance growth rate has been at 9.6% over the past years. Its currency has been relatively stable, ranging only from 99 to 105 Kenyan Shillings to the US dollar over the period. The growth has achieved is largely, therefore, a function of real growth in bank funding and property investment activity. In our experience, growth in this market has been led by market participants that would in South Africa or similar banking markets be classified as commercial or local corporate clients rather than institutional players.

In conclusion, it is evident that even though the most prominent segment of the investment-grade African property market has shown signs of strain, the broader bankable property market has been growing signiﬁcantly and in the case of key markets such as Kenya, the growth is the result of real property activity and risk-taking.

For banks and other ﬁnanciers, future growth may require broadening their target-range of clients and adapting their credit and service models for strong local players. For equity investors, potential focus may be on ﬁnding ways to get effective exposure to this same category of market participants. Opportunities exist for those who are willing to adapt their approach and their guiding beliefs regarding this market.

RMB Westport is a leading African Corporate and Investment Bank that operates with a unique blend of Traditional Values and Innovative Ideas. Their commitment to doing good business contributes to a better world for all. Some of their key offerings are Foreign Currency Clearing, ESG Risk and Impact Measuring Platforms.

Africa Economy: A Tipping Point | 46

“It is up to investors, financiers and other stakeholders to adapt their approaches to pursue the opportunities this market offers.”

Contributors’ Proﬁles

Selwyn Blieden manages a portfolio of investments for RMB Westport, a real estate private equity fund perating in subSaharan Africa. In this role he has served as a director of several project and investment companies in Nigeria, Ghana and Mauritius. RMB Westport is part of the FirstRand group, one of the largest banking and investment groups in Africa. Selwyn has worked in Rand Merchant Bank, the investment banking division of the FirstRand group, since 2004. Before taking on his current role, he co-founded and managed Rand Merchant Bank’s Opportunities in Global Real Estate business, investing into property assets in multiple jurisdiction including Japan, Germany and Eastern Europe

Prior to joining the FirstRand group, Selwyn was a consultant in the Johannesburg ofﬁce of McKinsey & Company. There he served clients in multiple African jurisdictions and worked alongside several of the founders of African Leadership Academy.Before entering commercial life, Selwyn was a member of the Faculty of Mathematics at the University of Cambridge and a Research Fellow at Wolfson College, Cambridge. Selwyn has a PhD in Mathematics from the University of Cambridge. He won an Emanuel Bradlow Scholarship to attend St John’s College, Cambridge.

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KENYAN ECONOMY HAS GROWN RESULTING IN THE GROWTH OF DISPOSAL INCOME, DEMAND FOR INVESTMENT AND SAVINGS PRODUCTS

CAPMARKETSAFRICA: Thank you for granting this interview. Could you please tell our readers more about your background and what motivated your choice of career?

KENNETH KANIU: I started off my career in 2004 in a bank as a graduate trainee. At the time, I was also studying for my CFA qualiﬁcation as I was keen to join the investment industry.

An opportunity to participate in a global asset management associate program at Allianz, a German insurance and asset management company, came by and I applied. After months of rigorous oral, written and psychometric interviews, I and a gentleman from France were selected for the one-year program. This was a great achievement.

I moved to Munich and joined the team handling investment research on Pan-European equities. I was also involved in performance calculations for various funds and buying derivative options protection for portions of the investment portfolios. This experience whetted my appetite for the asset management business, and I knew then that this was the sector that I wanted to build my career in.

CAPMARKETSAFRICA: Let’s ﬁnd out a little more about Britam Asset Managers (BAM). What led to the creation of BAM? What does BAM do? Which areas of ﬁnancial services is it engaged in? What category of clientele and any major recent or upcoming transactions?

KENNETH KANIU: Britam Asset Managers is a subsidiary of Britam Holdings PLC. The Company was incorporated in April 2004 and started operations in 2006 to fill a gap in quality fund management and investment advisory services to individual and institutional investors. As a company, we have grown remarkably to become an influential player in the financial services sector with assets under management of over USD 1.7 Billion. Britam Asset Managers Company (Uganda) Limited was established in 2017 and is growing at a fast rate.

We offer investment products and solutions to customers in retail, corporate and institutional segments namely; unit trust funds, wealth management, pension and property.

CAPMARKETSAFRICA: Now, let’s talk on broader issues but still on ﬁnance. The Kenyan sociopolitical climate has hanged over the past several decades. In view of this, how has the wealth and asset management industry in the country changed?

KENNETH KANIU, CEO, BRITAM ASSET MANAGERS KENYA

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KENNETH KANIU: The economy has grown, resulting in the growth of disposable income hence the increase in demand for investment and savings products. The market has responded by coming up with a variety of ﬁnancial products and services to meet these needs. Kenyans are also more conversant with the need to protect their future. They are keen to save for their children’s future, retirement and emergencies. As a ﬁnancial services company, we have had to adapt to the changing consumer needs so as to accommodate the growing market. Investments are now accessible to the mass market. For example, with as little as KES 1,000, an individual can now have access to the Britam Money Market Fund.

CAPMARKETSAFRICA: What are the priorities of wealthy private investors in Kenya in terms of exposure to risk and preferred asset classes?

KENNETH KANIU: Wealthy private investors are highly exposed individuals who demand customized service. They have more bargaining power and demand higher returns from their investments compared to the average investor. They also have the capacity and ability to take greater risks. Their investment demands vary depending on individual preferences e.g. equities, property and ﬁxed income.

CAPMARKETSAFRICA: What is key to investing in the Kenyan markets and what skills are needed to maintain good performance?

KENNETH KANIU: Deep knowledge and insights into the local markets dynamics is key and is usually acquired through many years of investing locally. Britam Asset Managers has been in the market for over 15 years and we have a deep understanding of local market drivers.

CAPMARKETSAFRICA: The ongoing cap on bank lending rates continues to dampen credit growth. What is your view on this?

KENNETH KANIU: It is true that before the rate cap the credit growth was at 20 percent year on year and has since dropped to under 5 percent. The rate cap signiﬁcantly reduced the banks’ ability to price risk and they therefore prefer to invest in risk-free government securities as opposed to lending to Small and Medium Enterprises (SMEs), who are the main drivers of economic activity in Kenya.

Both the Central Bank of Kenya and the Treasury have come out to say that the rate cap has failed to achieve its intended target and that is why the Treasury has proposed a complete repeal. In my view, there is need to re-look at the law and come up with a mechanism for banks to price risk and spur credit growth once more.

CAPMARKETSAFRICA: Impact investing and ESG investment are becoming popular globally. Do you feel that your ﬁrm is currently doing enough in the space? Also, do you have much presence in these areas?

KENNETH KANIU: It is true that ESG investing has become a very signiﬁcant part of investment globally. While a lot more can be done locally, we have seen investors begin to give consideration to factors like corporate social responsibility and social impact in their investment decision-making. We are continually looking to increase our focus on investments that have positive environmental and social impact which are hinged on the promise of long-term sustainability.

CAPMARKETSAFRICA: Looking ahead, what strategic plans do you have in place to maximize proﬁtability as well as enhance shareholders’ value? And where do you see BAM ﬁve years from now?

KENNETH KANIU: We are working hard to hit our assets under management target of KES 300 billion. Most importantly, we aim to continue impacting the lives of more people by driving our agenda of savings and investments. We are also keen in diversifying our investment portfolio into alternative assets in order to enhance returns for our customers. To this end, we are increasing our focus on investments in infrastructure, property and private equity.

CAPMARKETSAFRICA: On a personal note, what do you do in your spare time, when not busy managing Britam Asset Managers?

KENNETH KANIU: When I am not working, I spend most of my time with my family as well as playing golf over the weekends.

CAPMARKETSAFRICA: Thank you very much for granting this interview!

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PRIVATIZATION IN ETHIOPIA: SOME LEGAL CONSIDERATIONS AND PROSPECTS

By Tewodros Meheret, Attorney, GeTS Law O ce Ethiopia

With the change of leadership in Ethiopia last year, one of the off shoots was the announcement to revitalize privatization of state-owned enterprises. It was received with mixed feelings locally and it was perceived as an opportunity by many foreign investors. Hitherto, it was a paradox to witness mushrooming of public enterprises on the one hand and privatization on the other concurrently. Privatization gained and lost momentum depending on the priority of the government. It is interesting to note that the oscillation between privatization and expansion of the parastatal sector took place based on the same policy underpinning. Now, what is new is privatization has been made to encroach on sectors and affect enterprises which were favorites of the government.

