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The Longer Term Finance and Investment For
Africa: The Funding Gaps and Investment
Opportunities
Presentation by
Prof. Njuguna Ndung’u
Governor, Central Bank of Kenya
at the
Workshop on Longer-Term Finance in Africa
Bonn, Germany
December 9, 2014
Outline
1.
Background
2.
The Growth Potential for Africa
3.
Challenges for Long-Term Finance in Africa
4.
Financing Trends in Africa – Domestic and
External Sources
5.
Kenya’s Experience
2
1. Background
1.
2.
3.
4.
5.
6.
7.
8.
Africa has diversity in its countries: coastal, resource-rich; land-locked, resource-rich;
coastal resource-poor; and, land-locked, resource-poor
The urban population in Africa was estimated at 37% of the total in 2013 which was
below the world average of 53% (World Bank)
The African middle class is growing fast – now estimated at 380 million – a large
market is thus developing.
The macroeconomic environment in Sub-Saharan Africa (SSA) has improved: inflation
moderated from 9.3% in 2012 to less than 6.6% in 2013. Growth is resilient at 4.4%
to 5.1% (IMF Regional Economic Outlook-2014)
But Africa needs rapid and sustained growth to achieve poverty reduction and create
employment for the rising population of the youth – World Bank estimates show that
46.8% of SSA population live on less than USD1.25 a day against a global average
of 14.5% (World Bank)
Long-term finance is essential to meet the long-term physical investment needs
especially on enablers for growth such as Infrastructure, Real Estate, Research and
Development, and New Ventures
However, thin and shallow financial markets in Africa remain the main constraint
to long-term finance
But even with finance in some sectors infrastructural gaps has encouraged potential
investors to adopt a awaiting option. Heavy infusion of public investment and
availability of long term finance in infrastructure will dislodge the market from this
waiting option
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1. Background…
Infrastructure Development and Investment
Creates Capacity for Future Growth





Transport infrastructure development in Africa is limited while road transport
accounts for 80% of freight and 90% of passenger traffic – less than a
quarter of the total SSA road network is paved (IMF Regional Economic Outlook
for SSA-2014)
Transport and insurance costs in SSA are equivalent to 30% of export value –
this is much higher than the 9% in other developing countries (IMF)
Infrastructure projects are necessary to address the binding constraints – they
reduce transaction costs and enhance private sector investments’ profitability
Public investments in infrastructure are complementary to private investments –
enhances productivity of private investment
Regional infrastructure projects like Lamu Port Southern Sudan-Ethiopia
Transport (LAPSSET) Corridor in Kenya, Ethiopia and South Sudan will
enhance trade and encourage private sector investments – LAPSSET is
expected to generate at least 3% of Kenya’s GDP – but also an opportunity
for long term investments.
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2. The Growth Potential for Africa
1.
Africa has potential and is a large market for the world: (a)
Africa’s GDP in PPP terms is above USD4 trillion which places it as the fifth block
after the USA, China, India and Japan; and, (b) Africa’s middle class stands at
over 380 million which is considerably higher than the entire USA population and
provides potential for consumption, innovation and consequential investment
opportunities
2.
3.
4.
Financial Institutions are diversifying, growing and deepening
across Africa
Widespread institutional reforms supported by changes in legal
and regulatory frameworks have improved the business
environment – as an example, the devolved government structure
under the new Constitution in Kenya provides new opportunities for
inclusive growth
Macroeconomic stability in most SSA countries has enhanced
investor confidence and domestic policy (monetary and fiscal) to
support economic activity.
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2.The Growth Potential for Africa…
5.
6.
7.
8.
Adequate room for inclusive growth through reforms to promote
economic diversification and employment, deepen financial
sectors, and tackle infrastructural gaps – to make markets
accessible
Recent discoveries of oil and other mineral deposits in Eastern
and Southern African countries could provide new impetus for
growth by enhancing both the productive capacities of
economies and finance public investment
The diversification of trading partners has increased prospects
for increased trade opportunities and development cooperation
Public-Private-Partnerships should will supplement the skills of
the public
and endoginize risk in the long-term public
investments projects.
