Global Investing

As growth in Sub-Saharan Africa is set to post a steady 5-6 percent per annum to 2017 according to IMF estimates,  investors will be taking notes on the region’s growth story not least with the financial sector.

Growth projections have rebounded from forecasts of around a 3 percent rise in 2009 after falling commodity prices have hit one of the region’s main revenue sources. Yet, according to the World Bank’s recent Global Development Finance report, stronger commodities will firm growth prospects in the coming years. In recent weeks, commodities have dipped, dampening the outlook for some resource-rich countries, but as 76 percent of the region’s population do not have access to a bank account, lenders are set to grow their presence in the region.

Julius Baer notes the region’s market potential:

Since 2002, resource-hungry China has swept across a by-and-large grateful African continent, taking oil and minerals in exchange for debt relief, low-interest loans, or much needed infrastructure, such as roads, ports and housing.

The continent’s existing banking sector is nascent, with many payments bypassing traditional deposit methods, instead mobile technologies such as M-Pesa and M-Kesho are the only method of making payments and transfers. On banking Baer had this to say:

The main appeal of Africa’s banking market is that it is potentially enormous – Only 3 percent of Africans have access to a credit card … 76 percent of adults do not have access to a formal bank account.

Global Investing has commented before on how strongly the world’s riskiest bonds — from the so-called frontier markets such as Mongolia, Nigeria and Guatemala — have performed.  NEXGEM, the frontier component of the bond index family run by JP Morgan, is on track to outperform all other fixed income classes this year with returns of over 20 percent., the bank tells clients in a note today. Just to compare, broader emerging dollar bonds on the EMBI Global index have returned some 16 percent year-to-date while local currency emerging debt is up 13 percent.

That appetite for the sector is strong was proven by a September Eurobond from Zambia that was 15 times subscribed. Demand shows no sign of flagging despite a default in frontier peer Belize and shenanigans over the payment of Ivory Coast’s missed coupons from last year. Reasons are easy to find. First, the yield. The average yield on the NEXGEM is roughly 6.5 percent compared with  just under 5 percent on the EMBIG.

Second, this is where a lot of issuance is happening as big emerging markets such as Brazil and Mexico, once prolific dollar bond issuers, sell less and less on external markets in favour of domestic debt.  Frontier markets are filling the gap. JPM says Angola, Guatemala, Mongolia and Zambia joined the NEXGEM in 2012 as they made their debut on global capital markets. Bolivia is also set for inclusion soon, taking the number of NEXGEM members to 23 by end-2012.

Politics have turned nastier than usual this year in emerging markets. Nonetheless, if you were a buyer of emerging bonds, you would have been ill-advised to play safe. That’s because the best performing emerging credit so far this year is Ivory Coast, which at the end of January effectively defaulted on its $2.3 billion dollar bond. Yes really, according to JP Morgan, which runs the most widely-used emerging debt indexes.

That’s because the bond has risen about 15 points since the start of the year on hopes Alassane Ouattara — seen as the rightful winner of last year’s election — would wrest back the presidency from Laurent Gbagbo who had refused to quit office. Ouattara, now installed in the presidential palace, is expected to honour the bond. So if you’d bought this bond at the end of December you would have earned a notional return of 25 percent, according to JP Morgan. The index overall has returned just 1.6 percent.

In second place? Ecuador. It too defaulted in 2008 — on $3.2 billion in bonds — but has benefited recently from oil prices at well over $100 a barrel. That should help its economy grow 5 percent this year.  Another oil power, Venezuela, is in third place. Its bonds may be trading at a 10 percent yield premium to U.S.  Treasuries, reflecting its riskiness, but Venezuelan bonds returned close to 10 percent so far this year, JP Morgan told clients. Many fund managers have piled in, noting  that despite the unpredictability of its President Hugo Chavez, he is raking in oil export revenues and  has never shied away from repaying debt.