Considering the direction of the fresh programme, some argue that it is against the national interest while others contend that it is necessary to relieve the economy from foreign exchange crunch and foreign debt. For developing countries like Ethiopia, the most important goal of rivatization is reducing ﬁscal and credit pressures on the national budget.1 With the state of the economy characterized by high budget deﬁcit and high foreign debt, the argument holds water. Yet, it may be inquired whether the course of action is prompted by the change of ideology or that it is a reaction to

the dire economic condition of the country. Rebutting the contention that it is a change of ideology, some insist that with a majority shareholding the government will retain its dominance which will enable it to be in the driver’s seat maintaining its developmental policy.2 The debate seems to be irrelevant as far as the pertinent laws are concerned as the country applied the same law during period it claimed to uphold the free market economy, revolutionary democracy and/or developmental state models.3

Privatization presupposes the belief that private sector enterprises operate more efﬁciently than their public sector counterparts, which belief may relate to a particular sector or the entire economy. The law which directs the privatization programme foresees that economic development can be achieved by encouraging the private sector4 which is the credence underlying privatization in Ethiopia. This has been in existence side by side with the economy policy which favors the public sector. With this paradox and dubious policy direction as set out in the law and policy documents, the privatization policy has been implemented for more than ﬁfteen years before it has lately come to its culmination affecting the giants in the national economy. Obviously, the legal and institutional framework should be put in order to realize the privatization

1. Eshete argues that privatization is often viewed as credit-reducing and budget-relief exercise. Eshete Tadesse, The Impact and Policy Implication of Privatization in Ethiopia, https://www.eeaecon.org/sites/default/ﬁles/publications

2. Gedion G. Jalata, Ethiopia’s Journey to Privatization: Demise to Developmental State? , New business Ethiopia https://newbusinessethiopia.com

3. The difference does seem easily discernible if at all they can be seriously taken as ideological given the fact that the remains the same despite the change in ‘economic’ policy.

4. Privatization of Public Enterprises Proc. No. 146/1998, Preamble

Africa Economy: A Tipping Point | 49

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objectives of the Government. After the announcement made in October, 2018 to invigorate its privatization program, the government established a 12 member advisory council. Though it is a step in the direction of implementing the decision, the advisory council does not fit into the exiting legal and institutional framework. Subsequently, the Ministry of Public Enterprises was restructured as Public Enterprises Holding and Administration Agency which is made accountable to the Ministry of Finance.5 It has a clear mandate to submit proposal to the government on the privatization of public enterprises under its supervision.6 Therefore, the institutional framework is in place with a clear mandate. Though it does not supervise all enterprises wned by the state, the major ones which are in the list of enterprises to be floated for privatization are made under its supervision. In this list we find Sugar Corporation, Ethiopian Airlines and Ethio-Telecom and Ethiopian Shipping and Logistic Services.7 The enterprises were under the supervision of different Ministries and the centralization of supervision makes it easier to make decisions and implement the same.

In addition to the overarching power it has to oversee the privatization of public enterprises, the Ministry has the speciﬁc responsibility to prepare documents needed to privatize public enterprises and facilitate privatization process in collaboration with the relevant government bodies.8 The implementing entity is the agency which is empowered to execute privatization program as per proclamation No. 46/1998 as amended. The proclamation is the pertinent law which provides the legal framework for privatization. No new law or an amendment to the existing ones has been issued lately leaving the Agency to count on the law which has been in force for more than two decades. In other words, the same law will be employed to privatize those giant public enterprises pursuant to the new drive.

“No new law or an amendment to the existing ones has been issued lately leaving the Agency to count on the law which has been in force for more than two decades.”

Accepting that the existing legal framework and institutional set up are more or less responsive, one may wonder why the pace of privatization is not swift. This was the concern expressed by Budget and Finance Standing Committee of the Council of Peoples Representatives.9 The size of

the enterprises up for privatization and the complexity of the sector in which they operate, require preparation which includes revisiting the law governing that particular sector to the extent it is necessary to realize privatization. The telecom sector is a case in point. Communication Service proclamation has been issued which will establishes a regulatory agency for the sector considering that there will be several players in the market. Similarly, sugar Proclamation is in the pipeline which will regulate the sector with many private sector actors. In fact, the reform is not restricted to privatization which can be achieved by transferring shares to private entities. Usually, such reforms may involve not only privatization but also liberalization of some sectors which were monopolized. For instance, the telecom sector which was not only dominated by a state owned service provider but also a monopoly. Not only does the reform involve transferring stakes in the state owned telecom service provider but also opening up the sector to other service providers.10

Currently, the Ministry of Finance is actively involved in the privatization course as can be gathered from the announcements made so far. One can only guess how the two organs apportion the responsibilities in the privatization programme though it is not doubtful that the Agency is the implementing authority under the supervision of the Ministry. The latter made public that the government has issued request for information (RFI) to privatize about ﬁve sugar factories and is making preparation to privatize thio-telecom. It is interesting to observe that the RFI enables potential buyers to express their interests on the reform and privatization progresses process. The reform of the telecommunications sector, the enactment of the Communications Services Proclamation, and a review of the privatization options of Ethio-telecom and opening the sector to competition are the steps that have been taken so far. More is to come with the spreading out of the effort to other enterprises which will be privatized wholly or partly in the near future.

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EGYPTIAN FINANCIAL SECTOR HAS A GOOD STRUCTURE AND BALANCE SHEETS, WITH GOOD GROWTH POTENTIAL, DECENT MARGINS

AMR ABOL-ENEIN, MANAGING DIRECTOR, HEAD OF ASSET MANAGEMENT AND CI ASSET MANAGEMENT

Dubai-based DAMAC Invest’s prop funds in MENAT (MENA + Turkey) region. I have also been exposed to government-owned entities working in both Banque du Caire as GM and Head of Investment and in Central Bank of Egypt as senior investment consultant (Banking reform unit – with the focus on banks’ M&As). I have also been appointed in Egypt’s supreme committee for privatization in a number of economic sectors (including financial institutions, industry, chemicals, and Tourism). I have been also an investment committee head/member and/or board member in a number of investment firms in the fields of private equity (Africa), asset management, Venture Capital.

I am always challenged with beating market returns and have proven a strong track record in beating peers’ returns and benchmarks across all managed asset classes.

please?

AMR ABOL-ENEIN: Joined CI Capital in December 2012 as the managing director and head of asset management of CI Asset management with more than 20 years of previous experience in the field of banking and investment, starting as a treasury analyst in National Societé Generale Bank (now QNB) in 1992 and moved thereafter to Arab Bank in the corporate banking as a corporate credit officer after pursuing Chase Manhattan Credit Course. However, with the emergence of the stock market in Egypt and as I was attracted to this field due to its dynamism and aspirations of growth, I have decided to not only to leverage on my previous background in financial and credit analysis, cash flow modelling and management, derivatives and money management edge, which all acquired and developed through my both treasury and corporate banking hands-on experiences, but also to build on them through pursuing specialized investment-focused studies. I joined Birmingham Business School, UK in 1997 and pursued an on-campus MBA in International Banking and finance with a core focus on Investment Management. I am also a CFA charter holder, CAIA charter holder, and a certified FRM.

Since I returned bank, I have joined and worked in a number of regional and global investment banks including ING Netherland as head of MENA equities, HC (an afﬁliate to Morgan Stanley back then at that time) as head of equity research, and co-managed

CAPMARKETSAFRICA: In general, what is your outlook for the Egyptian ﬁnancial sector – key challenges and opportunities as well as suggestions needed to improve Egypt’s wealth and asset management sector, please?

AMR ABOL-ENEIN: Let ﬁrst look at the CI Asset Management’s Outlook on Financial Sector says:

Banking Sector:

• From a stock market perspective, CIB largely dominates the banking sector representation in Egypt bourse and other banking stocks are too illiquid.

• “The sector has a good structure and balance sheets, with good growth potential, decent margins and a healthy return on assets and equity. The banking indicators are all attractive, and with also low non-performing loans and a high coverage ratio, and still with good growth prospects. We also have a strong and very dynamic Central Bank that adopts best international practices in managing both business and risks and I am always very optimistic on the CBE’s ﬁnancial inclusion and digitalization initiatives.

• From a valuation perspective, the sector’s proﬁtability versus risk equation suggests an attractive proposal, but valuations now aren’t attractive enough for us. For those bank stocks with more appealing valuations, illiquidity is an evident issue that justify being traded at a discount. The banks are good companies, but

2. Gedion G. Jalata, Ethiopia’s Journey to Privatization: Demise to Developmental State? , New business Ethiopia https://newbusinessethiopia.com

3. The difference does seem easily discernible if at all they can be seriously taken as ideological given the fact that the remains the same despite the change in ‘economic’ policy.

4. Privatization of Public Enterprises Proc. No. 146/1998, Preamble

mostly not attractive enough for us as stocks at current market valuations.

• We’ve also started to see negative news flow on banks that can put some pressures on their margins and profitability due to the implementation of taxes on TBs, which would cut in banks’ profits in 2019 at least before having the able to pass it by to depositors and/or be able to change their funds’ utilization mix by growing faster in their loan books.

• Moreover, if there’s a slowdown globally, banks will be hurt – a signiﬁcant part of their fees and commissions comes from funding international trade transactions.

• “Banks are in good shape, but relative to other emerging market banks they’re mostly fairly valued and we see better opportunities in the Egyptian market.”

