Tag Archives: Frontier Markets

An Apples-to-Apples Comparison of African Sovereign Debt

I’ve been meaning to do this for months now, and the FT’s Jonathan Wheatley has just done it for me. Herewith, a side-by-side comparison of 10-year African sovereign debt issues from the past 15 months:

Country Issue Date Tenor Size Yield at issue
Zambia Sep 2012 10 years $750 mm 5.625%
Rwanda Apr 2013 10 years $400 mm 6.875%
Nigeria July 2013 10 years $500 mm 6.625%
Ghana July 2013 10 years $750 mm 8.000%
Gabon Dec 2013 10 years $1.5 bn 6.375%

As Wheatley correctly points out, this is a Gabon story as much as it’s an Africa story. There are a lot of ways to slice this, the most immediate being yield differences. Wheatley:

Is Zambia, at 5.625 per cent (cheaper than Spain at the time), really in a different ball park from Ghana at 8 per cent? Yes and no. When Zambia came to market in September 2012, yields on US Treasuries were at their tightest and investors were scrambling for any deal that offered something better.

“There were opportunities to lock in great transactions,” says Samara. “But you still had to have a story to tell.”

Rwanda faced perhaps an even more inviting market, with investors getting so frustrated at low yields in the US they seemed willing to take almost any risk. Even in that environment, however, Rwanda had to pay a lot more than Zambia.

Nigeria and Ghana tell a similar tale of the post-tapering world: the decidedly less risk-on environment that followed comments in May by Ben Bernanke, chairman of the US Federal Reserve, suggesting the end of ultra-loose monetary policy was on the horizon. But Samara says that even in those more difficult circumstances, the right issuers have been able to get bonds away.

I would also point out the dramatic difference between these yields, and the indicative yields of their currencies at the beginning of this year, which I previously discussed here. Pasting those local currency yields into the above table gives us the following:

 

Country Issue Date Tenor Size Yield at issue Indicative FX yield as of Jan 2013
Zambia Sep 2012 10 years $750 mm 5.625% 9.80%
Rwanda Apr 2013 10 years $400 mm 6.875% 12.30%
Nigeria July 2013 10 years $500 mm 6.625% 14.40%
Ghana July 2013 10 years $750 mm 8.000% 22.90%
Gabon Dec 2013 10 years $1.5 bn 6.375% N/A

 

The debt yields are significantly lower than the FX yields reported in January (courtesy of Silk Invest). A lot has happened in the world this year to drive this divergence, but what this screams of more than anything to me is the benefit of borrowing dollars in the Eurobond market. 

Put another way, let’s use the example of Nigeria, which is far and away the largest economy of any of these. In an ideal world, an economy like Nigeria should be able to draw a far larger issue size than $500 million, and denominated in naira, but if they did, they would be paying much more than 6.625%. And even in dollars, the $500 million ticket size indicates that appetite is still fairly limited, despite all the currency risk being shifted onto Nigeria (which, having some 90+% of its economy dependent on oil, is less burdensome than the task facing, say, Rwanda).

I’m all for developing local currency financing mechanisms, but what this all says to me is that there’s still a VERY long way to go.

The ongoing challenge of assessing Frontier Markets political risk

2013.12 Frontier Markets Political RiskI’m generalizing it, but frontier markets political risk is my main takeaway after reading through Clear Path Analysis’ just-released Investing in Frontier Markets 2013.

And if that doesn’t get you excited, don’t let that deter you from looking further as there’s a lot of other stuff in there that I’m totally glossing over.

Some highlights:

Asked what kind of investors are mostly interested in frontier markets and how they’re using the exposure, Yvonne Bakkum of FMO Investment Management had this to say:

“We are talking about a diversified African private equity proposition to U.S. institutional investors, and it strikes me that we hardly have to explain the Africa story to them. They seem very well aware of the fundamental attractiveness of Africa as an investment destination but, are still studying the best way to access that opportunity. What type of asset class, should they go through public markets or private equity and if so should they select funds themselves or use a fund of funds vehicle? These are the types of questions being asked but in most cases the interest still needs to translate into actual commitments. Some African institutions haven’t decided as to whether they should invest and there we see an interesting discrepancy between the investment professionals and their boards of trustees. Trustees tend to be more cautious and want to start with BRICs because they are the more advanced emerging markets or the ones closer to home, such as Latin America. This means that you don’t always get everybody aligned simultaneously.”

