RISK MANAGEMENT | 04 DECEMBER 2021 Three investment challenges Africa needs to overcome Absa | Corporate and Investment Banking > Insights and Events > Three investment challenges Africa needs to overcome Mamokete Lijane Institutional Fixed-Income Sales Trader, Absa CIB SHARE Africa represents one of the last true frontier investment markets. However, at least three core headwinds to debt sustainability need to be faced if the continent is to realise its potential as an investment destination of choice. This was a key theme that came out of the recent Absa Macro Conference entitled: “Sustainably Securing Africa’s tomorrow today”. This event brought together globally recognised thought leaders to discuss sustainability on the continent from three vantage points: the growing emphasis of ESG in global investment flows; growing concerns about debt sustainability for many African economies; and economic development models that would enhances the welfare of Africa’s people. Judging the mood of an investment conference such as this is always interesting. There is a level of optimism on the investment potential for Africa - yet it is clear that there are structural challenges that contribute to a lack of confidence in African as an investment destinantion. There are three key issues that African countries need to overcome for debt to move to a more sustainable path. The first relates to issues around hard currency debt exposure. While the commodity boom has helped to some degree to bring in foreign currency, many African countries have dollar-denominated debt that they may battle to service in the future. Some African countries loaded up on Dollar and Euro-denominated debt at a time when global interest rates were at record lows. If or when the interest rate cycle turns, the cost of servicing this debt will rise. For countries like Angola, Egypt, Ghana, Mozambique, and Zimbabwe who have debt to GDP ratios greater than 70%, a small shift in global interest rates could have a significant impact on borrowing costs. The second issue is the lack of a broad tax base in many countries and the lack of internal revenue to cover the costs associated with running a country and delivering services. According to data out of the Organisation for Co-operation and Economic Development (OECD), the tax to GDP ratio for 30 surveyed African countries was 16.5% compared to the OECD average of 34.3%. Countries like the Seychelles, Tunisia and South Africa sit around the 30% mark but places like Nigeria, Equatorial Guinea and the Democratic Republic of Congo are all the way down at 7.5%. This leads us to the third issue – if we are potentially walking into a debt trap and have a narrow tax base, the only other option on the table is economic growth. The African growth story was sorely curtailed in 2020 due to the COVID-19 pandemic. Higher oil prices and a broader commodity boom have helped, but these lofty prices are unlikely to last forever. The big growth countries could be Kenya, Morocco, Ghana, Egypt and South Africa. However, “big” growth is likely to be only 4% per annum – a healthy rate but certainly not fast enough to match population growth or offset potential disruptions in financial markets as a result of rising global interest rates. A theme that came through at the conference was the type of growth that was being created with the debt raised. Africa has access to a variety of funding mechanisms including private debt markets, DFIs, and countries like China. The risk is that money raised by governments has not been and will not be deployed in growth enhancing capital investment. Funders want to see sustainable growth enhancing investment, backed by sound fiscal and monetary policy frameworks. ESG and Sustainable investment goals are all very topical– particularly in the African context. These funds are available to access for countries on the continent. However, countries need to tackle the issues highlighted above to enhance sovereign credit worthiness and open the way to taking advantage of its potential as a sustainable investment destination. Mamokete LijaneInstitutional Fixed-Income Sales Trader, Absa CIB https://cib.absa.africa/wp-content/uploads/2020/07/file_example_MP3_700KB.mp3 Related Articles EVENT The Pan-African bank that drives innovative solutions Absa will participate in and sponsor the 2nd CII Summit on Innovative Financing Partnership with Africa on 24 – 25 November 2021. DEALS Creating sustainable economies through impactful development We are proud to have been part of the R1.056 billion infrastructural development investment, commercial property financing of the Sibaya Coastal Precinct in KwaZulu-Natal. EVENTS Macro Conference 2021 We are proud to bring you the fifth edition of our annual Macro Conference, designed to challenge and inspire your thinking. With this conference, we aim to help clients “take a step back” from day-to-day information and focus on the bigger strategic picture as influenced by developments in the macro-environment. EVENTS Absa Cape Epic That time of the year has come. It’s time for The Absa Cape Epic and your opportunity to explore and traverse the exquisite Western Cape from the best seat in the house; the back of a bike. This year’s race promises a fusion of rugged, scenic and unchartered territories. Over 600 kilometres of cycling, only the brave and passionate will cross the finish line.