Investors Need To Buy Unique African Stories To Commit Long Term Capital

By Soko Directory Team / Published April 24, 2024 | 11:14 am

A combination of geo-political risk, a liquidity challenge as a result of a stronger US dollar and weaker local currencies, as well as the cost-of-living crisis and higher interest rates, have combined to create an environment where banks are more risk averse to Kenya and Africa – limiting emerging market investments by sovereigns in transformative projects.

In Kenya, the Covid-19 pandemic led to a 45 percent reduction in Foreign Direct Investment (“FDI”) flows into the Country according to UNCTAD (2021) investment report that placed the flows at $717mn in 2020 from $1.3bn in 2019. The drop in FDI was not unique to Kenya as inflows in sub-Saharan Africa on average decreased by 12 percent to US$30bn in 2020.

Before the COVID-19 pandemic and the associated lockdowns, Africa was making progress in reducing the Trade Finance gap as emerging markets attracted capital. But this is fast reversing leading to an expanding trade finance gap of nearly $120bn per year, threatening to leave Africa behind once again lest we, stakeholders, take a more nuanced approach to risk and partnerships in 2024.

Unfortunately, just as the African continent begins to build momentum, it is often negatively impacted by external factors beyond its control. Unfortunately, the downside of the global economy manifests aggressively on the continent including the Global Financial Crisis in 2007/8, or the COVID-19 pandemic.

During the upward swings of the economic cycles, we see African countries establishing some confidence, taking on debt for key projects to support long-term, sustainable, and resilient growth objectives … then a crisis hits, and interventions are often aggressively applied.

For instance, concerns that Kenya could have defaulted on its $2bn 2024 Eurobond compounded the forex liquidity crisis which kept inflation elevated and led to the Central Bank of Kenya (CBK) hiking policy rates to contain it. This quickly reversed itself after the government returned to the market and successfully refinanced it, but by that time the economy had taken a huge hit.

For Africa to break this stop-start situation, we need to identify practical steps that can be taken to unlock affordable funding.

The first is to ensure that the necessary structural reforms are prioritized in Africa’s economies, and then enforce a narrative that Africa is an attractive investment destination for patient capital.

The structural and fiscal reforms in Kenya are already paying dividends by improving investor sentiment. The local currency infrastructure bond issued right after the 2024 Eurobond buyback was oversubscribed 4.1 times. Kenya also managed to augment its Extended Credit Facility/Extended Fund Facility program with the IMF, secured a USD500mn samurai bond, and is expected to receive at least USD 750mn in budget support from the World Bank.

From country to country in Africa, we continue to see many international banks taking on a more nuanced approach and optimistic stance than previously observed. This patient approach may be the best way to ride multiple crises as Africa continues on its journey of economic development.

While global banking groups enjoy deeper funding pockets, there must be a coordinated focus on local capital pools. This segues into our second practical step – partnerships.

In recent years, we have seen increased collaboration between banks, Development Finance Institutions (DFIs), and Insurers – particularly as Environmental, Social, and Governance (ESG) funding frameworks are maturing.

Funding pools are expanding and as a result, there is a renewed focus on the Social (“S”) side of ESG, with a special interest in projects that prioritize the economic participation of women and youth. It is imperative for African financial institutions, like Absa, to be at the forefront of the global efforts to define and inform policies and frameworks around the “S” of ESG – if we fail to lead these – the tendency is a huge bias towards Global North’s agenda and priorities.

Further, African economies should – individually or through the regional collective – be bold in driving those ESG priorities, like “S”, that align mostly with their developmental agenda. After all, Africa is on the cusp of huge industrialization – such should be deeply grounded on sustainability and inclusion – learning from the mistakes of the Global North.

Lastly, increased digitization and the adoption of technology must become a priority. The African fintech sector has been able to attract both local and international funding, being a beacon of success for early-stage capital in Africa.

For Africa to effectively tackle the trade finance gap, it can no longer be business as usual. Role players on the continent must spend more time understanding the nuances around supply chains. Ultimately, we need to build resilience and sustainability.

As one of the leading Pan-African banking groups, we recognize these challenges and continue to invest in our deep knowledge and understanding of supply chains to reduce the disruptions created by external shocks and events. Through partnerships with like-minded teams, we look forward to a solution-oriented focus in 2024.

Author: Robert Murai, Head – Capital Markets East Africa, Absa Bank

About Soko Directory Team

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