Oliver Bell, portfolio manager of Africa and Middle East strategy for T. Rowe Price wound up having a lot to say about East Africa, among which was this nugget on the key risks in investing in African markets:

“The key risk still remains around the politics and the economics but the two are quite strongly linked. The first risk is when you get a change of government. 50 of these countries have had elections in the last three years so we are no longer talking about despotic dictators – this has become a relatively democratic continent. The key risk is that if the opposition wins an election does power get handed over peacefully? We’ve just seen a transition of power in Kenya for example which was peaceful but five years ago the election transition was very brutal. The more times you go through the peaceful transition, the more entrenched the democracy becomes. In Ghana we’ve seen the handover of power peacefully a few times so you get the sense that democracy is now deeply rooted in their society.

Related to the politics is the economic fallout that can occur in the run up to elections, because you tend to find that the incumbents spend aggressively to ingratiate themselves with the electorate. The targets go out of the window leading to a larger fiscal deficit, which can lead to currency weakness and hence inflation. This knock-on effect usually corrects itself the year after an election but it remains one of those things that you need to be very aware of when investing in Africa. One other risk at the stock level that we assess, when considering an investment in a company, is whether there are any political connections that the company is benefitting from, as this is not sustainable in the long term, given that the politics can change quickly.”

And finally, Richard Fox, Fitch’s Head of Middle East and Africa Sovereigns, had this to say about MENA political risk:

“Political risk is a fact of life but it varies from country to country. And it doesn’t necessarily mean a country is off limits to investors. Going back to where we started, the World Bank Governance Indicators would put a country like Nigeria or Lebanon very low down on the political risk spectrum. Nevertheless, these countries have a track record of foreign investment receiving very good returns. Just because political risk is high doesn’t mean that people will not put their money there…

… You can have volatile political developments but this does not mean that they automatically affect financial markets. Despite the political ups and downs of Lebanon, including war, there has never been a default and people are allowed to withdraw their money freely which has worked very much in Lebanon’s favour. Environments can be very risky but if you have investors aware of and happy to take those risks then it isn’t really an issue. In most cases, risks can be priced.”

TCX Chooses Diligence on Myanmar

The folks from Netherlands-based TCX (The Currency Exchange Fund) have just passed me the following video, which encapsulates a two-day conference they hosted last month in Myanmar.

So far all I’ve only watched the introductory four-minute video and I can tell you that it’s worth noting first that this is eminently more watchable than the video attempts I’ve seen from certain other outfits in this space who shall remain nameless.

I’m all for the DIY revolution, but sometimes paid professionals are paid professionals for a reason.

Anyway, the point here being that if you understand and trust TCX’s general outlook and approach to new markets (which I do) and if you bear this in mind as you watch how TCX has chosen to chronicle its impressions of last month’s Myanmar gathering, this is worth your time.

In particular, I would like to draw attention to the emphasis on regulatory concerns voiced by some of the participants interviewed and encourage a lot of reading between the lines here. Maybe I’m reflecting my own bias, but the way I’m interpreting these answers is that nothing is happening overnight and that if your inclination is to ask a question like, “When will this begin to pay dividends?”, well…I think you may have taken a wrong turn somewhere.

