Middle Africa Fixed Income, Currency and Commodity Guidebook

Sub-Saharan Africa remains a dynamic and interesting investment destination. The continent weathered the onset of the global crisis in early 2008 and remained largely insulated from adverse global economic developments in the first half of 2012. While the global outlook remains highly uncertain, Ecobank’s first ‘Middle Africa Fixed Income, Currency and Commodity (FICC) Guidebook’, which was published in late-June, highlights recent macroeconomic, financial and commodity market trends along with developments that are likely to take place over the near term.

One trend that Ecobank sees continuing in Middle Africa is that of strong real growth at some of the highest levels in the world, highlighting theregion’s dynamism and immense investment opportunities. This reflects various factors, such as improved prospects for weather that benefits agriculture, robust domestic demand, strong population growth, robust global demand for exports (particularly from Asia), and high global commodity prices along with strengthening macroeconomic policies, capital markets, and infrastructure. Although nearly all countries in the region expanded in 2011 some were adversely affected by weakness in the eurozone, which remains a major concern for the continent in 2012. Moreover, weak global growth is likely to slow growth in Middle Africa’s exports, which in turn could increase pressure on some currencies following relatively strong depreciation in 2011.

High inflation is also proving a challenge to several countries on the continent, which has led to a tightening of monetary policy. Inflation accelerated sharply in 2011, particularly in eastern Africa, largely due to rising food and energy prices globally. Sustained tight monetary policies will help slow inflation through 2013, provided that there are no oil or other commodity price shocks. Indeed the recent fall in oil prices, partly reflecting the potential global impact of a further deterioration in the eurozone, is reducing imported inflation in Middle Africa. Howvere, oil exporters in Africa will see lower export revenues if prices continue to fall.

Fiscal policy varies between countries but many were generally accommodative for most of 2011, which resulted in fiscal deficits widening. However, strong growth in many countries should help rebuild fiscal revenues that, in turn, should support future policy interventions. Interestingly, the general increase in domestic debt issuance in recent years has helped to underpin conditions that led to the launch last November of the Ecobank Middle Africa Bond Index (MABI). This is the world’s first index to track domestic debt performance in sub-Saharan Africa. The performance since inception shows strong growth and extremely weak correlation with the JP Morgan East Africa Bond Index (EMBI), thereby offering investors solid returns and asset diversification in their search for yield in the current fatigued and fragile global environment.

Meanwhile, the business operating environment in many countries in sub-Saharan Africa has generally improved over recent years, despite a weak spot in the 1990s and more recent slippage in some countries’ global competitiveness rankings. Noentheless governments acknowledge the benefits of strengthening their investment climates, which has helped support increased capital inflows. Furthermore, most Middle African banking sectors remain largely insulated from global financial strains due to limited levels of global financial integration. However, improvements in banks’ portfolio quality, liquidity, and revenues would be welcome.

Despite the overall positive outlook for Middle Africa, there are risks in the outlook due to global uncertainties and no region is immune from the negative effects of the eurozone crisis. Sustained financial pressures in the eurozone could indirectly slow growth in sub-Saharan Africa in 2012 and 2013, with an adverse impact on individual countries depending on the importance of trade and credit links to Europe. Another oil price shock could drive inflation up, cut growth, and strain fiscal and external balances in oil importing countries. In addition, weather-related shocks remain a possibility across all countries, which could reduce food and hydroelectricity supplies and overall aggregate output.

Sub-Saharan Africa in a Global Context: Key Themes

Turning to the key indicators in Africa, the sub-Saharan region’s share of global gross domestic product (GDP) remains small compared with other areas. However, it remains one of the fastest expanding regions in the world in real terms. This is all the more interesting given the deterioration in investors’ global economic sentiment in 2011, much of which has carried over into 2012 due to the ongoing eurozone crisis.

Middle Africa’s share of global GDP will rise in 2012 and beyond as its economies continue to grow robustly and developed economies’ growth stagnates or contracts over the short term. Highlighting the continent’s dynamism, growth in the share of global exports has also accelerated sharply in recent years, and continued progress in infrastructure and policy improvements will improve the business environment and make Middle Africa a more attractive location for investment. This, in turn, will drive productivity, much of which will be in export sectors.

Meanwhile, population growth remains robust, which represents attractive opportunities for many firms looking to expand in Middle Africa’s growing consumer markets. Opportunities will increase across income brackets; at the low end the huge number of consumers creates good prospects for providers of mass market goods and services, including financial services. At higher income levels, sustained growth in the middle class offers the potential to service these markets with more sophisticated products and advice.

