Inside Ethiopia’s commodities pit

Ethiopia: brisk trading in coffee, sesame and white pea beans

How cash-strapped farmers get their goods to market quickly and at a fair, transparent price

Tricks of the trade © Wikimedia Commons

By Simon Allison

In a small, tidy office on the top floor of the Ethiopian Commodity Exchange building in Addis Ababa, communications manager Tewodros Assefa draws two diagrams on a large glass window pane. The window overlooks the capital city’s new light rail line, a raised concrete snake that bisects the city. This scene is unexpectedly sophisticated: a modern, first world pastiche in a country better known, not always fairly, for poverty and chaos. Like the new metro, the Ethiopian Commodity Exchange—better known as ECX—is a physical expression of the Ethiopian government’s massive drive to change this image. The big development push has lifted millions out of poverty. But sacrifice has partnered this success: open political space in Ethiopia is nearly non-existent; and the government holds a poor record on human rights. The ECX, however, is an example of government achievement, as Mr Assefa’s two diagrams illustrate. His first drawing is simple: a stick figure represents a farmer, while a car is a commodities exporter.

An arrow links the two to show the 20km round-trip that a farmer must make to get his goods to market, where the exporter’s car is waiting. This seems a short distance for those who have their own wheels. But it is a very long way for the average Ethiopian farmer, who makes the trip on foot or with a donkey laden with 10kg bags of product. Even worse, by the time the farmer gets to the market, he or she has invested too much time and effort in the journey to return empty-handed. The product must sell, no matter what, which gives the exporter the upper hand in the negotiations. The exporter can name his price, and the farmer—with only one market for the goods—must accept. This exploitative relationship allowed exporters to post margins of 300%-400%, according to Mr Assefa, until the ECX was established in 2008. Then Mr Assefa draws a triangle to illustrate the new process. Exporters, now called ECX clients, occupy the top, followed by ECX members. Agricultural cooperatives and farmers sit at the bottom.

This is how it works: the 3.1m farmers that are signed up to ECX still have to lug their goods to market, but now they deliver to one of 33 agricultural cooperatives. This does not necessarily shorten their journey, but guarantees them a buyer and a fair price, making the journey worthwhile. These cooperatives, representing many farmers, then sell to the 350 ECX members, who store the goods in several ECX warehouses scattered across the country. These members then deal with the exporters. Crucially, all players have access to real-time price information at every stage of the process and know roughly how much they should be clearing. Electronic tickers running in 90 locations throughout Ethiopia and two mobile services provide price updates on demand: using an Ethiopian cell phone, a farmer dials 929 for an interactive voice response or 934 for an SMS service. To prevent fraud and guarantee payment, ECX officials measure and grade the quality of all goods received.

Buyers must lodge a deposit with ECX before they negotiate, guaranteeing that promised funds will be available to members. Payment is delivered at 11am the day after a trade is concluded. On one level it is a counter-intuitive system. Usually, cutting out the middlemen generates efficiency and accountability.  In this case, however, it is the addition of the intermediaries—the cooperatives and the ECX members—who ensure that commodity profits are spread more evenly throughout the supply chain and that no one is ripped off, including the tax man, who can easily trace commodity payments. ECX’s role is to underwrite the process, from the quantity and quality of the goods supplied to their delivery and payment. It also hosts the negotiations between buyers and members in the smart trading pit on the second floor of the ECX building. Buyer representatives are easily identifiable by their khaki coats, while the sellers wear green.

Like competitors in a boxing tournament, each commodity has its allotted time in the pit, and the interested buyers spar verbally with sellers before reaching an agreement. The agreed prices are immediately updated on the main ECX ticker—an electronic board resembling the screen at the New York Stock Exchange, although it does not move quite as fast—and reflected across the country. Coffee, sesame and white pea beans dominate the trading because ECX has the sole mandate to trade these commodities. Buying them elsewhere is illegal. By tonnage, these are Ethiopia’s largest commodity exports. Raw coffee is Ethiopia’s most valuable commodity, earning $844.5m in 2011, according to the Food and Agriculture Organisation, but the country exports a greater volume of sesame. The ECX also offers a market in wheat, maize and green mung beans, which are far less popular. In the 2013-14 financial year, the ECX traded just 32 metric tonnes of wheat and ten metric tonnes of mung beans.