Here’s the video:

Frontier Markets Opportunities and Risks, Bloomberg Edition

As part of last month’s Bloomberg Dealmakers Summit in London, the following roundtable took place, featuring Timur Issatayev of Verny Capital, Parag Saxena of New Silk Route LLC and Danladi Verheijen of Verod Capital Management. It’s 22 minutes and all worth it, but if you want the single most profound statement for my time, fast-forward to 15:10, when Parag Saxena has the following to say when asked about investment risks in South Asia:

“If you stay away from purely government-granted things you can probably do all right but sometimes that is where the opportunity is so it’s hard. To me the big surprise that I learned in India, having been in the investment business for 31 years and thinking that I have made already most of the mistakes that I was going to make in my investment life, the one that surprised me in India, and I know it’s true in Pakistan and Bangladesh too, is the lack of talent. So when I invest in the U.S., which I continue to do, I know that even for a pretty tough to fill job, in 120 days to 180 days I can fill almost any job. And so typically now at my age, I get resumes from my friends’ children. I used to get them from my friends at one point and now I get them from my friends’ children. And in the US I think it’s going to be hard to actually place them because there is so much talent available for a limited number of jobs. In India, I find myself grabbing every resume because I can hire baristas for somebody that wants a summer internship job, we have a restaurant company and cellular tower company and we need CEOs, so I can hire CEOs for those companies, and everything in between. So the biggest surprise to me, and the opportunity, is training for lower level jobs. And that’s a real unexpected risk, because time is the enemy of internal rate of return and if it’s going to take you more time to fill these slots and you can’t get stuff done, you have a real problem.”

Here’s the video in full:

Chart of the Day: The World as 100 People

From Jack Hagley:

World-as-100-People_3

 

Charts Of The Day: Economic Potential In MENA

The most recent Milken Global Conference in Los Angeles featured a panel entitled, “Two, Three, Many Middle Easts: A Region’s Economic Prospects”, whose commentary is really only for the hard core MENA geeks, but I thought these charts were worth drawing attention to:

This one was the leader, showing average real GDP per capita from 1980 to 2000:

MENA Economic Development Variation 1

Here we have slides showing variation in GDP per capita across the Middle East and North Africa since 2001. Notice the y-axis scale difference between the Gulf states in the rightmost chart versus North Africa and “core” Middle East:

MENA Economic Development Variation 2

An approximate comparison of just how miniscule FDI flows to the region relative to the world:

MENA Economic Development Variation 3

Of the FDI that does go to the region, we shouldn’t be surprised to find more of it going to the oil producers than to the non-oil producers:

MENA Economic Development Variation 4

And yet expected GDP growth for the coming few years is expected to be mostly uniform:

MENA Economic Development Variation 5

Finally, intra-regional FDI against total FDI to the region:

MENA Economic Development Variation 6

The link to the full hour panel discussion is here and embedded below. If MENA development is your gig, I guarantee there’s something in there for everyone, from diplomats to venture capitalists and anyone in between. For my time, by far the best bang for the buck commentary comes from Chris Schroeder, who starts speaking at approximately minute 36. This man talks way too fast for me to transcribe or bother quoting any of it, but suffice it to say he depicts in words far more illustrious than any of these charts the economic potential the Arab World possesses.

Chart of the Day: Economic Growth vs Well-Being in Africa

I haven’t read the report yet and I’m not even sure I buy the premise, but this chart format is interesting, isn’t it?

Economic growth vs well being

Sourced from the Economist, on a recent Boston Consulting Group study entitled, “Strategies for Improving Well-being in Sub-Saharan Africa”.

Chart of the Day: Frontier Markets Correlations, Round 2

S&P Capital IQ slipped this press release out last week, which I’m glad I followed up on since it led me to the following correlation chart:

Frontier Markets Correlation vs Major Indices

Equally important, this comment which came alongside it:

From an asset allocation perspective, one of the biggest positive differentiators of frontier market equities is their relatively low correlation with both developed and emerging market equities as well as commodities (see table 2). The asset class’ ability to “zig” when others “zag” is a function of its aforementioned limited integration into the global economy and its more domestically driven fundamentals, in our view.

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Charts of the Day: The Future Of Emerging And Frontier Markets

CarnacTheMagnificentThanks to Ernst & Young, I’ve got my retirement destination all picked out: Turkey.

Because, you see, in 2040, when I’m 67 years old, forget the BRICs or Mexico or Dubai or South-South anything; Turkey’s gonna be an export boomtown. Or at least that’s one of the forecasts E&Y is touting in its new Rapid Growth Markets forecast. And if, come 2040, I’m not rolling G-style through the souks of Istanbul, I’m definitely suing the crap out of the 2040 incarnation of Ernst & Young,  which by then might be better known as ErnstPWCDeloitte-Slim/Gates LLC dot unit D sector. 