Hydrocarbons represent the main sector attracting foreign direct investment (FDI) into Africa (excluding South Africa), but manufacturing, financial services, and telecommunications are all growing in importance. The oil and gas sector will remain of great interest to oil majors due to the numerous investment opportunities. These exist both in established producing countries and also new producers and countries that offer the prospect of good returns, such as Kenya, Uganda, and Sierra Leone. Overall, FDI is likely to increase as investors seek to take advantage of these and other opportunities that will serve consumers in Middle Africa, as well as those in Asia and developed economies.

Sub-Saharan Africa in a Regional Context: Key Themes

With regard to the regional context, Nigeria’s economy dominates the continent (excluding South Africa) and accounts for nearly a third of sub-Saharan GDP. This reflects the size of its population, which drives domestic demand, and its wealth of natural resources that provide high levels of fiscal and export revenues. However most economies in Middle Africa are relatively small and reliant on one or two main exports, usually agricultural.

Ghana’s high real growth in 2011 reflected the impact of oil production on the economy. Meanwhile, Sierra Leone is expected to expand by around 50% in real terms in 2012, due to the development of iron ore deposits. Outside of these high growth rates, most countries in Middle Africa continue to expand at around 5% per year in real terms, which is good given global economic weaknesses and uncertainty.

Agriculture still accounts for a substantial part of GDP in most countries, although manufacturing and services continue to grow in importance as countries develop, which in turn will open up new investment opportunities. Exports vary, but many are based on natural resources such as hydrocarbons, minerals and metals. Middle Africa’s trade partners are located around the world. Traditional export markets are in Europe, supported by the EU’s ‘Everything but Arms’ trade agreement with African, Caribbean and Pacific (ACP) states. More recent export markets range from the US (for hydrocarbons, textiles, and other goods under the African Growth and Opportunity Act (AGOA) trade agreement) to Asia and now to Latin America.

Faced with persistent current account deficits, changes in foreign reserves have been one way to maintain balance of payments equilibrium. However, due to sustained strong import demand, many countries, particularly non-oil producers, struggle to raise their levels of foreign reserves from one year to the next. FDI and portfolio inflows remain largely directed towards countries that have attractive investment opportunities and help boost reserves in those countries.

Middle Africa exchange rate regimes have generally moved from fixed/pegged arrangements to floating arrangements. These changes in policy, along with changes in terms of trade, have largely led to currency depreciation against the US dollar over recent years, which also reflects high levels of import dependency and the costs related to importing high levels of goods and services. Meanwhile currencies linked to the euro have performed relatively well, highlighting the strong support provided by the currency arrangement, which is underpinned by the French Treasury and, ultimately, the European Central Bank (ECB).

Interest rates remain high, reflecting: loose fiscal policy and high levels of government spending that have required the simultaneous implementation of relatively tight monetary policies. Furthermore, rising global commodity prices since the mid-2000s have undermined the strength of Middle Africa’s currencies; monetary authorities have responded to currency weakness by tightening monetary policy. High interest rates have supported currencies but at a cost; government borrowing costs in many countries have risen and the private sector has been crowded out.

Few countries in Middle Africa have attained investment grade sovereign credit ratings (SCRs). Relatively low SCRs reflect various factors, such as weaknesses in public financial management, insufficient structural reforms, bottlenecks within productive sectors of the economy, and political/social pressures. As governments recognise the benefits of being able to access global capital, they continue their efforts to improve the attractiveness of their economies for foreign investors by reducing barriers to investment and enhancing the business environment.


As countries in Middle Africa continue to develop and grow, so too will the investment opportunities facing global investors. With real annual growth of over 5% likely to be sustained for the foreseeable future, as the policy environment matures, and as demand for Africa’s goods and service continues to grow (both domestically and globally), investors will likely see an increase in what and where they can invest. With regard to capital markets, their depth and liquidity will increase, creating further incentives for investment. Similarly, as demand for soft and mineral commodities rises, FDI is likely to expand to supply growing markets.

Overall, Middle Africa is a continent with great prospects. One way that we can help is by producing the Ecobank FICC Guidebook. It can be used a first point of reference in helping investors find their way around what, at first, sight may appear slightly opaque investment climates by explaining market infrastructure, regulations, and growth sectors. Whatever an investor’s needs are, the guidebook should help them in deciding how, where and what to invest in, across some of the most interesting and rewarding countries.



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