Issue 138 • 9 May, 2008

Rising prices, not sub-prime, make clouds on Africa’s financial horizon

Outside a few pockets of plenty, like the Gulf, bank credit is in short supply across the globe. African Energy’s regular scanning of the markets has suggested some tightening of terms and availability of project finance – and even some trade finance – in H1 2008 (AE 134/24, 132/8). But there seems still to be plenty of upside, with African markets relatively unscathed by sub-prime worries, according to leading development and commercial bankers who have talked to African Energy in the past fortnight.

Speaking in Tunis, African Development Bank (AfDB) president Donald Kaberuka highlighted the big problem: that “at this point in time the issue most taxing Africa’s policy-makers and ourselves is the food crisis and energy crisis.” Providing adequate policy responses to these issues will provide a central theme at the AfDB’s upcoming annual meeting, to be held in Maputo in mid-May.

Typical of the view that Africa can weather the sub-prime crisis, AfDB treasurer Pierre Van Peteghem commented that “Africa hasn’t suffered as much as other parts of the world in the credit crunch-induced crisis.” The continent’s economy “has been growing at 5%-plus for the past five years, and this performance is expected to continue in the near future.” Indeed, Van Peteghem argued that development finance institutions – and their clients – might have benefited from lower cost funding, as shown by the AfDB’s recent three-year, $500m global bond, which offered “our cheapest cost of funding ever for a public transaction”.

Development bankers are looking to provide more support to sustain the African private sector’s emergence, in an improved business environment for the region. According to International Finance Corporation head Lars Thunell, while Europe and North America have been mired in sub-prime problems, in “Asia, especially China and India, and in Africa, there are pockets of growth… Africa and the Middle East are doing reasonably well, except South Africa.”

Energy industries look particularly strong from a financier’s perspective. According to Standard Bank’s Stephen Enderle, “all banks are concerned about syndicating in this environment, but the African oil and gas sector seems somewhat insulated from the worst concerns of the credit crunch.” Banks’ appetite remains whetted by commodity prices that are “still strong, even on the long end of the curve.”

However, conventional banking conditions have got tougher, Nedbank Capital’s joint head of investment banking Mark Weston observed – although the South African bank remains “very positive on the project and infrastructure finance sectors”. Weston saw “a return to much more traditional banking, with some of the covenants and tighter terms of five to ten years ago.” But it seems unlikely that the huge upturn in positive market sentiment towards Africa will go away.

One sign of continued confidence is the planned launch this month of a new Africa/Middle East-focused hedge fund, Insparo Asset Management, whose co-founders are Mohammed Hanif and Francis Beddington, and whose first fund has attracted $125m from inter-dealer broker Icap’s founder Michael Spencer (through his IPGL family investment vehicle) and a US financial consultant; seed investor Exotix (the emerging market broker controlled by IPGL) is taking a stake in Insparo. The fund will invest in listed and private equity, corporate and government bonds, local currency and other loans.

Beddington still sees considerable value in assets in markets, led by Nigeria, that he championed during previous incarnations, as head of research at Standard Bank, where he moved from JP Morgan, following an earlier stint as a UK Foreign and Commonwealth Office economist. Hanif has been running a sample $15m portfolio for IPGL for nine months, including investments in Zimbabwe, where several investors see long-term potential.

The Financial Times, which on 7 May ran a big story on Insparo and the Spicer involvement, reported: “Insparo is a big launch among Africa hedge funds because of its seed investors, with few funds running much more than $100m.” The biggest fund focused on the region is London-based Blakeney Management, created by frontier markets pioneer Miles Morland, which runs some $1.5bn. More will follow: the FT reported that former UBS Investment Bank board member Tutu Agyare is near completion of fund-raising for two new hedge funds, expected to attract $200m-300m.

African Energy has commented on the debate over whether hedge fund and other frontier investor interest is drawing in ‘hot money’ rather than sustainable capital since substantial funds started to be committed to under-developed sub-Saharan markets (AE 129/22, 120/1). Now is the time this debate will be put to the test. Hopefully, the many promising signs – from the upturn in AfDB and IFC private sector lending to Insparo’s policy of having some 35%-40% of its holdings in illiquid, ‘hard to sell’, investments – are sufficient to show that the African investment boom is putting down solid roots, rather than inflating the next big bubble.

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