In all fairness E&Y does a dependable job of summarizing the main economic characteristics of developing markets for those who don’t plug into this stuff every day.

And they also have a nifty online interactive tool you  can play with here.

For the rest of us…the thing is I really just have a hard time taking seriously any forecast that goes out to 2040. But let’s try anyway. According to the charts, those of us lucky enough to still be alive in 2040, assuming there’s still a human race by then, should probably be doing something with exports. But definitely not anything between the Eurozone and the US:

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Making Sense Of Angola Stock Exchange Plans

Africa Stock Market Cap FiguresBloomberg had a story out late last week about plans for an Angola Stock Exchange, entitled, “Angola Plans 6th-Biggest Africa Bourse With Value at 10% of GDP”. Since we (and by we, I mean you and me, in an apparently small minority) are resolved to have a realistic approach in discussing economic prospects anywhere, here are the main points of interest from the article once we strip away all the spin and optimism:

  • Angola, Africa’s second-biggest oil producer, expects its stock exchange to have a market value of 10 percent of gross domestic product within 18 months of its startup, making it at least the continent’s sixth biggest.
  • The capitalization of the exchange, set to start in 2015, would be a minimum of $11 billion based on last year’s output of $114 billion.
  • The Angolan government is forecasting economic growth of 7.1 percent this year, down from 7.4 percent in 2012.
  • A secondary bond market will start this year to help develop a yield curve.
  • South Africa’s bourse is the continent’s largest at $842 billion, more than double its GDP.
  • Angola ranks 157th out of 176 countries on Transparency International’s 2012 Corruption Perceptions Index.

The investment bank Imara just put together this brief which summarizes some key data points for other stock markets in Africa. There’s some good trading info in there but missing is any indication of market capitalization figures. I should add that this isn’t Imara’s fault necessarily as this data is generally pretty hard to come by.

The thing is, this isn’t the first time Angola has made efforts at opening a stock exchange. In December 2007, allAfrica.com ran a story entitled, “Angola: Stock Exchange Opens in 2008”, but I definitely remember hearing about this before then, though not as far back as 2003, which is when this article dates the beginning of the process.

In any event, here’s a more “recent” take on the Angola stock exchange prediction, from How We Made It In Africa in 2010. Apparently, Angola’s planned exchange was then expected to be the third largest in Africa. Particularly striking from the 2010 article was this little snippet:
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What Central Bank FX Reserves Really Tell Us

The New York Fed has just published what is absolutely mandatory reading for anyone with a stake in the foreign exchange market. It’s a 10-page pdf entitled, “Do Industrialized Countries Hold the Right Foreign Exchange Reserves?” and is one of those rare documents whose entire text is quotable, making excerpting rather difficult, but I’ll try to keep it short. The abstract provides a pretty good summary:

That central banks should hold foreign currency reserves is a key tenet of the post–Bretton Woods international financial order. But recent growth in the reserve balances of industrialized countries raises questions about what level and composition of reserves are “right” for these countries. A look at the rationale for reserves and the reserve practices of select countries suggests that large balances may not be needed to maintain an effective exchange rate policy over the medium and long term. Moreover, countries may incur an opportunity cost by holding funds in currency and asset portfolios that, while highly liquid, produce relatively low rates of return.

And this, from the opening paragraph, is also worth drawing attention to:

To date, the foreign exchange reserves of major industrialized economies have received relatively little attention in public policy circles, with few questions posed regarding their optimal size, composition, and use. Instead, discussion of foreign exchange reserves tends to center on the large holdings of emerging market countries—including China, whose reserves reached about $3 trillion in mid-2012. Foreign currency reserves are also overshadowed in public discussion by the much larger external imbalances that countries amass in the form of trade deficits and surpluses.

