Sub-Saharan Africa is one of the world’s major growth markets. Investment opportunities have, in the past, been underestimated, but Europe is increasingly aware of the need to build its presence in the region. OMFIF, supported by KfW Development Bank and the Trade and Development Bank, convened a seminar in Frankfurt to share expertise on strategies, opportunities and experiences of investing in sub-Saharan Africa.
By large consensus, attendees agreed that the main challenge for investors is the lack of bankable projects. There is an oversupply of lenders, but having money to lend cannot be the catalyst for development; there must be projects. Investors reported that Africa’s so-called ‘infrastructure funding gap’ is less a shortfall in funding, and more a ‘gap’ in sufficient legal and regulatory architecture.
Having the capacity to identify which projects are available and in which countries was also raised as a crucial challenge. This reflects the view that Africa fails to attract investment not because of any perceived ‘riskiness’, but because there is a lack of understanding in the market. Other crucial issues include: ‘brain drain’ when young and educated people migrate away from the region; that more than half of entrepreneurs come from outside of Africa; the election cycle, which interrupts fund distribution; and financing economies in their own currency. The latter remains especially problematic, as interest rate differentials continue to incentivise debt being in dollars.
Nevertheless, opportunities still abound for perceptive international investors, particularly those who show a willingness to invest in local currency markets to make the most of the yield. Moreover, only around 20% of Africans have a documented credit history, which presents a considerable opportunity for innovative financial technology firms to gather and capitalise on novel data.
Panellists highlighted the importance of risk management through credit enhancement. Credit enhancement through blended finance for the investor and blended capital for the institution operating in sub-Saharan Africa was also discussed. Attendees emphasised that European institutional investors commonly ask for investment grade; they are searching for middle-income-country investments in Africa, instead of dealing with a higher or lower yield that reflects the risk.
Multilateral agency guarantees were raised as one strategy that can be used for credit enhancement for sovereign financing. When such insurance arrangements cover the risk of loss, large institutional investors can avoid the reputational risks of investing in fragile economies. It was noted, however, that such arrangements require private sector collaboration with multinationals; an unfamiliar territory for many institutional investors.
Attendees to the seminar identified a trade-off in such collaboration. Multilaterals have a budget that they must invest as well as triple-A ratings that they must defend, meaning they can get away with squeezing the yield too low, an option which may not be favourable to institutional investors.
Katie-Ann Wilson is Programmes Assistant at OMFIF. For more information regarding future OMFIF meetings, email firstname.lastname@example.org.
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