This is a fraction of the 239,778 metric tonnes of coffee, 280,552 metric tonnes of sesame and 65,702 metric tonnes of haricot beans traded in the same period. The total value of traded commodities in this period was 38% higher than the year before, reaching 26.2 billion birr (about $1.23 billion). Despite its advantages, these figures suggest that the ECX’s success is dependent on the government monopoly over coffee, sesame and haricot beans. Another problem is that the grading of its commodities is not sophisticated enough to maximise potential. This is especially true for coffee; the ECX does not have the means to certify coffee at the highest level, thus locking Ethiopian producers out of the ultra-quality coffee market and its higher prices. Nonetheless, this model works and others are copying it. “ECX is exceptional in its unique design, business model and use of information technology,” said António do Rosário Grispos, CEO of the Bolsa de Mercadorias de Moçambique, Mozambique’s ECX-equivalent.

“It is shaping the way forward for many African exchanges as a modern and dynamic market platform.” Mr do Rosário Grispos plans to use the ECX as a model for the development of his own commodities exchange. He signed a memorandum of understanding to that effect during a visit to the ECX in June. Others are learning lessons from Ethiopia’s model: Ghana and Tanzania have exchanges based on the ECX, with one in Malawi to follow soon. On this evidence, it is fair to conclude that the ECX will help to shape the continent’s commodities markets for decades to come. If still not convinced, let the money talk. When it was first launched, the ECX offered some 350 member seats at 50,000 birr each ($2,377). These seats were transferable after three years. But in recognition of their worth, they are rarely sold. When they are, however, the premium tells its own story. Kerchanshe Trading PLC won the most recent auction in June, paying an astonishing 1.9m birr ($90,338) for the privilege of trading on the ECX, or 38 times the seat’s original value.

Simon Allison is the Africa correspondent for the Daily Maverick website, in Johannesburg. He has reported from Egypt, Palestine and Somalia for the Asia Times and Agence France Presse.

Trust or bust

Diaspora bonds: alternative financing

Poor African countries can tap into their rich expatriates’ savings

By Nontobeko Mtshali

They are dollars wrapped with care—money that is homebound to villages and towns across the globe sent by relatives who have migrated in pursuit of greener pastures or refuge. These remittances to developing countries are expected to reach $516 billion dollars next year, an increase from the $404 billion recorded in 2013, according to the IMF. Global remittances to Africa went from $19.5 billion in 2004 and tripled to $63.8 billion in 2014, according to the World Bank. In addition to supporting parents and helping to put siblings through college, remittances play a major role in the economies of many countries. In an estimate slightly above the IMF’s, Dilip Ratha, an economist and manager of the World Bank’s migration and remittances unit, said the $413 billion international migrants sent home to families and friends in developing countries in 2013 was three times larger than the $135 billion that went towards global development aid over the same period. “We endlessly debate and discuss about development aid, while we ignore remittances as small change,” Mr Ratha said last year.

“True, people send $200 per month on average. But repeated month after month by millions of people, these sums of money add up to rivers of foreign currency.” Remittances to Egypt are three times larger than the revenue the government collects from the Suez Canal, Mr Ratha said. In poorer, fragile and conflict-ridden countries, remittances are “a lifeline”, he added. An example is Somalia, where they account for 35% of the country’s GDP. More governments in Africa are trying to harness this pool of funds by issuing diaspora bonds to pay for economic development. These bonds offer an alternative source of finance for countries that are too dependent on volatile commodities. Diaspora bonds have been around for decades. China and Japan were the first to issue them in the 1930s. But they came back in favour after the 2008 global recession, when aid to needy countries began to erode. The World Bank and the IMF started promoting diaspora bonds as an alternative source of capital to pay for development and costly infrastructure projects. Ethiopia was the first African country to issue a diaspora bond, in 2008.

“There have been regular bond issuances in African countries on the international market which were not restricted to a specific audience and could therefore be bought by the diaspora, for example, the Moroccan issuance in 2010 and Senegalese, Namibian, Nigerian and Zambian issuances in 2011 and 2012,” according to the African Development Bank (ADB). “For governments that have large diaspora populations, the bonds provide an opportunity to tap into a capital market beyond international investors, foreign direct investment or loans,” wrote Meiji Fatunla, then editor of a blog on the African Arguments news site. “If governments have experienced difficulties raising money on the international market or attracting investment, diaspora bonds can be an attractive new source of financing.” Many institutional investors may perceive investing in developing economies as a high-risk outlay, but expats may be savvier financiers because they know more about their homeland’s potential and pitfalls.

