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Africa’s foreign funding dilemma

Although many African borrowers encounter difficulties when borrowing in foreign currencies due to oil prices, exchange rates and high levels of leverage, multilateral lending does provide access to wider funding, and the sukuk markets could widen a borrowers’ investor base.

Jun 17, 2016 // 5:22PM

Borrowers across Africa have been struggling to access foreign capital, particularly dollar-funding, which only strong corporates or sovereigns are able to receive such as MTN Uganda’s US$114mn loan secured in May.

This has led to a large push from corporates to access local currency funding.

“The majority of corporates we look at in the unlisted space prefer to borrow from banks, where the majority of the funding is local currency-denominated,” said Michael Viljoen, Senior Portfolio Manager: Africa Fixed Income at Sanlam Investments.

There has been a reluctance from African entities in accessing foreign capital due to the expensive yields demanded by investors in the international capital markets.

“South African borrowers are likely to face higher risk-related pricing in connection with the country’s political situation,” said Jonty Levin, Partner at Alkebulan.

Political turmoil could lead to the country’s credit rating being lowered to junk according to Bloomberg.  

Levin also noted that Nigerian borrowers were in the past similarly likely to be blocked from accessing international capital, due to the country’s FX controls, which had kept the naira artificially trading at around 198 to the US dollar, whilst on the black market it is trading within the 300 area.

The naira currently stands at 199.050 to the dollar, however Nigeria’s FX policy will be amended by the Central Bank of Nigeria (CBN) to a less rigid system on Monday, allowing it to be dictated by market forces.

Levin stated that although Nigerian entities with dollar-denominated loans will have in the past struggled to obtain dollars at the official exchange rate to meet obligations, they now face new problems.

“Following the CBN’s announcement that the country will move to a floating exchange rate regime, those entities will experience even greater challenges as the currency is likely to depreciate significantly.”

Levin added that while such entities would have a greater ability to access the dollars, they would be significantly more expensive.

The economic shock of the naira’s devaluation is also likely to affect corporates’ performance, which will add to their challenges in meeting their debt obligations. 

Nigerian oil producers are also facing financial challenges. Depressed prices (Bent Crude is at US$48.51 per barrel) and production interruptions due to local insurgencies are now posing significant challenges to such entities in meeting their funding obligations.

“Nigeria’s domestic oil producers borrowed to fund their purchases of oil fields from the oil majors at valuations based on oil prices in excess of US$100 per barrel, the majority of which were unhedged.”

Similarly to concerns over the ability of Nigerian corporates to repay their dollar-denominated debts, there is concern over the debt exposure Mozambique’s state owned entities have caused the sovereign, which is now highly leveraged with total foreign debt standing at US$9.89bn in April according to Reuters.

Whilst certain African entities look set to struggle to access funding from international lenders, unlike elsewhere across emerging markets, such as in Latin America, Brexit woes are unlikely to have a significant impact on lending in the continent.

“The funders of African borrowers are those with a mandate focused on risk appetite suited for Africa,” said Levin.

He added however, that there may be an impact on the underlying cost of capital in global financial centres as a consequence of the global flight for safety that such events cause.

“Any such cost ramifications would affect all market participants.” 

Viljoen added that Brexit has not had a huge impact for investors sitting in and looking at Africa. “It is on the periphery for us,” he noted.

Although the high yields demanded by international lenders can put off African entities from accessing the markets, concessional lenders provide them with a funding opportunity.

“In many important projects, multilaterals are to be found participating in the funding. Their funding is not provided on concessional terms, but rather they play a crucial role in leading transactions which commercial participants might regard as being too risky,” Levin noted.

He added that in doing so, such lenders facilitate a crowding-in effect and so increase the borrowers’ access to capital. 

The development of sukuk markets, which Nigeria and Kenya are currently working towards, could also provide African borrowers with a wider investor base.

“Sukuk products would widen the potential investor base for African borrowers,” Levin said.

He noted however that the key Islamic financial centres are experiencing financial challenges of their own, so the scale of liquidity they could provide is unlikely to be as great as it was in the recent past.

Although Mozambique, South Africa and Nigeria and their entities are unlikely to find easy access to funding, other areas of Africa are more appealing.

“Regarding sovereigns, our focus is more on East Africa, on more diverse economies rather than single commodity-reliant countries. There are still opportunities,” said Viljoen.

Africa Macro

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