The key element here is that this paper only looks at the US, the UK, Switzerland, Japan, Canada, and the euro area, and rightly so as these are the big fish of the global FX market. The brief mention of emerging market countries’ holdings highlights what’s implied in the debate but rarely stated explicitly, so allow me to do so now:

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Chart of the Day: Sub-Saharan Africa’s Mobile Phone Market

Lots of room to run here. What this doesn’t give us a clear view of though is undersubscription relative to absolute market size. Nigeria would obviously be the winner on that front.

2013.03.18.Sub-Saharan Africa Mobile

How Oil Divides The Economies Of Africa Into Winners And Losers

I can’t get this article from the FT’s William Wallis out of my head. The headline is “Currencies pressed by trade imbalances” but this really only captures a small slice of the picture. Check it out:

With import demand outstripping export growth in some of the continent’s fastest expanding economies, rising trade imbalances are putting pressure on currencies. African and international investors hedge against this by spreading risk – one factor that is driving African banks and businesses across borders.

But even an expansive footprint is not always enough. MTN, the continent’s leading telecoms provider with a presence in 21 African countries, announced that currency swings had weighed heavily on its earnings.

More broadly says Razia Khan, head of Africa research at Standard Chartered Bank, widening current account deficits are the result of an investment and consumption boom, new resource exploration activity and “the scaling up of output”. Ghana fits into this category. It is also on the risk radar this year as heavy investment in oil and gas infrastructure continues, with only modest increases forecast for oil output.

A weak currency does not help those African countries with limited capacity to ramp up exports in response. Kenya cannot for example suddenly double tea production. So, it is forced to defend its currency to avert importing inflation.

Loose monetary policy in major developed economies has driven a rush of short-term funds into African markets. David Cowan, Africa economist at Citibank, says the way in which central banks defend their currencies and the margins that foreign investors earn will be one determining factor in how long the appetite endures.

I don’t disagree with any of this but would point out that this is all just the tip of the iceberg and there are a lot of ways to slice this.

One is that just six of Africa’s 53 countries account for two-thirds of the entirety of Africa’s $2.0 trillion economy. In descending order of nominal GDP: South Africa, Nigeria, Egypt, Algeria, Angola and Morocco. I think a pie chart best demonstrates this relationship:

2013.03.20.Africa 2013 GDP composition

Another is to think about how much of Africa’s total economy is driven by oil exports. Let’s try the following table to demonstrate this:

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InfoGraph of the Day: Chinese Companies and Risk in Africa

This is really impressive and makes me really rethink my previous notions of a political risk framework, particularly in the context of Africa. No more preface necessary:

2013.03.14.China risk in Africa

Sourced from Africa-Asia Confidential.

TRANSCRIPT: Nomad Capitalist Report Radio Show Interview

terraqueous-globeI was interviewed for the weekly Nomad Capitalist radio show over the weekend, hosted by Andrew Henderson. On the agenda: the Africa-China relationship, putting the hot-or-not test to Frontier Markets and the nuances of investing in Mexico. Here’s the link and here’s the mp3:

http://www.buzzsprout.com/8222/78536-nomad-capitalist-report-feb-23-2013.mp3

And here’s the transcript:

Andrew Henderson:   I want to start with a piece that you touched on recently, commodities, and emerging markets’ domination of reserves of commodities, explain that a little bit and let’s get into what exactly that can tell us.

Ulysses de la Torre:     Thanks for having me. If it’s the graph I think you’re talking about, it’s not a graph, it’s actually a map, which I pulled from Glencore, which, given Glencore’s footprint in this universe, shouldn’t be surprising that they should come up with something like this. And what it basically shows is a map of the world and how all of the key commodities are dominated in one form or another by underdeveloped markets. When I look at it, the first thing I see is that one of the big obstacles here is nothing more than logistics and infrastructure. And this is something that’s frequently lost on foreign investors trying to research this from afar because these are elements of an economy that you cannot fully understand without experiencing it. It’s one thing to be stuck in a traffic jam that takes you two hours to make a trip that normally takes one hour, but it’s entirely another thing for a truckload of raw materials to take three days to drive a couple hundred miles because of anything from bad roads, military checkpoints, bandits, local territorial disputes, on top of your basic traffic problems. This adds significantly to transport costs and who ultimately foots the bill for this added cost is often a point of dispute that can manifest in a lot of ways that North America and Europe haven’t really had to think about in decades, since before most of us were even alive.