As a result, it may often cost governments less to borrow from their citizens who are living overseas, according to a 2010 report on diaspora investments by the Migration Policy Institute (MPI), a think-tank in Washington, DC. “This difference in risk perception can lead to a ‘patriotic discount’ on expected returns,” the MPI report found. This markdown was the difference between the market interest rate for government debt and the interest rate that expats are willing to accept. While the willingness of migrants to invest is not purely a financial decision, governments still need to ensure that their houses are in order before pulling on nationalist heartstrings. “Evidence suggests that patriotic discounts are particularly meaningful among first-generation immigrants and when the country of origin faces an external threat” such as a foreign invasion, according to the MPI report. But succeeding generations are less likely to invest, the report warned. “In countries where capital markets are less developed, such as in much of Africa and Central America…diasporas might play the role of ‘first movers’ and contribute to innovation and price discovery as well as to scale.”

First-generation diasporas may be more interested in direct investment and may be more prone to patriotic discounts, while second and higher generation diasporas may find portfolio investment a more accessible and less time-intensive approach, the report says. However, all members of the diaspora, regardless of age, are “less forgiving when their countries of origin face financial challenges due to domestic mismanagement”, it concludes. Ethiopia learnt this lesson the hard way. Its first diaspora bond, issued in 2008, was intended to finance a hydroelectric project for the Ethiopian Electric Power Corporation, but failed to meet its funding target. The state has been tight-lipped over how much it intended to raise and how much funding it managed to attract. It only conceded that sales were slow. The bond failed to meet its revenue goal because of a “lack of trust in the ability of the utility to service the debt, the full faith and credit guarantee of the government and the overall political climate in Ethiopia”, said ADB analysts, Seliatou Kayode-Anglade and Nana Spio-Garbrah, in a 2012 brief.

This did not stop the country from issuing another diaspora bond in 2011 to finance the Grand Renaissance Dam, currently under construction on the Blue Nile near the Sudan border. It is set to be Africa’s largest hydroelectric dam but information on the amount raised so far through the diaspora bond for this $4.8 billion project has not been released. According to media reports, however, 80% of the funding was sourced from local taxes and the remaining 20% from treasury bonds. Ethiopians abroad and at home contributed the project’s first $350m and government workers donated amounts equivalent to a month of their salaries, according to Africa Renewal, a UN publication. More recently, Nigeria and Zimbabwe have also hopped onto the bond bandwagon. In March this year the Nigerian Senate approved outgoing President Goodluck Jonathan’s request to increase the revenue target of the country’s diaspora bond from $100m to $300m.

Raising the bond to $300m was needed to compensate for Nigeria’s dwindling oil revenues as oil prices have plummeted, said Ehigie Uzamere, head of a Senate committee that recommended the increase, according to This Day newspaper. The $100m diaspora bond in the 2012-2014 borrowing plan was too small considering the number of Nigerians living abroad, he added. Estimates of Nigerians living abroad range from 5m to 15m, according to, a research site. Patrick Chinamasa, Zimbabwe’s finance minister, reportedly told Parliament last June that he was considering raising funds through diaspora bonds to pay for some of the country’s small hydroelectric schemes. According to a World Bank official, over 3m Zimbabweans are estimated to have left the country since 2000, mostly to escape the country’s socioeconomic decline and political troubles. Countries need do to their homework before issuing diaspora bonds, the ADB analysts Mesdames Kayode-Anglade and Spio-Garbrah advise.

Relying on a country’s emigration figures is not enough, they warn. They need to look at education levels, income, how communities save their money and investment patterns, among other factors. The issuing country may need to conduct surveys in each destination country after determining countries or regions to target, they said in their brief. Ultimately, trust is critical to determining the success of a diaspora bond. “Good governance, transparency and political stability are the foundations of success,” wrote the ADB analysts. “Investors resident abroad, given their distance and in some cases, the underlying reason for their departure from the home country, must feel that the government has the capacity and goodwill to manage proceeds properly.”

