Africa: High stakes, higher hopes
A rate-cutting spree that saw seven of the world’s 10 major, developed-market central banks cut rates last year paved the way for a global risk binge, despite economic, political, and geopolitical dark clouds. Africa was not left out of the soiree, but local currencies remained the Achilles heel.
2024, the year of the dovish pivot
2024 was a big year for monetary easing globally as more countries tried to re-balance their economic scales. With inflationary pressures dissipating in many countries, 195 monetary policy rate cuts were delivered by global central bankers relative to 31 rate hikes. In 2023, the numbers were 84 vs 161 respectively – as reported by Central Bank Rates (CBR) -, confirming a tipped scale to support economic growth in developed and emerging economies.
Africa’s local bourses climbed a wall of worry.
The global risk-on sentiment set the stage for the moon rally of African bourses, despite a laundry list of investor concerns. Sticky inflationary pressures, still-tight financial conditions, widespread local currency weakness as the United States Dollar flexed its muscles, macro-fiscal imbalances, civil strife, and political instability all formed dark clouds over Africa’s investment horizon.
Eurobonds make a comeback
African Eurobonds were a delight to investors, but they cost a pretty penny. All issuances were oversubscribed and a total of US$11.3bn was raised by six countries, with yields ranging from 6.6% on Cote d’Ivoire’s notes to 10.4% on issuances from Kenya and Nigeria. However, these rates are significantly high, and the repayments will further strain the already limited resources of the regional governments.
Peering into the crystal ball
Economic and political challenges will persist through 2025 as Donald Trump takes office in the US. Trump in the Oval Office will keep every country’s government and central banks on their toes. There are already concerns about the global impact of the strengthening U.S. Dollar with the Trump Presidency as he implements his “America first” policies. His renowned pro-America policies pose a significant upside risk to global and domestic inflation, requiring hawks to rule the roost again.
As African issuers are highly vulnerable to shifts in global sentiments, a more hawkish global stance points to potential financial distress in the future from higher borrowing costs that could once again shut the region’s issuers out of the international capital market. The fact that governments are accepting these high rates and steep terms to access the external financing they need is a sign that the credit crunch persists. African countries will soon be left to sink or swim in a ruthless global financial environment. In 2025, Côte d’Ivoire, Nigeria, and Cameroon each have a Eurobond bullet payment due.
As politics & geopolitics in the global environment shape up, Africa’s domestic politics and geopolitics will carry more impact in 2025. There are eight (8) Presidential and nine (9) parliamentary elections scheduled for 2025. There is also ongoing civil strife like the border conflict in South Sudan, insurgencies in Chad, Nigeria, Djibouti, Ethiopia, and the DRC; ethnic and religious strife; etc. With deadly conflict raging in countries across the continent, the African Union has much to do in helping make peace in the year ahead. This – I believe – will be top on the to-do list of newly elected eight-man African Union Commission Senior Leadership once elections are concluded in February 2025.
GENES in focus
In 2025 my investment acronym is GENES – Ghana, Egypt, Nigeria, Ethiopia, and South Africa.
Ghana is gradually turning a corner on its fortunes and is set to finalize its debt restructuring exercise this year. The country secured the consent of a majority of its bondholders to restructure US$13 bn of external debt as its economic growth is historically strong, and consumer price shocks are less intense compared to the 2023 level. Its stock market also outperformed the continent’s local bourses logging a 56.2% year-to-date return in 2024. These with ongoing fiscal and financial sector reforms lay the groundwork for the current optimism in Ghanaian securities.
Optimism for Egyptian securities is fuelled by geopolitical tailwinds and carry-trade opportunities. The Gaza ceasefire deal struck between Israel and the Palestinian Hamas could result in the rebound of activities in the Suez Canal and improve revenue to the government’s coffers. In fiscal year 2023/24, the Canal logged a 68% decline in activities resulting in a 25% decline in revenue generated relative to the 2022/23 fiscal year. Suppose President Donald Trump also makes good on his promise to end the protracted Russia-Ukraine war. In that case, the Egyptian government can gradually scale back its subsidies for essential food items as the supply chain normalizes – creating fiscal space for the Egyptian government.
Nigerian securities get a nod thanks to the government’s mix of housekeeping changes and a record trade surplus. In the past year, Nigeria’s policymakers introduced reforms targeted at achieving price stability and improving access to the foreign exchange market. In addition, the country logged a record trade surplus as export growth outpaced import growth thanks to the burgeoning oil trade with the rest of the world.
Ethiopia is opening up pretty quickly, and staying the course on reforms. The country implemented banking and foreign exchange reforms and re-launched its stock market to facilitate access to capital for investors. The International Monetary Fund (IMF) reports that Ethiopia was the largest economy in East Africa in 2024, outpacing Kenya and Tanzania. I view this as an indication of the inherent gems of investment opportunities, especially as the stock exchange reopens.
As Eskom flipped the script in South Africa last year, the momentum for the country’s assets remains strong as its overall risk premium declines. Load shedding effectively ended in the Southern African country on 27th March 2024, a precursor for a better-performing economy through declining operational costs for business. This will have a positive knock-on effect on local bonds, as fiscal numbers improve from higher corporate tax revenues and lower Eskom bailout, reducing the country’s overall default risk.
Lastly, I understand that the bulls may be roaming currently but be careful not to catch the falling knife. It is important to remember that the financial markets are cyclical, and security prices will always come crashing down like an elevator after an extended rally. There is no way to predict when this will happen, but no rally lasts forever.