From The Economist print edition
Published on Dec 13th, 2007
THIS month Omar Bongo—the longest-serving ruler in Africa—celebrated 40 years in power in Gabon. In Libreville pictures of him hang everywhere. But outside the country, Gabon achieved a far more impressive landmark, when it raised $1 billion on the international markets—becoming only the third country in continental sub-Saharan Africa in two decades to issue sovereign bonds abroad.
The West African country has oil, close ties with China and better-managed public finances, which are three of the ingredients sought after by Africa's foreign creditors—even those who may struggle to find Gabon on a map. Increasingly, other African countries, including those without oil, are also arousing interest among outsiders. Ghana launched an international sovereign bond in September. Kenya, and possibly Zambia and Tanzania, hope to follow.
There is a dizzying sense of the gold rush about the way investment bankers are peddling the continent to investors. Many portray parts of sub-Saharan Africa as the new frontier for risk-takers, offering returns that, it is hoped, will be uncorrelated to the fluctuations of developed markets. Sometimes the salesmen gloss over the political risks, the corruption and the debilitating exposure to commodity cycles. But it is not all hype. High commodities prices, good debt-management (the proceeds of Gabon's ten-year bond will go toward buying back its Paris Club debt), debt relief and better economic leadership have produced the strongest growth and lowest inflation in sub-Saharan Africa in over 30 years. South Africa is still the biggest magnet for foreign portfolio investment, but capital is flowing into shares and bonds elsewhere, too (see chart).
Even those countries unable to issue international bonds are preparing the ground. Standard & Poor's (S&P), a credit-rating agency, has been working since 2003 with the United Nations Development Programme and rates 13 countries in sub-Saharan Africa. In November S&P opened its first African office in Johannesburg. Ratings provide a proxy measure of country risk and demonstrate a country's commitment to transparency, both of which should help attract foreign capital.
Domestic debt markets are also opening to foreigners—though most of the money is being raised by states, rather than private companies. In the West African Economic and Monetary Union, annual issues of publicly traded government debt have grown tenfold since 2000, reaching 383 billion CFA francs ($770m) in 2006. In some sub-Saharan countries, 10-20% of local sovereign bonds are now held by foreigners, according to the IMF.
Because investing in local markets can still give foreigners headaches, some banks are offering synthetic securities instead. For example, South Africa's Standard Bank, which operates in 18 African countries, packages local government bonds into instruments it sells to foreign investors. Meanwhile, the development institutions are doing their bit to spur innovation. The African Development Bank has issued eight Eurobonds denominated in, or linked to, African currencies, starting with a bond in Botswanan pulas in 2005. The International Finance Corporation (IFC), the private arm of the World Bank, has done currency swaps in Zambian kwachas and Nigerian nairas.
Equity investors are also finding a way in, though via circuitous routes. Most stock exchanges outside South Africa and Nigeria remain minuscule and illiquid, but returns are picking up. Renaissance Group, a Moscow-based emerging-market bank, says that its index of 50 shares listed on 11 exchanges across sub-Saharan Africa increased by 39% in dollar terms between January and October this year—compared with 29% for the broader MSCI emerging-market index. Making the markets more accessible to outsiders, Merrill Lynch is listing its Africa Lions Index certificates, which track shares in at least 15 African countries, on several European exchanges.
Is the appetite likely to last? On the one hand, more transparency means less scope for corruption and profligacy. Provided the funds are used sensibly, they should keep on coming. But until Africa's economies become more diversified, they will be over-exposed to changeable weather, fickle aid flows and volatile commodity prices. Ultimately, Africa has to manage the bounty carefully. After an unprecedented wave of debt relief, it would be a shame to drown in debt again.