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3. Challenges for Long-Term Finance
in Africa
1.
2.
3.
The level of capital markets development, with limited tradable
securities such as debt and corporate equity. The securities
markets act as catalysts of long-term finance. But this potential
has scarcely been realized in Africa – domestic credit provided
by the financial sector stands at 66.4% of GDP in SSA which is
way below the world average of 171.4% (World Bank)
Limited range of long-term instruments, weak risk management
and diversification, including few transparent price discovery
channels
Minimal bond issues in African Stock Exchanges and lack of
trading activity limit the ability of most of these markets to
provide a platform for price discovery and for benchmarking
long-term assets
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3. Challenges for Long-Term Finance
in Africa…
The mismatch especially between demand and supply of
infrastructure finance is due to lack of a pipeline of properly
structured projects
Infrastructure investments entail complex legal and financial
arrangements, requiring a lot of expertise, which is costly. Investors
need sufficient and predictable pipelines of infrastructure investment
opportunities
5. Need for solid legal framework as infrastructure projects are
long-term, and political risks loom large for investors
6. Various Development Finance Institutions established across
Africa to provide long-term finance needs for housing, industrial
development and agriculture suffer from Governance Issues,
Political patronage and above all, low levels of funding.
4.
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4. Financing Trends in Africa:
Domestic
Sources
of
long-Term
Finance
Banks in most SSA Countries are traditionally the Key
Players in the Financial System, just like in Kenya
Source: Kenya Financial Stability Report, 2013

The insurance and pension
penetration remains low in
most African countries. In
Kenya, the insurance and
pension industry accounted
for 8.9 percent and 17.0
percent, respectively of
financial sector assets in
2013

But pension funds in Africa
often have sizeable and
growing funds that should
be invested long-term given
the available investment
opportunities.
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4. Financing Trends in Africa:
Domestic
Sources
of
Long-Term
Finance…
Most Insurance Companies and Pension Funds have invested mainly in
Real Estate, Government Securities, and Bank Deposits and comparably
little in Traded Equities. This in some cases is due to Investment
Restrictions imposed by Prudential Regulations, as well as the Risk
Appetite
Kenya Pension Industry Investment Portfolio, 2013 (%)
Kenya Insurance Industry Investment Portfolio, 2013 (%)
Source: Kenya Financial Stability Report, 2013
•Large investments in deposits and risk free government securities should
be seen as a waiting option by potential investors in fixed irreversible investments
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4. Financing Trends in Africa:
Foreign Source of Long-Term Finance…
Foreign Direct Investment (FDI) Remained the Main Source of External
Finance in Africa driven mainly by Infrastructure Investment. But FDI
flows to SSA are much lower than those in other Developing Economies
Source: IMF Regional Economic Outlook, 2014
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4. Financing Trends in Africa:
Foreign Source of Long-Term Finance…
Sovereign Bonds has become an additional source of external long-term finance in Africa
supported by improved credit ratings and macroeconomic management. Sovereign Bond
inflows in SSA stood at USD5.0 billion in 2013 which was equivalent to 20% of Aid to
SSA and 12% of Foreign Direct Investment flows (ODI, April 2014).
Recent Sovereign Bond Issues in Sub-Saharan Africa
Spread
S&P
Yield at
from Size (US
Governing
Tenor
(rating at Currency
issue (%)
LIBOR $mn.)
