Growth, returns and aid shift investor focus to West Africa

by MMC
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(Bloomberg) — Investors in West African countries are benefiting from the continent’s best returns and shifting their financial flows to a region that has performed well despite coups, sweeping economic reforms and debt restructurings.

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Over the past year, dollar bondholders gained 8.5% in Ivory Coast, 8.7% in Gabon, 11.4% in Senegal, 14.2% in Ghana and 28, 2% in Nigeria, all exceeding the average of 8.3% for the country’s emerging and frontier sovereigns. a Bloomberg index.

The western region is now home to Africa’s most dynamic economies, which have diversified their sources of financing and mostly have debt that investors consider relatively well managed. And while Nigeria’s currency has been devalued, many of its neighbors – particularly French-speaking countries that have pegged their currencies to the euro – offer lower currency risk and more stability to investors who fear getting burned by the strong depreciations and devaluations occurring elsewhere.

Economic reforms in countries like Ivory Coast and Benin have made the region a magnet for support from international lending institutions like the International Monetary Fund. And although political upheaval has taken its toll – there have been seven military coups in West and Central Africa in the past four years and Senegal’s president tried to delay elections this year – Stronger institutions have allayed some of investors’ worst fears, according to Søren Mørch, portfolio manager at Danske Bank Asset Management.

“I think some investors underestimate the enormous support from the IMF, the World Bank, the African Development Bank and many other IFIs,” Mørch said, referring to international financial institutions. The fact that Western lenders are keen to help is “clearly a positive sign in terms of credit, and the technical situation is also very favorable for these countries”, he said.

China has also taken note. In 2021 and 2022, it provided 16 loans worth a total of $2.22 billion to African countries, according to data compiled by the Global Development Policy Center at Boston University. Of this sum, $1.92 billion, or 86%, was spent on projects in West Africa, with Senegal, Benin and Ivory Coast receiving the largest amounts. Chinese investments have traditionally been concentrated in southern and eastern Africa.

Investors are also looking to capitalize on geographic advantages, particularly as trade routes move further away from the Red Sea due to attacks linked to the Israel-Hamas war, and as developed countries seek to move their channels closer together. supply.

Hubs in West Africa are “increasing their appeal” as “strong foundations for manufacturing companies,” said Yvette Babb, portfolio manager at William Blair Investment Management in The Hague. “Ivory Coast is an example because it has expressed a desire to move forward in the value chain of some of its agri-food products” and has seen foreign direct investment linked to this, she said.

Political risks

For now, this promise has been enough to encourage many investors to overlook the risks.

The volatility of Gabon’s bonds increased after last year’s coup, and Senegal’s were hit hard by President Macky Sall’s short-lived attempt to delay elections. Burkina Faso, Mali and Niger are now ruled by the junta and considering withdrawing from the regional economic bloc ECOWAS, adding potential risks, according to S&P Global Ratings. None of the three countries have Eurobonds.

In East Africa, Ethiopia has long been the fastest growing economy on the continent – ​​and in 2019, the fastest growing in the world, until a civil war broke out in 2020. She defaulted in December. Last year’s downgrade of the region’s largest economy, Kenya, “damped somewhat” interest in the East, according to Gerhard Zeelie, head of real estate finance in Africa at Nedbank Group Ltd .

Interest in southern Africa has also waned. According to the African Development Bank Group, the region is expected to grow by only 2.7% in 2024, held back by the performance of South Africa, the continent’s most industrialized economy.

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