2 3 j u n e 2 0 0 8 t r e n d s i n g l o b a l f i n a n c e a n d i n f r a s t r u c t u r e
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2 3 J U N E 2 0 0 8
T R E N D S I N G L O B A L F I N A N C E A N D I N F R A S T R U C T U R E
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The credit crunch has triggered the worst banking crisis for decades with unprecedented write-downs and equity injections
Stock performance of major investment banksStock performance of major investment banks
Overview of selected announced capital injections Overview of selected announced capital injections
Source: FactSet, Bloomberg. Market data rebased to 100 as of June 6, 2008
Write-downs across major financials institutions ($bn)
Write-downs across major financials institutions ($bn)
020406080
100120140
J un-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 J un-08
J P M (20)% GS (23)% CS (43)% MS (52)%
ML (55)% LB (56)% C (62)%
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Credit crisis impact on sub-Saharan Africa
CausesCauses ConsequencesConsequences
Global SSA Comment
Credit shock in sub-prime
No mortgage market
Heavy balance sheet leverage
Could occur if sources of funding are limited
Short-dated funding
Most likely challenge current environment does not lend itself to LT funding
Impact on SSA Credit writedown by banks
Profit taking by financial investors especially HFs
Tightening of available credit to HF and more generally change in risk tolerance
Loss of confidence in global financial markets of Bears
Activity of types of some IBs will change re. more structured and toxic products
Heavier regulation
Key causes and consequences of recent credit crisisKey causes and consequences of recent credit crisis
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Sub-Saharan Africa is enjoying a growth spurt
Sub-Saharan Africa (SSA) has enjoyed strong growth for much of this decade, contributing to significant improvement in living standards in some countries.
Buoyant commodity prices, improved governance and rising investment have underpinned this acceleration in growth rates. There are still, however, important discrepancies between countries.
Oil exporters such as Nigeria and Angola have enjoyed the strongest growth rates, despite capacity constraints in some cases. Oil importers have been protected in many cases by high prices for non-oil commodities. The laggards are resource-poor and landlocked, which impedes their market access.
Growth has averaged around 6% per year since 2004Growth has averaged around 6% per year since 2004
4.8
7.7 7.3
8.89.9
3.6
6.1 5.6 6.1 5.8
3.85.2 5.3 5.8 5.6
4.1
7.36.5
7.7 7.3
1998-2004 2005 2006 2007 2008F
Net African Oil Exporters Net African Oil Importers The Big Four* Others
3.8
6.17.0
8.1 8.5 8.6
2.2
4.35.3 5.3
4.1 4.24.0
5.9 6.4 6.55.7 5.5
6.9 7.3 7.5
2.8 3.2 3.7 3.52.5 2.8
8.88.47.8
1998-2004 2005 2006 2007E 2008F 2009F
Sub-Saharan Africa Latin America Emerging Europe Emerging Asia Global
Source:AfDB, IMF, and JPMorgan estimates
*Big Four=South Africa, Algeria, Nigeria and Egypt
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Sub-Saharan Africa: Commodity price strength is a major positive
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97-02 2003 2004 2005 2006 2007 2008F
SSA
Low income countries
Oil importers
Oil exporters
Fragile
Inflation in SSA (excluding Zimbabwe) has eased from over 16% in 2000 to 7.2% in 2007. Rising global food and energy prices are creating problems for net importers, but the inflationary impact has generally been contained by prudent macroeconomic policy.
The strength of commodity prices is a major positive for the resource-intensive region. Asia’s industrialisation and infrastructure development have been a key driver of demand for commodities, and should deliver continued price strength, reinforced by portfolio diversification by institutional investors.
Resources make Africa a key beneficiary of strong Asian demand
Resources make Africa a key beneficiary of strong Asian demand
Commodity prices remain elevated Commodity prices remain elevated
2005 2006 2007 2008f 2009f
Gold $/ oz 445 604 697 914 843
Platinum $/ oz 897 1,139 1,305 1,950
Aluminum $/ ton 1,895 2,593 2,664 2,494 2,389
Copper $/ ton 3,506 6,669 7,286 6,913 5,425
Silver $/ oz 7.30 11.50 13.40 16.20 15.20
Oil (WTI) $/ barrel 56.59 66.25 72.36 90.50 80.00
Wheat $/ bushel 3.18 4.02 6.40 8.31 Source: J PMorgan
Commodity prices to moderate in ’09 but hold well above ’05 levels
Commodity prices to moderate in ’09 but hold well above ’05 levels
Inflation, %oyaInflation, %oya
Source: IMF
Source: S&P GSCI spot indices
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2002 2003 2004 2005 2006 2007 2008
Crude oil Precious metals Industrial metals
Cotton Cocoa
J an 2002 = 100
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Sub-Saharan Africa: External balances are looking healthier
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1970 1975 1980 1985 1990 1995 2000 2005
Africa
Sub-Saharan Africa
Sub-Saharan Africa excluding South Africa
Rising commodity prices and comprehensive debt relief have ignited private interest in investing in SSA, after several decades of isolation. At about $22 billion, FDI continues to be the largest source of private capital inflows into SSA. While South Africa and the oil-exporters still attract about 80 percent of the inflows, direct investment in the rest of SSA has been steadily increasing; for 2006 it is estimated to have reached $4.1 billion, with $1.2 billion going to landlocked countries.
Capital inflows into SSA remain relatively small, however, because the costs of doing business there are still high by global standards. On the World Bank’s “ease of doing business” indicator, the average SSA country ranks more than 40 positions below that of the average East Asian and Pacific country, and nearly 30 positions below that of the average LatAm country.