Non- Banking Financial Sector:

On the other hand, CI Asset Management sees great potential in the leasing and microfinance sector insurance, mortgage finance, consumer finance and forfeiting due to their low penetration rates and huge growth prospects then. We see a double-digit growth on average in these sectors, which is driving market players and new entrants to significantly expand in these sectors. We are also optimistic about the prospects of Egypt’s asset management industry with increased awareness of institutional and pension funds’ of equity markets long term return and hence more allocations’ potentials into the capital markets.

Next, what are the key opportunities in the ﬁnancial sectors?

• Global and domestic easing, expected decline in inﬂation and the interest rates and yield curve going forward will boost the Egyptian equity market.

• Improved macroeconomic picture, overall with accelerated GDP growth rates and more disciplined public ﬁnance would positively reﬂect on equity and capital markets. This includes, among other indicators:

• The removal of subsidies will enhance the Government’s Balance sheet.

• The expected decline of Inﬂation debt/GDP and unemployment rate.

• Growth in healthcare, industry and tourism sectors, in addition to energy sector.

• More focused strategies towards a pronounced improvement in trade balance and BOP.

All of the expected improvements in the macro level as well as we are approaching towards a more accelerated caped cycle with more focus on financial inclusion and sustainable growth will be positively reflected on the financial sector and the overall investment attractiveness of Egypt as an investment destination.

Then, let look at the key global and sector-speciﬁc challenges and these are:

• Uncertainty and volatility which mostly a function of global markets as we see:

• European and U.S. markets appear vulnerable, with corporate earnings likely to show a mixed bag.

• The ups and down in the China-U.S. trade war (including technology cold-war) could have a domino effect across countries and industries.

• Geopolitical risks.

In brief we see global markets aren’t very attractive from a “return vs. risk” perspective and we see Egypt won’t rally when global markets are so uncertain, but could still outperform, thus CI Asset Management is cautious, but still selectively buying in industries that offer deep value and are less vulnerable to global shocks.

In general, we see Egypt could outperform other markets, but that doesn’t necessarily mean positive returns. And from a very speciﬁc perspective, we see the decline in Fees and Commissions in the Asset Management sector as a big challenge for the operating asset managers.

Some of the suggestions needed to Improve Egypt’s Wealth and Asset Management’s sectors are:

- Legislative approvals to introduce a new ﬁnancial product in the Egyptian market:

• Sharia Compliant Sukuk

• IPO Funds, carry trade and Sectorial Funds

• market makers and short selling

• Derivatives: options, and futures

- Changes to the current legislations:

• Removal of the restrictions imposed on Money Market and ﬁxed Income Funds’ sizes

• Assurance of not imposing any Capital Gains Tax to remain competitive on regional and EM space

- Banks to start introducing and supporting Wealth Management divisions

• Easing of the restrictions imposed on subscribing and redeeming mutual funds’ from abroad

• Approving the online subscriptions and redemp tions

• Approving automatic signature

• Approving Online KYCs

This comes of course in addition to a more awareness of institutional clients in Egypt about the importance of external asset managers in delivering superior consistent returns, as well as to have asset managers not competing mostly on the basis of fees but rather on the basis of performance and the value creation to their clients.

CI Capital is a diversified financial services group and Egypt’s leading provider of investment banking, leasing, and microfinance products and services. With it’s headquarter in Cairo and a presence in New York and Dubai, CI Capital caters to a diverse client base that includes global and regional institutions, family offices, large corporates, SMEs, and high-net-worth individuals.

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CAPMARKETSAFRICA: In a more speciﬁc term, what are the biggest challenges and opportunities you see in the corporate ﬁnance sector in Egypt? And in what ways does your corporate banking division assist clients in managing their risk and enhance their revenue?

AMR ABOL-ENEIN: CI Asset Management does not offer corporate ﬁnance services, but this is rather offered through the investment banking arm of CI Capital to both government and private sector clients. However, when it comes to asset management clients, we are concerned with helping our clients determine their returns objectives as well as their risk capacities and tolerance.

CAPMARKETSAFRICA: What do wealthy private investors in Egypt tend to prioritize the most in terms of exposure to risk and their preferred asset classes, please?

AMR ABOL-ENEIN: Unfortunately, Wealth management in Egypt is still an untapped area. Wealthy private investors are still preferring banking products, especially considering the high interest rate environment. CI Asset Management believes that wealthy investors, once they will be offered professional wealth management services where they will be assisted in identifying their risk proﬁle through risk proﬁling systems, will be able to diversify their wealth to more risky asset classes. CI Capital is working with two Egyptian banks to expand their wealth management divisions, which are relatively under- developed, in order to create more savings and investment products for high net worth individuals. This also comes in line with the development of new products in the market to broaden the products’ platforms offered to HNWIs. We are also optimistic here as a number of Egyptian banks are currently working hard to develop this area of business and are putting some good weight in its development.

CAPMARKETSAFRICA: How has technology changed the wealth management industry in Egypt — for example, ﬁrms’ use of social media to reach current and prospective clients?

AMR ABOL-ENEIN: Technology has enhanced the investment knowledge in the Egyptian market thus not to its full potentials. As discussed above, technology may play a greater role once online KYC and opening of bank accounts and subscriptions and redemptions of mutual funds investment certiﬁcate are approved. As for CI Asset Management’s use of technology in marketing the company and its outperformance, CI asset Management is constantly updating its website and company’s accounts on social media with the Funds’ performances and international awards won in addition to press releases both on social media, news wires, and in papers. Software programs that help managers in

their investment decisions (e.g. Asset allocation, portfolios’ optimizations, etc.) are also amongst merits of technology we beneﬁt and will continue to beneﬁt from.

CAPMARKETSAFRICA: On a ﬁnal note, what is your outlook for Egypt in 2019 and beyond, given the current fuzzy global economic outlook as a result of slow growth in US-China trade war and protectionist policies, please?

AMR ABOL-ENEIN: We are optimistic about the progress of Egypt’s economic reform program and its prospects. Egypt managed to surpass a few bottlenecks and structural reforms in its public and monetary finance. Egypt’s reform story is one of the most profound, bold and successful stories in the last ten years. Accelerated GDP growth rates, floatation of the local currency, subsidy cuts, controlling inflation and unemployment rates as well as a more disciplined public finance are among the positive indicators we see now. This comes with a noticeable improvement in Egypt’s infrastructure, energy and tourism sectors. We are also very encouraged by Egypt’s GDP growth rates now and the acceleration in its pace. We see the current valuation level attractive to us continue buying in the market. EGX30 is trading at significant discounts (30%- 40%) to both frontier and EMs’ averages, and we see some 25% upside adjustment purely on multiple expansion (leave alone future and performance of corporates growth rates vs. regional and EMs’ peers).

CAPMARKETSAFRICA: Looking ahead, what strategic plans do you have in place to maximize proﬁtability as well as enhance shareholders’ value? And where do you see CI CAPITAL in ﬁve years from now, please?

AMR ABOL-ENEIN: We will continue to maximize our market positioning in Egypt’s AM business as we leverage on our superior performance and new products initiatives. Moreover, we are also keeping an eye on both regional and African continent space, which both represent a logic growth dimension for CIAM in both MT and LT horizons.

CAPMARKETSAFRICA: To bring the interview to an end, what do you do in your spare time, when not busy managing CI CAPITAL?

AMR ABOL-ENEIN: I am seizing any spare time in spending more time with both my family and friends, and in watching old movies and listening to old music & songs. I also enjoy watching football matches of different local and Europe’s leagues, and that eats up a big portion of my spare time.

CAPMARKETSAFRICA: Thank you very much for granting this interview!

THE WEALTH MANAGEMENT INDUSTRY HAS BECOME MORE SOPHISTICATED, DIGITIZED AND MORE INFORMATION DRIVEN

CAPMARKETSAFRICA: Firstly, let’s talk about you. Please tell our readers more about your background and what motivated your choice of career path?

OLADELE SOTUBO: I graduated about 26 years ago from Lagos State University and got my first job in 1995. The dream of most fresh graduate then was to work in a bank. However, for me, rather than a bank, I got my first job in a Stock Brokerage firm and that set my path in the Capital Market. With sound mentoring, self-discipline, Great Institutional support in organisations that I have worked for and above all divine Grace from the Almighty God, I am where I am today.

CAPMARKETSAFRICA: Let’s ﬁnd out a little more about Stanbic IBTC Asset Management Nigeria. What led to the creation of SIAML? What does SIAML do? Which areas of ﬁnancial services is it engaged in? What category of clientele and any major recent or upcoming trans-actions?

OLADELE SOTUBO: SIAML is licensed as a Fund/Portfolio Manager and Investment Adviser and offers its numerous clients’ products and services ranging from traditional asset classes (i.e. equities, ﬁxed income securities, and mutual funds) to alternative investment options such as unlisted equities and private equity opportunities. SIAML also offers ﬁnancial advisory to a wide range of clients and make recommendations to help them plan towards meeting their investment goals and objectives

CAPMARKETSAFRICA: Now, let’s talk on broader issues but still on ﬁnance. As Nigeria’s sociopolitical climate has changed over the past several decades, what are some ways that the wealth management industry in the country has changed as well?.

