ESG investors must engage with emerging markets to deepen capital base

Should developing markets evolve locally or raise funds internationally?

The emerging markets present an attractive opportunity for sustainable investors, with a huge financing gap for clean energy projects and a developing capital markets base. But the region requires better engagement among investors.

‘With the African continent, I think a lot of it has to do with the fact that we’re not well understood,’ said Sheila M’Mbijjewe, deputy governor at the Central Bank of Kenya, speaking at OMFIF’s Sustainable Policy Institute Symposium on 23 March.

‘We are not the same as well,’ said M’Mbijjewe. ‘So I think it’s naive for people to think that they’re going to replicate London in Nairobi – you’re not. But you’re going to get a different opportunity, and you’re probably going to get better returns.’

Investors need to assess Africa differently. One common complaint from investors is that the region does not issue much via their capital markets. ‘Our capital markets are not as deep, but we’re very happy to make them deep,’ added M’Mbijjewe. ‘You say you want products, which products do you want? Tell us what you want and then we’ll tell you what we can or can’t do so that we can have an engagement.’

Egypt is a good example of an African country that has benefitted from deepening its capital markets.

‘I must admit that being more active and present in the capital markets, even in the conventional bonds, has put Egypt more on the radar,’ said Rami Aboul Naga, deputy governor at the Central Bank of Egypt.

‘So we have to owe it in part to what has happened in terms of the regular issuance in capital markets in becoming an investable market that has helped make Egypt more visible to investors,’ said Naga, adding that this has helped bring in investors to its green issuance. Egypt became the first in the Middle East and North Africa region to issue a green bond with a $750m deal in September 2020.

Sarah Kemmitt, lead secretariat at the Net-Zero Banking Alliance said there is a ‘massive opportunity’ for investments in sustainable projects in emerging and developing countries with a financing need of $1tn in clean energy by the end of this decade all the way up to 2050.

However, one of the reasons why investment is not happening at the pace it needs to is the lack of deep capital markets in many of these countries, with the need to ‘build into these capital markets in a really holistic way from the outset’, said Kemmitt.

But what should the focus of emerging and developing markets be? To develop local capital markets or raise funds via the international markets?

‘I don’t think you can do one or the other. I think you have to do the two together,’ said M’Mbijjewe. ‘In Kenya, recently, we’ve released a new law on public-private partnership, which is going to be built into the capital markets. In addition, the CBK is working on a project, which is a central depository system, which is going to be purely digital. So even people overseas in England, Europe or wherever can invest into Kenyan domestic government debt.’

In a poll of attendees at the SPI symposium on what the main challenges are to mobilising sustainable finance in EM, the majority said it was insufficient data and information (38%) and debt constraints (31%).

Naga agreed that developing both local and international capital markets must go hand in hand. ‘You need to continue to establish your capital markets because it’s going to be at the end of the capital markets where these bonds are going to be issued and traded,’ he said.

However, the big obstacle for many EM in issuing debt via capital markets is that the cost of capital is simply too high as a result of their low credit ratings and rising interest rates. Just this February, Egypt raised $1.5bn with its debut three-year sukuk at an extortionate yield of 11%. Egypt’s 10-year yield has reached over 20% while Kenya’s has reached above 14%. Debt experts say that when yields reach above 10%, this is unsustainable territory as the risk of default soars.

Burhan Khadbai is Head of Content at the Sovereign Debt Institute at OMFIF.

This discussion took place at OMFIF’s 2023 SPI symposium held on 23 March. View all of the SPI symposium sessions here.

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