As frontier markets, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in developing, emergent continental markets consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.
Luckily, the ups and downs of the African currency markets aren’t one of them if you know where to look. To help with that, AFKInsider has compiled news you need to slim down your currency risk. Let’s see what’s happening out there.
As 2013 came to a close, the past year marked a banner one for the issuance of African Eurobonds, or sovereign debt issued in euros. Four countries – Rwanda, Nigeria, Ghana, and Gabon – issued a combined debt of just over $3.1 billion in 10-year notes at an average yield at issue of 6.968 percent.
This follows the example set by Zambia in 2012, which issued a $750 million, 10-year note. A sixth country, Kenya, looks set to issue between $1.5 and $2 billion in sovereign debt by early 2014, possibly sometime in January.
All this issuance of debt raises questions for investors looking for growth opportunities outside both the stagnant west and the speculator-flooded BRIC economies.
True, Africa is growing as never before with relatively strong engines driving growth in all three major regions of Sub-Saharan Africa. But at the same time, developing world debt is always risky and the African growth story may be too tied to East and South Asian industrialization to be trusted. Investors need to ask, is this the real thing? An opportunity to get in on the ground floor of truly spectacular, self-sustaining growth going forward? Or is all this speculation that can only end in tears?
At first blush, all six countries had relatively strong periods of economic growth in the past 10 years, with the group averaging an annual 6-percent increase over the decade. Oil-dependent Gabon has grown the slowest while Nigeria and Rwanda have grown the fastest with Ghana not far behind. Kenya, meanwhile, had relatively sluggish growth over the past decade, clocking in at an average of 4.63 percent the past 10 years while Zambia sustained growth more like higher-performing Ghana. Lusaka registered an impressive 6.18-percent annual growth over the period.
Percent Increase, 2003 – 2012:
While growth in these countries has been strong, their respective currencies have not held up nearly as well. Gabon, a member of the Central African Franc monetary union — which is backed by Paris and, via it, the euro — has not only retained its value against the dollar, but has increased in value by approximately 9 percent over the past 10 years.
For debt denominated in euros, this is good news since a strong currency eases the relative debt burden on Gabon and makes repayment, if not easy, manageable. Furthermore, for U.S.-based investors, holding debt denominated in the strong euro is an added attraction as a potential currency gain can be added onto the already high yield one receives from dealing in emerging-market debt.
A history of strong currencies, however, is not so much found in the other countries issuing euro-denominated sovereign debt.
The Zambian kwacha lost the least relative to the dollar, though data on it is limited to the last year. The Ghanian cedi lost the most, plummeting 151 percent relative to the dollar over the course of 10 years of trading.
This does not mean that the cedi is bound to fall more or continue its miserable track record, but monetary mismanagement of this sort that consistently produces a falling currency is a signal to investors that the country bears watching – and not in a good way.
Falling currency values make debt denominated in foreign currency much more difficult, and add significantly to the relative debt burden of the country — in many cases, crushingly so.
Relative to the U.S. dollar, 2003 – 2013:
It is also important to understand what is driving real growth or its expectations and thus the economic activity that will eventually pay off all this debt.
For three countries – Gabon, Nigeria, and Ghana — the expectation is clearly that oil will be the primary source of wealth backing up these sovereign debt issues.
Both Gabon and Nigeria are heavily dependent on oil while significant petroleum reserves have been found offshore in Ghana, driving an exploration and investment boom in that country.
In turn, while oil is not a primary driver of the Zambian economy, copper is – and China has become a huge importer of all things copper as a result of its rapid industrialization and urban buildout. Hopes of continuing high prices for copper could likely drive growth prospects there.
This leaves Kenya and Rwanda. Kenya, to some extent, could be seen as a resource play since it is also undergoing an oil and gas exploration boom, though it is unclear whether or even if any significant hydrocarbon will be found in the near future.
On the other hand, Kenya is one of the most industrialized countries in Africa and as a hub for East African trade, finance, and transport it could see significant commercial development in the future if the East African growth story continues.
Tiny Rwanda, meanwhile, has an excellent investment climate due to the steady leadership of President Paul Kagame. While underdeveloped, landlocked and far from East Africa’s ports, improved infrastructure links could make Rwanda an important transport hub linking Central African resources with East African ports.
So, depending upon how one views the future, investing into any one of these economies could be a great opportunity. Some come with more risks than others, however. Ghana’s inability to stave off the collapse of its currency relative to the U.S. dollar over the past 10 years is a major warning sign that perhaps the risk-averse investor might want to avoid that country. On the other hand, Gabon’s strong currency and the likely continued global high demand for oil make that country’s debt more attractive.
In turn, the risk-acceptant might look at countries like Rwanda or Ghana, both with troubled currency histories, as potential goldmines in terms of opportunity. It all depends on what you as an investor are looking for and what your taste for risk happens to be. Fortunately, on a continent as big and diverse as Africa one is sure to find just the right investment choice for whatever balance of risk and return one is comfortable with.
Jeffrey Cavanaugh holds a Ph.D in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider, Mint Press News and BAM South.