AH:                             You talk a lot about Africa and I want to get into some of the specifics that are going on there. There’s a big media play that China is recolonizing Africa and so many of the resources plays, even the financial sector plays, let’s talk about Africa, because that’s one area to hone in on for these resources, it’s very resource rich, it’s fast growing, but it’s more than just China, let’s talk about who the players are in Africa and what’s going on there, give us the introductory sketch to Africa.

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A Very Frank Discussion of Corruption and Risk in Frontier Markets

2013.02.22.Frank discussion of corruption and risk in Frontier MarketsHuge kudos to Andrew Henderson of Nomad Capitalist and Chris Tell of Capitalist Exploits for this discussion of investment prospects primarily in frontier markets. The focus is mainly on Mongolia, but they also cover Fiji, Myanmar and Cambodia. The podcast is worth listening to in its entirety, but the discussion of risk and corruption in particular grabbed my attention for its rare candor. I don’t think Henderson consulted any of the things I’ve previously said about due diligence and liquidity risk, but some of his questions may as well have been lifted directly from some of my thoughts on these themes, most recently here and here.

Since I can’t find any transcription of the interview anywhere, I thought I’d transcribe the salient points directly since this is definitely something I’ll be referring back to: Continue reading

Map Of The Day: Emerging and Frontier Markets Dominate Global Reserves of Key Commodities

Why does it not surprise me that a map showing commodities reserves of emerging and frontier markets would have come from a Glencore report?

2013.02.20.Map of the day EM FM dominate global resereves of key commodities 2

Looking at it in these terms kind of raises an obvious question: how is it that these countries aren’t in more dominant positions of setting the global agenda, policymaking, or development? Chalking it up to corruption is a bit too easy,  and I’m honestly coming around to the opinion that nobody is totally free from corruption. It’s partly corruption, sure, but it’s also just simple logistics.

Central America, Forgotten Stepchild

2013.02.20.Central America forgotten stepchildThe reality is that the world evolves in large part on the basis of relativity. And the thing about Central America is that it’s so overlooked that even when there’s nothing new to say, it’s still worth reminding ourselves what’s there since it’s so rarely the object of focus.

In fact, it’s so out of focus that I listened to this Business Monitor International podcast back in December when it was first released and didn’t think twice of it until seeing this very bullish take the other day on investing in Central America from MoneyWeek. The headline should give you an idea of where we’re going here:

CENTRAL AMERICA IS A GREAT INVESTMENT STORY – BUY NOW

Since BMI came first, let’s review that. Here’s what I didn’t necessarily learn, but am happy to be reminded of: Continue reading

The Problem With Trying To Rank Emerging And Frontier Markets

“Only the most bullish should even think about putting up to 5% of their equity portfolio in frontier markets. And even that might be too much.” — Ben Levisohn

The March issue of Bloomberg Markets magazine apparently attempts to rank the “most promising” Emerging and Frontier Markets for investors according to relative economic performance across a variety of areas. And because we simply cannot resist rankings and lists, I’ve been spending some time digging through some of this which is currently available online (the methodology is described here).

So this is the EM table (go here if you prefer a slideshow format…I personally do not):

2013.02.19.Bloomberg Emerging Markets ranking

And here’s the FM table: Continue reading

Frontier Markets! These Prices are IN-SANE!

Sometimes when I read mainstream financial media coverage of how frontier and emerging markets are booming-heaving-climbing-winning-advancing-accelerating-faster-bigger-better-more, I get this weird sensation in my gut. It’s like I’m listening to some combination of carnival barker and auctioneer and used car salesman all rolled into one.

Actually, I know what it reminds me of. This is exactly what it reminds me of:

Take a look at this opening from this Bloomberg article last week and see if you don’t feel it too. It starts with the headline, “Best Stock Pickers Trawl Frontier Markets as U.S. Funds Lose” and continues as such. Try reading this aloud in as few breaths as possible:

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