OLADELE SOTUBO: The wealth management industry has become more sophisticated, digitized and more information driven. Investments options available to clients are increasing away from the traditional money market and equities to structured investment vehicles, derivatives, etc. Clients are becoming more aware and are making more demands on their portfolio managers. Mode of reporting has changed over the years, looking for one view of their portfolios and reporting, increasing for a one relationship management point which is leading to the

Africa Economy: A Tipping Point | 54

advent of family ofﬁces in some instance depending on the afﬂuence of the customer

CAPMARKETSAFRICA: What do wealthy private investors in Nigeria tend to prioritize the most in terms of exposure to risk and their preferred asset classes, please?

OLADELE SOTUBO: From interactions, we have observed that investors as a matter of priority ﬁrst check the risk involved in any investment option as risk appetite varies, this is then followed by the yield (interest income) involved for them to fully dimension the risk Vs reward conversation. After which, tenor and the asset class might be the last question to ask.

CAPMARKETSAFRICA: Impact investing and ESG investment are becoming popular globally. Do you feel that your ﬁrms is currently doing enough in the space, please? And also, do you have much presence in these areas?

OLADELE SOTUBO: Impact investing and ESG investment is gaining prominence in the Nigerian market and other developing countries. The Federal Government of Nigeria (“FGN”) debuted a Green Bond in December 2017 and recently issued a series II Green Bond this year.

OLADELE SOTUBO, CHIEF EXECUTIVE, STANBIC IBTC ASSET MANAGEMENT NIGERIA

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The FGN has also issued two Shari’ah compliant bonds speciﬁcally to fund the development of roads across the 6 Geo- political zones of the country. The Corporate sector is also embracing the trend with the recent issuance of two Green Bonds. Stanbic IBTC served as the Joint Issuing House to the issuance of the second FGN Green Bond and one of the Corporate Green Bonds. We also manage portfolios that have invested in these Bonds and other impact-driven investments. We collaborate with our clients to manage Foundations and Endowment portfolios. In recent times, we have included Environmental, Social and Governance (“ESG”) requirements as one of the key indicators to assess when evaluating opportunities from various promoters. SIAML just concluded the Initial public offering (“IPO”) of the Stanbic IBTC Shari’ah Fixed Income Fund whose primary objective is to invest in asset-backed instruments and Shari’ah compliant. We are committed to investing our clients' funds in opportunities that would not only generate sustainable returns but also result in a positive impact on society and our environment.

CAPMARKETSAFRICA: Disruptive social, technological, economic, environmental, political and regulatory changes are megatrends reshaping the competitive environment for ﬁrms and the markets they operate. How are you leveraging the positive impacts and mitigating against the negative inﬂuences of these megatrends, please?

OLADELE SOTUBO: The operating environment for financial services providers is always evolving. As such, SIAML adopts an agile approach in creating value for all its stakeholders as well as maintaining its position as the preferred Fund Manager in Nigeria. There have been significant advancements with data analytics, artificial intelligence, and technology in the last decade. Consequently, customers are now on-boarded without visiting Brick and Mortar offices or filling any hardcopy form. Customers are also seeking products that are aligned to their lifestyle needs. Furthermore, the rise in terrorism, money laundering and misappropriation of public funds have culminated in stricter regulatory requirements for financial services firm. SIAML continuously surveys its ecosystem to maximize the positive impacts of these developments.

Recently, Stanbic IBTC collaborated with Co-Creation Hub to pilot the Stanbic IBTC innova tion challenge that received over 150 proposals from young and established indigenous technology companies. Stanbic IBTC funded the eventual winner with $15,000 in the development of a digital solution. SIAML’s array of Mutual Funds also provides clients a wide range of options to select from irrespective of the economic cycle. We continue to deploy technology and data analytics to enhance the experience of our customers at every touchpoint.

As the foremost end-to-end financial services provider in Nigeria, our customers have access to other financial services products such as Insurance, Wills, Banking, Stockbroking amongst others. These and many more have endeared us to the public irrespective of the negative influences of some of these trends

OLADELE SOTUBO: Our guiding principle is to do everything we do following the set rules and regulations. Our values as an organisation drives and guides how we operate. Now and always, we will continue to innovate both in our process and products with a focus on delivering value to all stakeholders.

CAPMARKETSAFRICA: On a general note, Nigeria’s demographics are astounding. Presently, about 190 million people are living in Nigeria and this is expected to increase to c400 million by 2050, the majority of whom will be young people. This is two-sided coin opportunities and threats. Do you have any suggestions on what governments and policymakers should be doing to manage the threats and capitalize on the opportunities?

OLADELE SOTUBO: They should simply keep creating an enabling environment for all to express their capabilities.

CAPMARKETSAFRICA: To bring the interview to an end, what do you do in your spare time, when not busy managing SIAML?

OLADELE SOTUBO: Very simple, that is the time for my family.

CAPMARKETSAFRICA: Thank you very much for granting this interview!

Itntroduction

DEVELOPMENT OF DOMESTIC FINANCIAL INSTITUTIONS FOR INCLUSIVE GROWTH IN AFRICA

By Ibrahim Abdullahi Zeidy, Chief Executive O cer of the COMESA Monetary Institute

Domestic financial markets can play a critical role in promoting inclusive growth. The savingsinvestment-growth link remains central to the question of financial sector development and the ability of financial institutions to fully play their intermediary role. Putting in place well-functioning domestic financial infrastructure is, therefore, crucial for catalyzing domestic and foreign resources for growth and investment.

Development of domestic financial institutions to ensure inclusive growth has, however, remained a global challenge with as much as 54% of adults worldwide being financially excluded. Sub-Saharan Africa is the region with the lowest share of banked households¹. This worrisome level of access to finance in Africa poses a serious challenge to inclusive growth. This necessitates pragmatic efforts by policymakers to remove barriers for the development of domestic financial markets in order to enhance inclusive growth.

Given this context, the objective of this paper is to examine the efforts so far in Africa in developing domestic ﬁnancial markets for the purpose of achieving inclusive growth, the challenges therein; the need for Regional Financial Integration (RFI) and the way forward.

Theoretical and empirical evidence on the causal relationship between domestic ﬁnancial development and inclusive growth

Economic theory suggests that finance shapes the distribution of economic opportunities. The financial system affects the degree to which a person’s economic opportunities are defined. It influences who can launch a new business venture and who cannot, who can acquire education and who cannot, who can live in a neighborhood that fosters the cognitive and non-cognitive development of their children and who cannot, who can pursue one’s economic dreams and who cannot.

A more competitive, better functioning ﬁnancial system exerts a disproportionately positive impact on relatively low-income families. According to the extent that the ﬁnancial system performs these functions well, economies tend to

grow correspondingly faster. For example, when banks screen borrowers effectively and identify firms with the most promising prospects, this is a first step in boosting productivity growth. When financial markets and institutions mobilize savings from disparate households to invest in these promising projects, this represents a second crucial step in fostering economic growth.

When financial institutions monitor the use of investments after financing firms and scrutinize their managerial performance, this is an additional, essential ingredient in boosting the operational efficiency of corporations, reducing waste and fraud, and spurring economic inclusivity. There is a robust positive relationship between financial development and both poverty alleviation and reduction in income inequality. It is not just that finance accelerates economic growth, which trickles down to the poor; rather, finance exerts a disproportionately positive influence on lowerincome households. Building on the finance and poverty connection, there is a direct link between finance and human welfare. When policy reforms foster the development of the financial system, financial services improve, accelerating economic growth, which ultimately leads to ending extreme poverty and boosting shared prosperity.

Research has established the robust positive impact of financial sector deepening on economic development in many countries. There is a wellestablished body of empirical evidence which shows that countries with higher levels of credit to the private sector relative to GDP experienced higher average annual real GDP per capita growth. Recent research has also pointed to a significant indirect impact of financial deepening on poverty alleviation. By changing the structure of the economy and allowing more entry into the labour market by previously unemployed or underemployed segments of the population, finance helps reduce income inequality and poverty, as evidence from Thailand and the US² . A study³ employed the trivariate causality test to examine the dynamic relationship between financial development, growth, and poverty in South Africa. The study reported that financial development and economic growth granger cause poverty reduction. The paper also found economic growth to granger cause financial development and, in the process, lead to poverty reduction in South Africa and a similar result was found on Ghana4

1. U. Kama, M. Adigan: “Financial Inclusion

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Determinants of Performance of the Financial System to ensure that they contribute to inclusive growth

The Level of Financial Intermediation: This has to do with the depth of the financial system or its size as measured by several indices such as the ratio of the financial system’s assets to gross domestic product; ratio of financial system’s liabilities to gross domestic product, claims of the financial intermediaries on the private sector, relative to the gross domestic product; and the ratio of bank credit to the private sector relative to total credit in the system.

