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Africa

SWOT Analysis: African Credit Markets in 60 Seconds

Bonds & Loans examines the strengths, weaknesses, opportunities and threats across Africa following a research trip to the region.

Oct 10, 2019 // 4:32PM

Strengths

  • Key regional economies, notably across Francophone and West Africa, are benefitting from a credit cycle reversal, new ratings allocations and upgrades
  • The local ZAR market is liquid and has proven robust in the face of economic headwinds
  • South African banks are fairly well regulated and liquid
  • The external perception of ANC’s election win is that political stability in South Africa will persist
  • Nigerian post-election market activity is picking up with a number of issuances successfully closed in recent months and a strong pipeline of upcoming deals
  • The role of DFIs across East Africa is growing and they have an increasing amount of capital at their disposal to fund large-scale projects

Weaknesses

  • Policy reform efforts across the continent have led to little meaningful change and clarity
  • The development of local capital markets (excl. South Africa) has been slow, resulting in limited access to additional market liquidity
  • Bond issuance processes are admin-heavy and surrounded by red tape, with the new JSE directives increasing the complexity of procedures
  • Mismanagement stories about South African SOEs are attracting local and international media attention, raising questions around institutional corporate governance

Opportunities

  • Despite political risk continuing to be a deterrent for foreign investment into the continent, South Africa’s economic headwinds are expected to create an opportunity for increased investor appetite for the rest of Africa
  • The increasing focus on ESG and impact investing, not only has the potential to unlock new funding avenues, but improve accountability and debt sustainability
  • Africa’s Free Trade agreement is expected to boost intra-regional cooperation and reduce the continent’s dependence on foreign exports and investment
  • The recent first green bond issued by a commercial bank will lead to more activity off the back of the issuance
  • The launch of the infrastructure PPP model will provide a much-needed capital injection for the continents’ vast project needs
  • South Africa’s local currency sukuk is setting the benchmark for developing the market and opening it up for parastatals and private companies
  • MNCs across the continent are looking to optimise their cash positions and decrease their leverage
  • Digital transition and alternative payment mechanisms are already visible on the continent, particularly in East Africa

Threats

  • US-China deteriorating relations and escalating trade tensions will have a negative impact on African commodity exporters selling into China
  • Hydro carbon economies and resource-rich countries are vulnerable to oil and commodity cycles shocks
  • With debt to GDP and servicing ratios back to HIPIC levels, concerns are being raised about debt sustainability across the continent
  • There are rising concerns over Asian investment in Africa given the opaqueness of the terms and conditions attached to the funding agreements
  • An unravelling of Eskom’s situation will lead to systemic shocks across South Africa’s banking system
Africa Currencies Energy Islamic Finance Policy & Government Projects & Infrastructure Ratings Sustainable Finance Economics and Markets Commodities Macro

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