Sub-Saharan Africaâ€™s local bond markets are for the most part small and rudimentary and lack transparency. In some cases even yields are difficult to find. But many have made significant progress in recent years, potentially offering succour to companies starved of institutional funding.
These markets â€“ where the debt securities are priced in Nigerian naira, Kenyan shillings, Zambian kwacha or Botswana pula, as opposed to US dollars â€“ are mostly dominated by government bonds. For companies the cost is often high and the process arduous. But several markets now boast an array of corporate bonds â€“ and more are on the way.
The largest local currency bond market is in Nigeria. Most of the $34.5bn worth of naira-denominated bonds listed in Nigeria is issued by governments, states and government agencies, but banks and a smattering of companies â€“ such as Flour Mills of Nigeria and Nigerian Aviation Handling Company â€“ have also turned to the local market for funding.
Yet arguably the most developed is Kenyaâ€™s smaller local bond market. Government bonds make up almost 90 per cent of the $6.7bn market but corporate bonds are becoming an increasingly important source of long term funding for local companies, such as Shelter Afrique and Safaricom.
Local currency corporate bond markets are also starting to develop in Mozambique, Tanzania, and Botswana, where there is now $344m of local company debt listed. Local bourse heads, regulators and policymakers are keen to develop their local markets further, eyeing an opportunity to give kick the continentâ€™s growth rate into a new gear.
â€œWeâ€™re trying to encourage companies to grow by using capital markets,â€ says Hiran Mendis, the chief executive of the Botswana Stock Exchange. â€œAfrican markets are small but we have the ideal climate for growth. The potential is high.â€
These local markets are still too small and thinly traded for most international investors. There has been some overseas investment in Nigerian naira and Kenyan shilling bonds, but predominantly in short term government paper. Although the returns on the underlying bonds are high, this is largely due to high inflation, and the volatility of the currencies can quickly erode some or all of the returns. All but one African currency lost ground against the US dollar last year.
Moreover, many investors are still wary of the credit risk of African countries and companies, pointing out the sometimes volatile politics.
â€œThe returns have to very high before weâ€™re interested in African names,â€ says Kieran Curtis, a local currency bond fund manager at Aviva, the insurer. â€œGiven the risks we need a large safety margin. Fiscally a lot of these countries look fine, but thereâ€™s more to sovereign debt than just the debts and deficitsâ€¦ There will be defaults in Africa.â€
Nonetheless, many sub-Saharan African countries have relatively high savings rates and there are signs of this translating into larger domestic investor bases. Such investors care less about currency volatility and are not put off by the local politics.
Nigeriaâ€™s pension fund assets, for example, have grown from â‚¦815bn ($5.2bn) in 2007 to about â‚¦2.45tn by the end of 2011. Although Nigeria is an outlier, given the size of its economy, financial industry and bond market, economists say that other countries in the region are beginning to see the building blocs of indigenous investor bases.
If the recent progress continues, sub-Saharan African bond markets could be due a growth spurt, which will in turn help fund local companies and allow them to fulfil their potential.