The Efficiency of Financial Intermediation: The efficiency of financial intermediation has to do with the quality of financial services. Such quality varies depending on several variables. Where workers in the financial system (e.g. bank-staff) lack requisite skills-set, which may lead to poor analysis of projects; inappropriate oversight of borrowers, and sub-optimal levels of financing and inefficient capital allocation.

The Composition of the Financial Intermediaries: In the financial structure, there are financial intermediaries known as Non-Bank Financial Intermediaries. This category includes, Pension Funds, Insurance Companies, Mortgage Finance Institutions, Mutual funds, Unit Trusts, Stock Exchange etc. when the banks are unable to give long-term finance, (if they have only mobilized short-term funds) the Pension Funds and Insurance Companies can make such long-term funds available in a well-diversified financial system.

The Features of the Financial Sector in Sub-Saharan African Countries

As a result of the reform program in the last two decades, the financial system in most Sub-Saharan African countries has transformed despite being highly dominated by the banking system. Even though there are many other institutions, including finance and leasing companies, they are often linked to banks through ownership. The financial system was also becoming more stable, mostly due to addressing loan losses in state-owned banks, increasing provisioning and increase in minimum capital. The NPL ratio in many SubSaharan African Countries reduced in recent years while the risk-weighted capital/asset ratio rose. The resilience of the banking system in most countries to the recent global financial crisis reflects the improved personnel and institutional capacity, including risk management and loan procedures, as well as the stronger regulation and

supervision of the Central Banks as well as limited connections with the international financial system. There has also been progressed in many countries in the financial infrastructure, most notably through the establishment of the Credit Reference Bureau and improvements in the payments system. In payments, the RTGS payments system became operational in many countries. This reduces the problems of default in payments that have proved very costly in some countries. However, there is evidence of low intermediation efficiency, despite high savings mobilization capacity of the banking system in most countries. The explanations are numerous.

Government‘s financing needs crowd out credit to the private sector, reflecting the (perceived) lower risk of government securities. Credit is concentrated among a few borrowers, with most of the enterprise population being left out. There is also little competition from outside the banking system, consistent with the bank-based nature of the financial system in most countries. There is very limited physical outreach of the banking sector. Microfinance in most countries has remained limited in size, with only a small portion of the potential market being served. Additionally, Microfinance institutions are restricted by the lack of a proper regulatory framework and the prohibition to take deposits in some countries. As well, non-bank financial intermediaries and securities markets are less developed.

Given the importance of SMEs in creating employment, the lack of credit supporting their activity in Sub-Saharan African Countries financial systems is a major drawback for development. International financial indicators show that in Sub-Saharan African countries’ businesses, in general, are disadvantaged through less access to finance than competitors in other regions.

In an effort to increase the level of participation of financial institutions to finance small and medium enterprises, the African Development Bank (AfDB), is implementing a number of initiatives designed to encourage the participation of financial institutions. One notable initiative is the African Guarantee Fund (AGF). The AGF is owned by AfDB, AECID and DANIDA with contributions of US$10 million, US$20 million and US$20 million, respectively5 . Over the next 3 to 5 years, this share capital is expected to increase to US$ 500 million, giving the institution capacity to guarantee up to US$2 billion worth of SME loans. The additional capital will be coming from bilateral donors, private investors as well as from DFIs.

2. Giné, Xavier, and Robert M. Townsend. 2004. “Evaluation of Financial Liberalization: A General Equilibrium Model with Constrained Occupation Choice.” Journal of Development Economics 74, 269–307

3. Odhiambo M. N (2009): “Finance, Growth and Poverty Nexus in South Africa”. A Dynamic Causality Linkage. The Journal of Socio-economics, 38 pp.380-325. 4. Quartey P. (2005): Financial Sector Development Savings, Mobilization and Poverty Reduction in Ghana” UNU-WIDER Research paper No.

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Innovations in financial system development to ensure inclusive growth in African countries. Africa is innovating in new and exciting ways. The best example of this is Africa’s mobile revolution. Kenya is the global example of how cellular technology can be leveraged to offer financial services at great scale and low cost. The M-PESA (M for “mobile” and PESA, Swahili word for “cash money”) otherwise “mobile cash money” mobile money service in Kenya stands out as a model (for other African nations) of how consumer access to financial services can be revolutionised through technology. The service provides the average Kenyan without a bank account the opportunity among others to transfer cash; purchase airtime credit; pay bills, and purchase goods and services without the use of cash by simply transferring value from one individual to another through float balance on the phone. With a significant portion of the Kenyan population depending on money transfer from the employed, the introduction of M-PESA provided a cheaper, safer, more efficient means of transferring money to their dependents in the remote villages6 . Even the business population with traditional banking accounts adopted the channel to pay wages, bills, salaries and pay for services provided in the remote part of the country. The populace was able to overcome the challenges of illiteracy, documentation bureaucracy, minimum balance requirement, and limited traditional banking distribution channels all of which limited the ability of the majority to open the conventional banking accounts.

“The

service provides the average Kenyan without a bank account the opportunity among others to transfer cash; purchase airtime credit; pay bills, and purchase goods and services without the use of cash…”

The factors which are peculiar for the success of mobile in Kenya include wide usage of mobile phones which provided a ready potential market for mobile money service, the creation of the right government regulatory environment; the liberalization of the telecom sector, and prompt granting of mobile money transfer service license among others. The government of Kenya ensured the creation of the right environment for innovation while at the same time ensuring the stability of the financial system. Many African countries have also in recent times stepped-up the campaign for banks to invest heavily in other low-cost branchless channels such as ATMs, point-of-sale (POS) and mobile banking, etc. Existing challenges for technology-based financial services in many African countries including among others, stringent regulations that govern the activities of technology-based financial services, limited interoperability; and low level of financial literacy and income among others.

Fostering and improving the microfinance institutions (MFIs) in Africa is also a top priority across the continent. Ministers of Finance and Economic Development of member countries made recommendations to the African Union Commission (AUC) in 2009 to consider minimum standards and policies concerning microfinance. Currently, microfinance specific legislation and regulations exist in almost all African countries.

“Many

African countries have stepped-up the campaign for banks to invest heavily in other low-cost branchless channels such as ATMs’ point-of-sale (POS) and mobile banking..”

Existing challenges for Microfinance development in many African countries including among other high costs of outreach, high transaction costs, Know Your Customer (KYC) and security challenges and insufficient resources, which limit MFIs their capacity to purchase world-class banking solutions that can help them fulfill their requirements and support their growth targets.

How Regional Financial Integration can support growth, development and poverty reduction in Africa. African countries have been strengthening and modernizing their financial systems as part of their domestic reform programmes, recognizing that strong financial systems will deliver dividends in terms of growth and poverty reduction. However, despite these efforts, African financial systems lack depth and deliver only a limited range of products, at a relatively high cost, with the result that the expected benefits have not materialized to the full. Many studies have concluded that the disappointing outcome in Africa reflects, inter-alia, the small scale of the operations of most African financial system, and that this deficiency could be corrected through promoting regional financial integration (RFI).

RFI’s contribution to growth comes through four different channels; (i) it provides further powerful stimulus for domestic financial reforms; (ii) it increases the scale of operations and cooperation, thereby increasing the system’s efficiency and productivity; (iii) it induces foreign direct investment (FDI) inflows and (iv) it enables the African systems to grow into regional and ultimately global players in financial markets. A major new circumstance favouring RFI is the renewed, and credible, efforts towards fostering African Continental Free Trade Area (ACFTA). Increased Intra-Africa trade requires a higher level of financing and increased access to financial services and products, which may be more efficiently provided by regional institutions, services, and products. The expected progress in the implementation of ACFTA will no doubt increase the demand for financial services and may, thus, induce a demand-led regional Financial integration within Africa.

5. African Development Bank (2012) “African Guarantee Fund for Small and Medium Sized Enterprises Information Memorandum, Tunis 6. Ngugi Benjamin and Pelowski Matthew (2010): “M-PESA: Case Study of the Critical Early Adopter’s Role in the Rapid Adoption of Mobile Money Banking in Kenya”. Africa Economy: A Tipping Point | 58

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Proposed Solutions to Establish Well Functioning and Inclusive Financial Markets

a) Address regulatory bottlenecks and allow mobile phone services to thrive;

b) Taking a strategic approach by developing a national ﬁnancial inclusion strategy which brings together diverse stakeholders, including ﬁnancial regulators, telecommunication, education ministry, etc.

c) Paying attention to consumer protection and ﬁnancial capacity to promote responsible and sustainable ﬁnancial services;

d) Provision by governments, development banks, and ﬁnancial institutions partial loan guarantees to commercial banks that lend to SMEs. This approach would be particularly useful in sectors such as agriculture, for which credit is difﬁcult to access due to lack of collateral and important climate risk.

e) Put in place credit reference bureaus and rating agencies responsible for providing banks with information on their clients, this would help reduce risk thereby lowering interest rates and facilitating businesses‘ access to credit;

f) Provision of ﬁnancial (and managerial) literacy training, particularly for micro-enterprises that would otherwise not have the ability to present a viable business plan to secure a loan;

g) It is necessary for MFIs to be integrated in the formal ﬁnancial system in order to scaleup their activities while retaining their com parative advantage in their relatively lower interest rates. Several MFIs have successfully made the transition to formal ﬁnancial institutions in a few African countries.

h) Provide microﬁnance institutions with hedging instruments as well as risk management and mitigation tools. The goal is to offset currency risks faced by MFIs (which might borrow in

i) Given the importance of ﬁnancial services to the economy and the reality that SMEs are not only less likely to access credit and to pay more for it, but it is also necessary for policymakers to design innovative ﬁnancial products geared towards SMEs.

