AFRICA IN TODAY’S FINANCIAL MARKETS

Presentation at the Africa Debt Capital Markets21 June 2011

African Development Bank Group

Prof. Mthuli Ncube

Vice President & Chief Economist

2

OUTLINE

1. Africa’s Sustained Economic Expansion

2. Development of African Financial Markets

3. Stock Markets

4. Bond Markets in Africa

5. Private Equity Industry

6. Potentials for African Capital Markets

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Africa’s Sustained Economic ExpansionGDP Growth: Africa’s growth record has

been significant after the crisis

2005 2006 2007 2008 2009 2010 2011 (p)

0

1

2

3

4

5

6

7

8

5.5

2.5

4.95.5

Trade : Recovery and high demand led to favorable terms of trade

2008 2009 2010 20110

20000

40000

60000

80000

100000

120000$ 106 bil-

lion

$ 1.1 bil-lion

Inflation: Inflationary pressures have remained relatively contained

Source: AfDB AEO

2008 2008 2010 2011 (p)0

2

4

6

8

10

12 10.6%9.9%

7.7%7%

0

1

2

3

4

5

6

4.9 4.8 4.85.02469397858339 5.1

3.7

4.5 4.6

5.459256862344465.7

2010 2011

Gro

wth

rat

e (%

) The Libya and Côte d’Ivoire Effects

4

GDP growth 5.3%

GDP growth 5.9%

GDP growth 0.7%

GDP growth 6.7%

GDP growt

h 4.5%

Disparities in Economic Performance in 2011

Central AfricaEast Africa

Southern Africa

West Africa North Africa

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Ghana12% DRC

8.4%

Nigeria6.9%

Liberia 7.3%

Angola 7.3%

Botswana6.9%

Ethiopia10%

Zimbabwe7.8%

Mozambique7.7%

Tanzania6.9%

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The 10 Fastest Growing African Countries in 2011

Tunisia1.1% Libya

-19% Egypt1.6%

Côte d’Ivoire -7.3%

Benin2.5%

Comoros2.5%

Madagascar0.6%

South Africa3.6%

Swaziland1.9%

Lesotho2.9%

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The 10 Slowest Growing African Countries in 2011

1984 1989 1994 1999 2004 2005 2006 20100

5

10

15

20

25

16.4

14.2

2.3

20.3Unemployment rate

Gro

wth

rat

e (%

) Tunisia: Unemployment Triggered the Revolution

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ExternalInternal

Good macroeconomic policies and management

Domestic consumer demand

Growth sectors: Agriculture, services, construction and

manufacturing

Prices of agricultural export

Commodity prices

Drivers of Growth

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Africa’s slow poverty

reduction relative to other

developing regions

High inequality

Youth unemployment

Financial Inclusion

Foster human development

Inclusive Growth

10

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Financial Flows to Africa: Considerable slowdown of foreign investment in Africa after the crisis

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

0102030405060708090

100 87.6

55.9

FDI Inflows(USD billion)

20

06

20

07

20

08

20

09

0

10

20

30

40

50

60

Aid Flows (USD billion)

2004 2005 2006 2007 20080

50001000015000200002500030000350004000045000

Worker Remittances (USD million)

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Development of African Financial Markets

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0

10

20

30

40

50

60

70

0

1

2

3

4

5

6

7

8

External Debt (% GDP) GDP (% y/y)

Source: IMF WEO, AfDB AEO

Growing financial markets driven by improved macroeconomic fundamentals, increased political stability, high commodity prices and robust domestic demand.

Increasing trading volumes and capitalization in stock markets – highest returns in the world.

Nascent but buoyant bond and private equity markets.

Growing investment rates supported by strong emerging middle class.

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However, African capital markets remain small and underdeveloped African capital markets have developed steadily over the years with

29 stock exchanges (from only 7 in 1988) However, African capital markets remain narrow and illiquid

compared to developed economies and other emerging countries Factors affecting their growth include:

Low income levels Ineffective collateral registration systems Weak judicial institutions Exposure to external shocks Weak human capital and financial infrastructure Limited portfolio choice options Inadequate monetary policy and capital account

regimes Financial literacy Inadequate pension fund reform

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•Increasing number (29) but with only a few being relatively active and well developed

•Characterized by low market capitalization and lack of market depth and liquidity

•Dominated by 4 biggest markets: South Africa (total market capitalization of USD 770.4 billion), Egypt, Morocco and Nigeria

•Despite small size and low liquidity, high returns (average 34%) present opportunities for international investors

Stock Markets

Mor

occo

Mau

ritiu

s

Egypt

Tunisi

a

Kenya

Niger

ia

Ghana

0

10

20

30

40

50

60

Market Capitalization(USD, billion)

South

Afri

ca

Mor

occo

Mau

ritiu

s

Egypt

Tunisi

a

Kenya

Niger

ia0

50

100

150

200

250

300

Stock Market Cap to GDP Ratio (%)