… and debt relief has also attracted private capital… and debt relief has also attracted private capital
SSA is benefiting from a favourable external environment. Import demand from advanced economies has strengthened steadily in recent years, and China’s hunger for commodities has driven higher prices as well as inward FDI. With the continued rise in oil and other commodity prices, exporters of both oil and non-fuel commodities have experienced an aggregate improvement in their terms of trade.
However, a number of SSA textile exporters have come under pressure as the United States and the European Union (EU) have phased out textile quotas.
Terms of trade have improved …Terms of trade have improved …
Africa’s share of global FDI is finally rising againAfrica’s share of global FDI is finally rising againTerms of trade (Index, 2000 = 100)Terms of trade (Index, 2000 = 100)
Source: IMF Source: UNCTAD
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97-02 2003 2004 2005 2006 2007F 2008F
SSA
Low income countries
Oil importers
Oil exporters
Fragile countries
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Sub-Saharan Africa: Reserves high and debt now low
Foreign reserves for all of SSA are estimated to have reached an all-time high of US$137 billion in 2007, raising import coverage to 5.7 months. While this is not a high level of coverage by global standards, it comes from a low base. The improvement reflects positive terms of trade effects and the policy decision to build precautionary levels of FX reserves to guard against balance of payments risks, as well as limit the negative impact of currency appreciation on competitiveness outside the resource sector.
Oil exporters and South Africa have led the way in building up reserve levels. Other SSA countries have kept reserves roughly stable as a share of imports.
Record reserve levels reflect improved BOP balancesRecord reserve levels reflect improved BOP balances
Sub-Saharan Africa’s external debt is estimated to have fallen to just 11% of GDP in 2007. This represents a 30-year low, and is the result of rapid growth, comprehensive debt relief, and debt repayment by Nigeria, Angola, Malawi and others. Debt relief has been delivered through the enhanced HIPC initiative and MDRI, as well as bilateral deals in countries such as Nigeria.
17 countries have so far benefited from MDRI, and eight more could qualify once they reach the HIPC completion point. This latter group includes many of the most fragile economies, where debt ratios remain uncomfortably high.
Government debt has fallenGovernment debt has fallen
FX reserves by region, US$ bnFX reserves by region, US$ bnExternal debt to official creditors (% of GDP)External debt to official creditors (% of GDP)
75 160 209 254 310
40 83 110 137 167
786
1,604
1,974
2,556
2,874
Avg 1999-2004 2005 2006 2007E 2008F
AfricaSub-Saharan AfricaSub-Saharan Africa excluding Nigeria and South AfricaLatin AmericaEmerging EuropeEmerging Asia
Source: IMF Source: JPMorgan
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97-02 2003 2004 2005 2006 2007F 2008F
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Low income countries
Oil importers
Oil exportersFragile countries
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Sub-Saharan Africa: Investor interest is climbing rapidly
79%
61%
31%
11%
20%
89% 87%
64%
35%
48%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Emerging Asia CEE/ Russia LatAm &
Caribbean
Middle East Africa
2007 2012
% of respondents
Source: EMPEA, 2007 Surv ey
Funds raised for EM private equity continue to climb
US$m
Emerging
Asia
CEE/
Russia
LatAm &
Caribbean
Sub-
Saharan
Africa MENA
Africa/
ME
Multi-
region
EM Total
2003 2,200 406 417 350 116 3,489
2004 2,800 1,777 714 545 618 6,454
2005 15,446 2,711 1,272 791 1,915 3,630 25,765
2006 19,386 3,272 2,656 2,353 2,946 2,580 33,193
H1 2007 11,549 3,611 1,354 592 1,816 2,127 21,049
Source: EMPEA. Africa/ ME reported together in 2003-04.
SSA has led outperformance in frontier equity marketsSSA has led outperformance in frontier equity marketsEMTA trading volumes in frontier markets are climbingEMTA trading volumes in frontier markets are climbing
Private equity activity in EM - 2007 vs plans for 2012Private equity activity in EM - 2007 vs plans for 2012The region has shared in private equity’s enthusiasm for EM
The region has shared in private equity’s enthusiasm for EM
EMPEA reports US$592m raised for SSA in H1 2007, but another two large closes for pan-African funds in July totalling over US$1.8bn. 2007 as a whole looks to have set new highs, and flows have continued in Q1 08.
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Sub-Saharan Africa Eastern Europe
MENA Latam & Caribbean
Asia
US$bn, 4-q sum
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2000 2001 2002 2003 2004 2005 2006 2007 2008
Nigeria
Kenya
S&P/IFCG Frontier Markets
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Significant infrastructure gap across sectors
Significant infrastructure gap – Ideal funding profile Significant infrastructure gap – Ideal funding profile
Strategic Countries (e.g. China/ Russia)
DFIs (e.g. World Bank, IMF, AfDB)
Local Financial institutions
Foreign Direct Investments
Government
Foreign Financial Institutions
15%
10%
5%
25% - 35%
25% - 35%
10%
The total infrastructure spend over the next 10 years in sub-Saharan Africa is estimated at approximately US$1 tn. Key areas of deficiency include power, energy and transportation (especially roads and rails)
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Challenges/Opportunities
Capital Markets
PPP Environment
BusinessEnvironment
Development of capital
Key Reference points required including - Risk free rates, yield curves etc
Liquidity
Depth of products
Necessary to create a highly attractive environment for PPP Legal framework Regulatory framework Government support – for top priority projects only
— Subsidy/tariffs/tax breaks— Co-investment 5—10%— Guarantees— Incentives to local banks – including tax breaks and lower liquidity limits.
Ease of doing business must improve
Transparency index must improve
Anti-corruption
Reality check on cost benefit for genuine investors
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