Conclusion

Innovation and a wide spread of public and private activities and partnerships can contribute significantly to the development of African financial markets. However, access to finance is still a challenge for most Africans. Overcoming this bottleneck is critical if Africa is to increase its investment rate and its growth potential, as financial intermediation is the key to channeling resources into productive activities. Making African financial markets work for investment and development will require significant efforts aimed at among other things, creating and maintaining a stable macro-financial environment; establishing an incentive framework and a business climate supportive of entrepreneurship and private sector development; strengthening legal and regulatory environment; diversifying the supply of financial products and resources; regionalizing financial markets through legal harmonization and crosslisting at regional level and fostering an all-out national training effort in managerial and technical skills related to financial operations and use of proper accounting procedures and adequate auditing and financial information dissemination.

“African countries have been strengthening and modernizing their financial systems and will deliver dividends in terms of

SOUTH AFRICA’S Q3 2019 MACRO-ECONOMICS

OUTLOOK 2019-2025: SOUTH AFRICA MARKETS, RAND FOLLOW GLOBAL, IGNORES GDP WHICH STUTTERS ON STRUCTURAL (REGULATORY) IMPEDIMENTS TO GROWTH

By Annabel Bishop, Group Economist, Investec Bank, South Africa

With once again showing a lower real GDP outturn in Q1 (-3.2% qqsaa for Q1.19), South Africa’s economic growth outlook for the rest of the year has dimmed again, and consensus for 2019 now ranges between 0.6% y/y to 0.8% y/y, from closer to 1.5% y/y at the start of the year. Such persistent mild growth (2018 0.8% y/y) does not necessarily absorb all incoming labour market entrants, and risks the unemployment rate ticking up towards 30%, if it persists. The IMF recently concluded “South Africa’s subdued economic growth could be reignited if the pace of structural reform implementation accelerates. Robust actions are needed to reduce the fiscal deficit and reverse the increase in public debt. The government has a renewed opportunity to press ahead with policies to further strengthen governance, encourage competition, increase labour market flexibility, and, more generally, reduce the cost of doing busi ness.” With regulatory blockages, specifically the ease of doing business hampered by an onerous regulatory burden that is suppressing economic activity, government cannot move fast enough to unlock these impediments to economic growth, marked reindustrialisation and job creation. Such structural reforms are urgently needed to boost confidence and so production and output, with economic growth unlikely to lift sustainably to 3.0% y/y in the absence of this. The IMF additionally warns “(a)mid challenging global economic conditions, (SA’s) growth outlook will depend critically on the pace of implementation of reforms that address long- standing structural constraints. If reform implementation accelerates sufficiently to lift business confidence and jump-start private

investment, growth would be reignited. However, if reforms are delayed, investment would fail to pick up, economic growth would remain weak in the medium term, and per-capita income would continue to decline.”

President Ramaphosa recently identiﬁed the need to “reimagine our industrial strategy, to unleash private investment and energise the state to boost economic inclusion. It requires the State to effectively play its role as … a regulator that sets rules that create equitable opportunities for all players ….” However, the South African economy can no longer-afford to wait for the longer-term adjust ments to improve its ease of doing business.

With South Africa achieving little in reducing unemployment over the past ten years on a sustainable basis, household are constrained financially, and household expenditure growth in real terms is weak, resulting in low GDP growth, as household consumption expenditure accounts for two thirds of GDP. Indeed, demand is weak in South Africa, and is also influencing inflation outcomes, with CPI inflation modest at 4.5% y/y, well below its historic average since 2009 of 5.4% y/y. With services indeed accounting for over 70% of the economy, up from 62% in 1993, a heady deindustrialisation trend has occurred in the SA’s economy, while the economy has also matured. Reindustrialisation of SA will do much to boost economic growth and job creation in South Africa, while SA’s mature, sophisticated services sector can be leveraged to make this happen if, and likely only if, government severely reduces its regulatory

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burden placed on business activity, particularly in the manufacturing and mining sectors. Demand is weak in South Africa, with high administered price inﬂation of 8.2% y/y severely eating into disposable incomes and so weakening household consumption expenditure and economic growth.

CPI inflation in SA excluding administered prices is 3.7% y/y, evidencing the weakness of demand side price pressures in SA. Households have seen the pace of growth in debt rise, to 6.5% y/y from around 3.5% y/y in early 2017 as they have increasingly resorted to debt in a constrained environment (household debt has reached 72.5% of disposable income from 71.3% in 2017). Growth in disposable income has slowed materially over this period, from 11.3% y/y at the beginning of 2017, to 4.0% y/y currently, while compensation of employees has seen growth falter too, down to 4.3% y/y from around 7.0% y/y at the beginning of 2017, with the historic average since 1994 of around 10% y/y. Indeed, even in real terms, disposable income growth has slowed, to 0.8% qqsaa in Q1.19, from around 3.0% qqsaa in Q1.17. Households’ net wealth improved in Q1.19, to 366% of disposable income, from 356% of disposable income in Q4.18 as equity prices improved, although debt did increase. Household savings as a % of disposable income is negative, while the cost of servicing debt as a percentage of disposable income remained at 9.3% in Q1.19, with the SARB cutting interest rates at the MPC meeting on 18th July. The SARB (South African Reserve Bank) shows a forecast for CPI inflation of 4.5% y/y in 2020 and that “(t)he overall risks to the inflation outlook are assessed to be more or less evenly balanced.” The SARB has also warned that the “current challenges facing the economy are primarily structural in nature and cannot be resolved by monetary policy alone.” With political pressure escalating and disruptive in SA, the recent reemergence of threats to SARB independence has been damaging, causing marked rand weakness. Globally, concerns over economic growth persist, and monetary policy has become dovish, resulting in the US expected to cut its interest rates by 50bp this year, likely resulting in a weaker US dollar and underpinning the rand.

The rand, and other emerging markets, have beneﬁtted from ﬁnancial market expectations that the US will cut its interest rates this year by 50bp, while expectations that the ECB could ease policy are rising, and SA is likely to join the dovish direction. The rand is likely to continue to gain from percep tions, and particularly the occurrence, of global monetary policy easing. We have revised our forecast for world GDP growth down again, to 2.6% y/y for 2019, versus the forecast we made in Q2.19 of 2.9% y/y in line with the World Bank which highlights that “(g)lobal growth has continued to weaken and momentum remains fragile. … Downside risks to growth predominate, including rising trade barriers, a build-up of government debt, and deeper-than expected slowdowns in several major economies.” “U.S. growth is expected to slow to 2.5 percent in 2019 and

further decelerate to 1.7 percent in 2020 and 1.6 percent in 2021, as the effects of recent fiscal stimulus wane.” While the rand could see further strength this year, this may be more likely to be sustained in the last quarter, as global financial markets tend to be less risk averse in that period (the last and first quarters of the year), while the third quarter tends be a quarter in which financial markets often experience risk-off. Longer-term the rand is expected to return to its purchasing power parity valuation (in the expected case), absent a further escalation in trade tensions between the US and China, and absent also a Moody’s credit rating downgrade and a prolonged global financial markets risk-off environment.

“South Africa’s subdued economic growth could be reignited if the pace of structural reform implementation accelerates. Robust actions are needed to reduce the fiscal deficit and reverse the increase in public debt.”

Contributor’s Proﬁle

Annabel Bishop joined Investec in 2001, and has worked in the macroeconomic, risk, ﬁnancial market and econometric, among others, ﬁelds for around 25 years. Annabel is the holder of the Sake/Beeld Economist of the Year title for 2010 and has won numerous monthly Reuters Econometer awards, and various Focus Economics (Economic Forecasts from the World’s Leading Economists) categories for correctly forecasting a range of economic variables. She has authored a wide range of in-house and external articles, published both abroad and in South Africa. She has also lectured at Gibbs, the University of Preto ria, Wits, UJ and other academic institutions, and has presented at various national and international conferences.

INTO AFRICA

ZAMBIA HAS UNTAPPED INVESTMENT OPPORTUNITIES IN FINANCIAL SECTORS, RENEWABLE

ENERGY, AGRI-PROCESSING AND MANUFACTURING

CAPMARKETSAFRICA: Thanks for granting this interview. Please, could you tell our readers more about your background and what motivated your choice of career path, please?