Selected African Stock Exchanges

Source: Bloomberg

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Fitch Moody’s S&P

Local Currency Foreign Currency

Local Currency Foreign Currency

Local Currency Foreign Currency

Botswana Not Rated Not Rated A2 A2 A A-

Gabon BB- BB- Not Rated Not Rated BB- BB-

Cameroon B- B Not Rated Not Rated B B

Egypt BBB- BB+ Ba1 Ba1 BBB- BB+

Ghana B+ B+ Not Rated Not Rated B+ B+

Kenya BB- B+ Not Rated Not Rated B B

Lesotho BB BB- Not Rated Not Rated Not Rated Not Rated

Libya BBB+ BBB+ Not Rated Not Rated A- A-

Mauritius Not Rated Not Rated Baa2 Baa2 Not Rated Not Rated

Morocco BBB BBB- Ba1 Ba1 BBB+ BBB-

Mozambique B+ B Not Rated Not Rated B+ B+

Namibia BBB BBB- Not Rated Not Rated Not Rated Not Rated

Nigeria BB BB- Not Rated Not Rated B+ B+

Rwanda B- B- Not Rated Not Rated Not Rated Not Rated

Seychelles B B- Not Rated Not Rated Not Rated Not Rated

South Africa A BBB+ A3 A3 A+ BBB+

Tunisia A- BBB Baa2 Baa2 A- BBB

Uganda B B Not Rated Not Rated B+ B+

Senegal Not Rated Not Rated Not Rated Not Rated B+ B+

Sovereign Rating of Selected African Countries as at March 2010

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Bond Markets in Africa• Underdeveloped and illiquid – for the exception of South Africa, all African bond

markets are at infancy stage• Dominated by short-term government securities with activity focused on

domestic primary market• Precarious conditions hampering the development and growth of corporate debt

markets – lack of government benchmark• Ineffective domestic market infrastructure (clearing and settlement systems)• Very low foreign holdings of domestic debts• Infrastructure bonds – Kenya, South Africa

Deep and well-functioning domestic debt markets play an important role in financing government budgets and help bridge African infrastructure financing gap (estimated at USD 20 billion a year).

As such, efforts should aim at addressing the market infrastructure and microstructure problems and attract more investment in domestic bond markets:

- Need for regular and liquid benchmark auctions/issues

- Development of maturity instruments (social security, insurance)

- Remove regulatory costs of corporate issuance

- Facilitate creation of liquid secondary market and transparency

- Promote domestic savings industry

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Snapshot of African Bond Performance ( 2 months - April/May 2011)

-2m yield -1m forecast yield

Actual yield 2m actual bond return

(%)

Botswana 8.55 8.55 8.40 0.5

Egypt 15.0 15 15.00 3.0

Ghana 12.75 12.75 12.86 1.7

Kenya 8.05 9.03 13.00 -32.9

Mauritius 8.23 10.75 8.23 0.4

Nigeria 13.2 13.3 12.90 2.6

South Africa 8.51 8.55 8.40 -0.2

Tanzania 12.00 12.10 12.20 4.4

Uganda 13.82 13.82 13.86 -1.8

Zambia 15.40 15.7 15.00 1.8

Source: Reuters; Standard Bank Research

Fundraising in Africa reached a peak of 31 funds and a capital of $ 11.4 billion in 2007

2005 2006 2007 2008 2009 20100

5

10

15

20

25

30

35

Number of Funds RaisedAggregate Capital Raised (USD billion)

Expansion illustrated through Top 5 Africa-Focused Funds Currently RaisingFund Name Fund Manager Fund Type Fund

Size ($ mn)

Pan African Infrastructure Development Fund

Harith Infrastructure

630

ECP Africa Fund III Emerging Capital Markets

Expansion 613

South Africa Workforce Housing Fund

International Housing Solutions

Real Estate 240

AfricInvest II Tuninvest – Afriicinvest Group

Balanced 189

GroFin African Fund GroFin Venture 170

The Private Equity Industry• African private equity industry has been expanding during the past few years with

new funds flowing into the continent (surpassing USD 156 million in the first quarter of 2011)

• Traditional barriers such as poorly developed financial markets, political instability and fragmentation of the economy are being addressed.

• As the world’s fastest growing region (average real GDP rate of 5.8% since 2000), Africa presents significant opportunities for investors from both developed and emerging countries.

• Venture Capital finance still largely unavailable

Source: Prepin Private Equity Market in Africa October 2010

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Potentials for African Capital Markets

Rising entrepreneurship activity

Emerging Partners (BRICs, Korea, Turkey)

Growing Middle Class

Infrastructure Bonds

Extractive Industries

Agriculture

Clean Energy

Public-Private Partnerships (PPPs)

New Technologies – “EG Mobile Banking”

Diaspora Bonds