Webinar Report and Playback: Insights on the Investment Landscape in Africa: The 2019 Bright Africa Research Findings
On March 03rd, 2020, MFW4A and RisCura jointly organized a webinar based on the 2019 Bright Africa research findings. Bright Africa is a yearly flagship report by RisCura incepted in 2013 that seeks to plot the investment landscape on the continent, and provide decision useful information for asset managers and asset owners. The 2019 report highlighted the marked structural differences between African sub-regions, while assessing how these markets compare to global markets. The key findings and full report can be found at brightafrica.riscura.com. RisCura is an independent investment advisor and financial analytics provider that offers investment decision support in developed and emerging markets. RisCura also provides a range of services to the largest investor base in Africa in listed and unlisted investments, notably institutional investors, asset managers, hedge funds and private equity clients with over USD 200bn in assets under advisement.
This webinar was moderated by Guy Menan, Knowledge Manager within the MFW4A team and the keynote speakers were Gilbert Anyetei and Adam Bennot, who worked respectively as Junior Associate and Senior Associate within the RisCura’s alternative investment services team.
The keynote presentation began with the analysis of recent regional trends in terms of development potential (emerging and frontier markets), GDP output and sectoral performances, regional wealth and inequalities and weakness of interregional transport infrastructure (example of road and rail networks). With regards to the sources of capital, pensions systems in Africa remained largely dominated by Southern Africa countries - including South Africa, Namibia and Botswana – in terms of size with the highest continental Assets under Management (AuM) at domestic level. As in South Africa, public sector system significantly supports the high pension coverage with the Government Employees Pension Fund (GEPF) being the biggest pension institution in Africa. Anyetei explained the low pension coverage in the region by the relatively important size of the informal economy, negatively impacting saving mobilization by the formal financial channels. According to the International Labour Organization (ILO), 86% of Africa’s working population works in the informal sector, while the same metric stands at 68.2 % in Asia and the Pacific, 69% in the Arab States, 40% in the Americas and 25% in Europe and Central Asia. However, Africa’s youthful population and growing middle classes could be considered as an advantage for future investment and savings levels in the region. Regarding pension funds allocation, bonds and equities remain the two predominant asset classes for regional pension funds, with equity investment dominating allocation strategies in Southern Africa while Eastern and Western Africa favoured fixed income assets.
The African insurance industry remained largely underdeveloped as compared to the rest of the world, with gross insurance premiums written (GPW) accounting for 1.56% of global GPW and largely dominated by South Africa (USD 48.3bn in 2018) and followed by Egypt (USD 1.6bn in 2018). The South African insurance market is the fourth performer in the emerging markets groups with the highest penetration and density rates. This is supported by a sound regulatory environment, diversified multichannel distribution and a high level of local competition.
With regards to Development Finance Institutions’ (DFIs) commitment in the region, debt instruments (such as credit lines and bonds) are more commonly used by selected DFIs, including Dutch Entrepreunrial Development Bank (FMO) – German Investment Corporation (DEG) – African Development Bank (AfDB) – Proparco – International Finance Corporation (IFC) and Overseas Private Investment Corporation (OPIC) , as opposed to (direct and indirect) equity investments and other forms of financing support such as guarantee and risk sharing facilities. In 2018, the most significant DFI in terms of commitment was the African Development Bank (AfDB) with USD 34.1 billion, followed by IFC with USD 21 billion. In terms of regional breakdown, West Africa, East Africa and Southern Africa with DFI’s financing respectively amounted to USD 21 – 17.3 and 16.5 billion. South Africa, Nigeria, Kenya, Cameroon and Egypt are the countries receiving the bulk of the financing in each sub-region. With regards to the banking industry, the loan to GDP ratio remains low on the continent, due to limited access to capital for large portions of the population, relatively large size of informal economy negatively impacting the formal savings levels, inadequacy of social security systems in some countries and the overall lack of trust in financial institutions. There is also quite a large concentration in the regional banking sector: South Africa, Egypt, Morocco, Nigeria and Algeria account for 83% of total banking assets in the region in 2018.
On capital markets, low levels of liquidity affected (listed) equity activities across different stock exchanges in Africa, with high costs of trading mainly due to brokerage commissions largely dominating other fees such as clearing and settlement costs. Private equity (PE), activity continued to trend upward between 2009 and 2018 mainly in Southern and Eastern Africa. The IT sector by far dominated the sectoral dispersion of PE investments, especially in 2017 and 2018. This performance is largely supported by significant increase in mobile phones penetration, internet usage and digital payments. South Africa and Egypt make up the most substantial portion of bonds outstanding at, 35% and 28%, respectively. These two (2) countries have relatively stable and liquid capital markets compared to the rest of the continent, with foreign investors holding 46% and 20% of bonds and bills respectively in South Africa and Egypt, while domestic investors hold the major parts of these assets portfolio.
During the Q&A session, participants raise their concern on domestic sources of capital, PE investment returns and in Africa. The panelists explained how important informal savings channels hampered a better collection of formal savings. They also mentioned MSCI and FTSE criteria such as sustainability of economic development, size-accessibility and liquidity of capital markets that helps to classify frontiers and emerging capital markets at a global level. For example, based on these criteria, Nigeria falls into the frontier markets category as opposed to the emerging markets classification.