CEASER SIWALE: I was born in Zambia and grew up in various parts of the world namely Botswana, Malta, Italy, the United Kingdom and parts of North America. I attended University in the United Kingdom and graduated with a degree in Economics. I decided to come back to Zambia because I saw an opportunity to fill in the gap in the market that foreigners saw potential in and pursued. At that time Zambian participation in businesses was low. In Zambia I also secured a professional qualification as a Fellow Certified Chartered Accountant.

The passion to pursue a career in financial securities began when I was in England. I had an experience on the London Underground. Whilst on the train, I read a headline that stated that a bank [Barrings] had been acquired for £1.00. I found this fascinating. Having read that article myself, I got more involved in learning more about this sector. When I returned to Zambia I firstly worked for Deloitte and Touché (“Deloitte”) as an auditor. After a short stay at Deloitte, I decided I wanted to pursue something more forward looking rather than a career based on certification of the historical financial performance of a business. To my advantage, I met Bruce Bouchard who was then the Chief Executive Officer (“CEO”) of Pangaea Securities, who offered me a job as a senior analyst. A few years down the line I was appointed the CEO of Pangaea

CAPMARKETSAFRICA: Let’s ﬁnd out a little more about PANGAEA SECURTIES ZAMBIA. What led to the creation of PANGAEA? What does PANGAEA do? Which areas of ﬁnancial services is it engaged in? What category of clientele and any major recent or upcoming trans-actions?

CEASER SIWALE: Pangaea was formed in 1994. The founder of Pangaea, Eric Pastel, was involved in the creation of Zambia’s capital market and offered brokerage services in the country from that time. In 1998 Pangaea merged with EMI Securities, an investment banking and ﬁnancial services group also based in Zambia. The combined company became known as Pangaea/EMI Securities. In 2008, the shareholders behind Pangaea/EMI sold the business to Moscow based Renaissance Capital [RenCap]. The ﬁrm was renamed Pangaea Renaissance Securities. In 2012 I led a management buy-out of Pangaea Securities which is now wholly owned. That being said, it wasn’t an easy journey, the team worked through various chal lenges that required organisational restructuring that led us to where we are today.

Pangaea Securities deals in brokerage, corporate ﬁnance transactions and has a strong investment banking component that focuses on ﬁnancial advisory services in debt and equity capital markets, as well as mergers and acquisitions. Pangaea has strategic international and local partnerships that puts it in a unique position to deliver clientfocused solutions. It has access to the largest pool of international fund managers seeking investment opportunities in Zambia and the broader SADC region.

CEASER SIWALE, CEO, PANGAEA SECURITIES ZAMBIA

EXCLUSIVE INTERVIEW INTO AFRICA

Recent corporate ﬁnance transactions that Pangaea has concluded are:

• disposal by Copperbelt Energy Corporation PLC (“CEC”) of its 50% shareholding in CEC-Liquid Limited, Zambia’s leading broadband wholesaler;

• USD74mn conversion of mezzanine debt into CEC ordinary shares; and

• USD65mn investment into Zambeef Products PLC by CDC Group Plc.

“Pangaea Securities deals in brokerage, corporate finance transactions and has a strong investment banking component that focuses on financial advisory services in debt and equity capital markets as well as mergers and acquisitions.”

CAPMARKETSAFRICA: Looking ahead, what strategic plans do you have in place to maximise proﬁtability as well as enhance shareholders’ value? And where do you see PANGAEA in ﬁve years from now, please?

CEASER SIWALE: Pangaea has evolved over the years from providing capital market services to a full range of other products. The business has always been entrepreneurial in nature and always seeking bespoke solutions for clients. We have always considered ourselves to be ahead of the local market and in touch with developments in the more advanced markets. Our strategy for the coming years will really be to incorporate more ﬁnancial technology into our business and increasingly focus on mid-tier Zambian businesses.

We are already the only brokerage firm in Zambia with a bespoke trading software that is integrated into the Lusaka Securities Exchange (“LuSE”). In late 2018, we started developing our own mobile trading application, which can be utilized for primary market transactions; and secondary market trading. Our intentions are to enable the application to trade both equities and debt instruments over the LuSE and Bank of Zambia. We anticipate that the utilization of the application can be launched before the end of 2019. Pangaea is also the only financial advisory firm in Zambia that utilizes the Bloomberg Terminal for its advisory activities. Although a standard tool in the global financial markets, Bloomberg is not common in Zambia even with the commercial banks. In order to leverage off the accessibility that Bloomberg provides, we have developed a bespoke advisory application. The application, Dilsence, allows for the investment banking team to onboard clients, upload the various stages of the transactions according to the firm’s

policies and connect the transactions to the appropriate potential providers of capital; and all in real time.

Finally Pangaea is committed to exploring opportunities in the SADC region with a bias towards medium sized businesses that are scalable.

CAPMARKETSAFRICA: In general, what is your outlook for the Zambian ﬁnancial sector - key challenges and opportunities as well as suggestions needed to improve Zambian wealth and asset management sector, please?

CEASER SIWALE: The key challenges affecting the Zambian financial sector centre around the deepening of access to different forms of capital by the investing public. At present, Zambia’s financial services market is heavily dependent on borrowing from commercial banks, who in turn have limitations on the form of lending they can do. The market has considerable scope for new entrants to provide asset management services; access to private equity/debt financing; amongst others.

CAPMARKETSAFRICA: In a more speciﬁc term, what are the biggest challenges and opportunities you see in the corporate banking sector in Zambia? And in what ways does your corporate banking division assist clients in managing their risk and enhance their revenue?

CEASER SIWALE: The immediate challenge is the tightening of liquidity, higher interest rates, introduction of IFRS 9 and a volatile fiscal environment all of which has led to a shift of capital from traditional lending activities by the banks and capital market trading by the asset managers to low risk assets such as government treasury bills and bonds. Hence, companies have been priced out of the market therefore causing constraints in accessing finance. Furthermore, due to a lack of alternative sources of finance, corporate banks cannot offer flexible solutions to businesses. This has impacted growth prospects that need different forms of funding in the short to medium-term.

“The market has considerable scope for new entrants to provide asset management services access to private equity/debt financing; amongst other.”

We work toward providing innovative solutions for our clients that take into account the different market dynamics, limiting factors and opportunities. Our expertise in understanding the market and having a global network, aids us to better match the needs of clients and get the best deals at the right price. This enables us to manage risks and identify opportunities that enhance clients’ revenue and give them access to local and international funding.

Africa Economy: A Tipping Point | 63

CAPMARKETSAFRICA: Given the prominence of counterparty credit risk in ﬁnancial markets deals, to what extent can this risk be mitigated as well as managed in Zambia, please?

CEASER SIWALE: At Pangaea, having access to the largest pool of international fund managers seeking investment opportunities and the broader SADC market we find it vital to carry out extensive due diligence to mitigate credit risk. On a local level we carry out site visits and ensure we gather extensive information and understand the financial position of our potential clients in order to make well informed decisions. On an international level, we adhere to Anti-Money laundering procedures and international standards that are provided by regulators to ensure mitigation of credit risk exposure. According to the Zambian Banking Industry PWC Survey 2018 managing credit risk is one of the most significant problems faced in the financial industry. Stringent policies have been implemented by the Bank of Zambia to reduce counterparty credit risk and the International Accounting Standards Board provided a framework in International

Accounting Standards 9 (IFRS9) ﬁnancial instruments, to account for expected credit losses. This standard enables entities to have a better view of the consequences of lending practices.

CAPMARKETSAFRICA: Beyond the extractive industries, what makes Zambia an attractive area for investment? And what are some of the issues investors should be aware of when looking to invest in Zambia?

CEASER SIWALE: Apart from the extractive industries, Zambia has untapped investment opportunities in ﬁnancial services, renewable energy, agri-processing, and manufacturing. Zambia is an attractive area for investment because it has a strategic location in the region, neighboring eight (8) nations. Further, the country is peaceful and relatively politically stable. In relation to the agriculture sector, only 14% of arable land is under cultivation despite 58% of the landmass being arable – thus presenting opportunities in the agriculture and agribusiness sector. Further, Zambia has access to about 40% of the water in Southern African which could be beneﬁcial for various sectors. Investors will also be interested to know that for companies listed on the Lusaka Securities Exchange, there are no restrictions on shareholding levels, no capital gains tax on the sale of shares, and no dividend withholding taxes.

Some of the issues that investors should be aware of are changes in ﬁscal policies, the current level of government debt, and challenges such as energy shortages, lack of advanced technology, weak infrastructure and lack of adequate transportation, all of which impede productivity. Investors should also be aware that there are limitations on expatriates who can be employed, such as only those with critical skills that are recognised and needed in Zambia.

Africa Economy: A Tipping Point | 64

CAPMARKETSAFRICA: On a personal note, what do you do in your spare time, when not busy managing PANGAEA?