laws
issue)
(in bps)
Bond
type1
Coupon
type2
England
Bullet
Fixed
USD
Luxembourg
Bullet
Fixed
Not rated
USD
England
Bullet
Fixed
750
B+
USD
England
Bullet
Fixed
600
600
Not rated
USD
England
Sinkable
Floating
10
500
400
B
USD
England
Bullet
Fixed
6.375
11
354
1500
BB-
USD
England
Sinkable
Fixed
2014
8.5
10
574
1000
B+
USD
England
Bullet
Fixed
6/24/2014
2014
6.875
10
429
1500
B+
USD
England
Bullet
Fixed
6/24/2014
2014
5.875
5
418
500
B+
USD
England
Bullet
Fixed
Date
Year
Nigeria
1/21/2011
2011
7.125
10
369
500
B+
USD
Senegal
6/5/2011
2011
9.125
10
594
500
B+
Namibia
10/27/2011
2011
5.835
10
342
500
Zambia
9/13/2012
2012
5.625
10
388
Tanzania
2/27/2013
2013
7
Rwanda
4/16/2013
2013
6.746
Gabon
4/12/2013
2014
Zambia
7/4/2014
Kenya
Kenya
Country
1 Sinkable =Bond backed by a fund, which set aside money on a regular basis to ensure investors are paid principal and interest. Bullet =Entire face value of
bond is paid at maturity
2 Fixed=Fixed percentage of face value paid in interest. Floating =variable percentage, often calculated as fixed spread above LIBOR
Source: Kenya: IMF 2014 Article IV Consultation – Staff Report
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5. Kenya’s Experience
• Central Bank of Kenya in collaboration with stakeholders in the
financial sector initiated domestic debt market development
programs
1. Lengthening of Debt Maturity Profile
 Prior to 2002, the Government domestic debt market was dominated
by short term debt instruments with the debt portfolio ratio of 70:30
(T/Bills:Bonds) and an average debt maturity profile of 0.7 years
 There has been a notable success in the transformation of debt
composition and maturity profile. As at October 2014, the average
time to maturity of Government debt was 5 years and 7 months while
that for bonds alone was 7 years and 7 months
 In 2008, CBK issued the first long-dated paper of 20-years to
maturity. This was followed by successful issuance of a 25-year Bond
in 2010 and a debut 30-year Savings Development Bond in 2011
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5. Kenya’s Experience…
2. Infrastructure Bond (IB) Issuance
 A major milestone - Infrastructure Bond first issued in
2009, with the debut IB successfully raising Ksh.18.5bn
(USD231.25mn)
 A total of six Infrastructure Bonds have been issued
successfully since 2009 with the largest single IB of
USD395mn issued in August 2010
 This has seen even corporate institutions venture into the
Infrastructure Bonds avenue- But they are still limited in
number
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5. Kenya’s Experience…
Infrastructure Bond Targeted Projects/Sectors
1.
2.
Unlike conventional bonds, IB proceeds target specific projects, with
potential for sustaining reliable income streams and great economic
value
There is transparency as the targeted projects are factored in the
annual Budget of the Government under development expenditure
 Spatial distribution of the projects around the country very important
for regional equity
 Enhance success rate of the bond
3.
4.
5.
Transport Sector – e.g. construction of new roads and rehabilitation of
old ones
Water, Sewerage and Irrigation – e.g. construction of water supply
and sewerage systems, water reservoir dams, boreholes and irrigation
schemes around the country
Energy – e.g. drilling of Electricity Generating Steam Wells
(Geothermal), upgrading the National Grid System with New
Transmission Lines and expanding the Rural Electrification Project
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5. Kenya’s Experience…
Bond Trading Market Performance has continued to improve
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5. Kenya’s Experience…
The Sovereign Bond…
Kenya issued A Sovereign Bond of USD2 billion in June 2014
to enhance the capacity for a faster rollout of public
investments in infrastructure – under Vision 2030
b) The Bond was massively oversubscribed at 440 percent. The
realised yields of 5.875% for the 5-year and 6.875% for the
10-year were comparably lower relative to those on recent
issues of similar bonds in the region and on domestic Government
securities
c) The Bond has helped to benchmark the country’s credit and
facilitate access to international capital markets by corporate
entities thereby enhancing investment
d) The Sovereign Bond has also dampened pressure on both
Government domestic borrowing and interest rates
a)
Given these successes in Kenya, it shows it is ready for long-term
investments – it is not a risky environment to invest in long-term
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