CEASER SIWALE: I believe a work-life balance is critical to a fulﬁlled life. In my spare time I enjoy spending time with my kids, watching and playing basketball. I thoroughly enjoy living a healthy lifestyle and being active in the gym is one of the ways I do so. I also enjoy travelling and seeing new places whenever I get the chance.

CAPMARKETSAFRICA: To bring the interview to an end, how would you like to be remembered?

CEASER SIWALE: I would like to be remembered as someone who made an impact by contributing to the expansion of the ﬁnancial services and assistance to the growth in not only companies but also individuals that needed support in achieving their ambitions.

CAPMARKETSAFRICA: Thank you very much for granting this interview!

“Pangaea has evolved over the years from providing capital market services to a full range of other products. The business has always been entrepreneurial in nature and always seeking bespoke solutions for clients.”

Pangaea Securities Limited is a prominent investment bank and stockbroker in Zambia and a founding member of the Lusaka Stock Exchange. Regulated by the Securities and Exchange Commision, Pangaea has been serving the Zambia ﬁnancial market since it’s establishment in 1994.

ECONOMIC WATCH INTO AFRICA

WHAT ANALYSTS ARE SAYING

AFRICA’S ECONOMIC OUTLOOK AND FINANCIAL STABILITY

EAST

AFRICA: Debt sustainability concerns to accelerate fiscal consolidation. IHS Markit indicated that Kenya, Rwanda, Tanzania, and Uganda increased their fiscal consolidation efforts in their national budgets for the fiscal year that ends in June 2020, in order to improve debt sustainability. It anticipated that the degree of fiscal consolidation and sustainable debt management will vary across East Africa, due to the authorities' different political interests and agendas in each country. It added that East African governments adopted a more selective approach to infrastructure development in their budgets for FY2019/20.

ANGOLA: Real GDP to contract by 0.7% in 2019. IHS Markit expected Angola's real GDP to contract by 0.7% in 2019 due to ﬁscal tightening under the IMF program, low oil production and constrained external liquidity conditions. It indicated that real GDP contracted by 0.4% year-on-year in the ﬁrst quarter of 2019, compared to a growth rate of 2.8% in the fourth quarter of 2018, due to a slowdown in the hydrocarbon and retail trade sectors, which together generate 46% of economic activity. It added that Angola's foreign currency reserves declined by $353m in the covered quarter amid the fall in oil and diamond export receipts, and high external debt servicing.

EGYPT: IMF calls for stepping up structural reforms.

The International Monetary Fund indicated that Egypt has successfully completed the three-year arrangement under the Extended Fund Facility and realized the main objectives of the reform program. It considered that deep reforms achieved macroeconomic stabilization, supported a recovery in growth and employment, and put the public debt level on a downward path. It noted that monetary policy is anchored by the authorities' target of reducing the inﬂation rate to single digits in the medium term, but it stressed that the Central Bank of Egypt should remain cautious despite a well-contained core inﬂation rate.

NIGERIA: Economic recovery facing structural constraints. BNP Paribas projected real GDP growth in Nigeria to slightly recover from 1.9% in 2018 to 2.5% in 2020 and to stabilize over the medium term. It anticipated that the hydrocarbon and non-hydrocarbon sectors will face challenges that will constrain growth prospects. It expected the authorities' reform efforts in the hydrocarbon sector, which have been ongoing for more than a decade, to be complex. Also, it said that the country's poor infrastructure, signiﬁcantly low investment levels, subdued FDI in- ﬂows, and weak governance are obstacles to the development of the private sector. It pointed out that, given the expected growth of the country's population, real GDP per-capita will continue to contract.

WORLD: Nearly 54% of rated sovereigns have investment-grade rating, S&P Global Ratings indicated that 53.7% of the sovereigns that it rates had an investment grade rating as of July 19, 2019, relative to a low of 51.5% in June 2017, and a recent high of 55.8% at the end of 2014. However, it said that sovereigns rated in the 'B' category or lower reached a record high of 34.3% of total rated sovereigns relative to 24.6% at the end of 2008. It noted that the global average sovereign credit rating declined from 'BBB' at the end of June 2009 to 'BBB-' currently, while the GDP weighted average sovereign rating declined from 'AA-' to 'A+' over the past 10 years. It expected domestic politics and geopolitical tensions to be the main factors behind changes in sovereign ratings over the next six months.

External debt issuance up 22% to $412bn in first seven months of 2019. Figures compiled by Citi Research show that emerging markets (EMs) issued $412bn in external sovereign and corporate bonds in the first seven months of 2019, up by 21.5% from $339bn in the same period of 2018. The debt issued in Asia excluding Japan reached $211bn or 51.2% of the total, followed by bond issuance in the Middle East & Africa (ME&A) with $82bn (20%), Latin America with $61bn (14.7%), and Emerging Europe with $57bn (14%). Further, EM corporates issued $300bn in bonds in the covered period, or 72.8% of total sovereign and corporate bond issuance. Asia ex-Japan issued $197bn, or 65.6% of total corporate issuance in the first seven months of 2019, followed by the ME&A region with $40bn (13.5%), Latin America with $39bn (12.9%), and Emerging Europe with $23bn (7.8%).

Africa Economy: A Tipping Point | 66

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INTO AFRICA Special Edition

A TIPPING POINT

INNOVATING TO IMPROVE

Uncover Africa

Capital Markets in Africa

Editorial INTO AFRICA

EDITORIAL

TEAM

CONTENTS

CORONAVIRUS SHOCK COMPOUNDS

SUB-SAHARAN AFRICA’S PUBLIC FINANCE

CHALLENGES

FEATURED ARTICLE INTO AFRICA

FACTORS IMPACTING THE DEVELOPMENT OF INFRASTRUCTURE IN AFRICA

Poor infrastructure

Economic potential

The key to unlocking Kenya

A FOCUS ON AFRICA: TURNING AN ECONOMIC DOWNTURN INTO AN OPPORTUNITY

Re-think supply chains

Accelerate Africa’s digital transformation

e-Commerce and virtual marketplaces

FEATURED ARTICLE INTO AFRICA

Public services and trade processes

Virtual classrooms

Transform African healthcare systems for resilience and equity

Scale up Africa’s infrastructure investments

FEATURED ARTICLE INTO AFRICA

FOREIGN DIRECT INVESTMENT (FDI) INFLOW BEGINS

FEATURED ARTICLE INTO AFRICA

COVID-19 IN AFRICA: LOOKING

BEYOND THE DOOM AND GLOOM

Debt relief for Africa

FEATURED ARTICLE INTO AFRICA

FEATURED ARTICLE INTO AFRICA

AFRICA: CORPORATE FINANCE LANDSCAPE IN THE “NEW NORMAL”

FEATURED ARTICLE INTO AFRICA

SCALING UP INFRASTRUCTURE FINANCING USING PORTFOLIO INSURANCE WRAPS AS A BALANCE SHEET OPTIMIZATION TOOL

INTO AFRICA

FEATURED ARTICLE INTO AFRICA

NEW NORMAL FOR TRADE STRUCTURING IN AFRICA

FEATURED ARTICLE INTO AFRICA

THE ALTERNATIVE POCKETS: COVID-19 PANDEMIC AND DIGITALIZATION

Adaptation, post covid-19 & digitalization

FEATURED ARTICLE INTO AFRICA

Engaging with customers

Digitalisation challenges

COVID-19 PANDEMIC EFFECT ON THE MAURITIUS ECONOMY & BUSINESS

Financial Services

Hospitality

FEATURED ARTICLE INTO AFRICA

Agriculture

Trade

Real Estate

2020: PROVEN RESILIENCE OF MOROCCAN ECONOMY

FEATURED ARTICLE INTO AFRICA

Mapping of opportunities & Threats of Moroccan economy

HOW EGYPT BANKS ON RENEWABLES TO MEET EXPECTED SURGE OF ENERGY DEMAND

AFRICA’S TOURISM INDUSTRY FOR RESILIENCE AND SUSTAINABLE GROWTH

Enable intra-African travel

FEATURED ARTICLE INTO AFRICA

Scale up infrastructure development

Address climate change

Conclusion

ALTERNATIVE LENDERS

MUSTN’T BE FROZEN OUT DURING THE COVID-19 CRISIS

THE ROLE OF

EXPORT DIVERSIFICATION

FOR ECONOMIC GROWTH AND EMPLOYMENT CREATION IN AFRICA

Introduction

Empirical Review of the Relationship between Export Diversiﬁcation Employment and Economic Growth

Major Determinants of Export Diversiﬁcation

INTO AFRICA

Challenges of Export Diversiﬁcation

Experiences in National Economic Diversiﬁcation in Africa

Lessons from Export Diversiﬁcation and Employment Strategies of Emerging Markets

SPECIAL FEATURE INTO AFRICA

INNOVATING TO IMPROVE

Editorial INTO AFRICA

EDITORIAL TEAM

CONTENTS