Nontobeko Mtshali is a researcher at Good Governance Africa. She has worked at The Star, Johannesburg, as a general reporter and specialist education reporter.


Will it ever?

Angola: out of stock

Sub-Saharan Africa’s third largest economy still does not have a stock exchange

Will Angola’s stock market ever float? © David Stanley

By Louise Redvers

Angola is Africa’s fifth largest economy, its second producer of crude oil, a magnet for foreign direct investment and the custodian of one of the continent’s biggest sovereign wealth funds. Yet, rather surprisingly, unlike many of its smaller and poorer peers, Angola does not have an equities exchange. Trading government bonds outside of the central bank began only in May. “Fund management as an industry doesn’t exist in Angola, which is crazy because basically you’ve got the third largest financial market in sub-Saharan Africa,” said Anthony Lopes Pinto, the managing director of Imara Securities Angola, the Angolan arm of Botswana listed asset management firm Imara Holdings Ltd. “Total assets in the banking sector are now more than $70 billion and the inefficient allocation of capital is directly inhibiting economic growth,” he said. At around 20% after costs and commissions have been included, the high cost of borrowing from banks was one of the reasons why “you never hear of many small to medium-sized companies becoming regional players,” he added.

Mario de Carvalho, an investment entrepreneur, told Africa in Fact that the country was crying out for an exchange. “Equities trading would be a very positive thing for Angola,” he said. “There is a big need for alternative financing options and it would help diversify our economy, which is very focused on oil and therefore highly vulnerable to price shocks.” So why does Angola not have an equities exchange? Will it ever? For more than a decade, global investors have salivated over media headlines heralding the inauguration of share trading in Luanda. But anticipated dates have come and gone, only for government officials to belatedly blame the “wrong economic conditions”. The country has had a capital markets commission, or regulator— known as the Comissão do Mercado de Capitais (CMC)—since 2005. In 2006 the Bolsa de Valores de Angola (BVDA) was set up to run the exchange. Newly trained BVDA and CMC staff took up a plush office building in downtown Luanda amid expectations that equities trading would begin after the September 2008 general election, the nation’s first in 16 years.

But this happened just as the global financial crash interrupted several years of heady post-war growth and sent oil prices into free fall. Angola, which depends on crude oil for more than 90% of its exports, was plunged into a liquidity crisis, forcing it to go cap in hand to the International Monetary Fund for a $1.4 billion loan. Plans for share trading appeared to fall off the agenda. Black plastic sheeting was taped over the silver signage on the front of the BVDA’s office and most of the staff were let go, frustrating asset management firms that had been working hard on their Angola entry strategies ahead of the exchange’s launch. In the following years various ministerial announcements proclaimed the exchange would “open next year”. But the BVDA was quietly wound up in June 2013 and liquidators were called in to return its assets to investors. With little fanfare and even less explanation, it was replaced by BODIVA, the Bolsa da Dívida e de Valores de Angola (Angola Debt and Securities Exchange), in July 2014 under the leadership of a former central bank governor, Antonio Furtado.

In May this year, BODIVA, housed in new premises in the capital, began trading government bonds, previously only available in-house at the central bank, the Banco Nacional de Angola. Although volumes are still small ($47m in May and $188m in June, according to BODIVA) relative to the size of Angola’s economy, investors and asset management firms have called the move an important first step. “We believe that securitised debt will be able to give depth and liquidity to capital markets, which, combined with the perception of sovereign risk, lead to a learning curve for the corporate debt segment, the stock market—and later the futures market,” Mr Furtado told investors at a business roundtable in Luanda in July. With the government debt market now in place and corporate bond sales due to follow next year, a new date of 2017 has been set for equity trading. A futures market may open in 2019. But after so many missed deadlines, it is difficult to take these dates too seriously. And questions remain about which companies would list on the new stock market.

“Who would be in a position to list and who would want to? That’s the challenge,” de Carvalho said. “After the banks and maybe the mobile phone company Unitel, there are very few Angolan corporates that are in a position to join an equities exchange.” The country’s large state-owned enterprises, such as oil company Sonangol and national air carrier TAAG (Transportes Aéreos Angolanos), would certainly elicit plenty of interest if they listed. But few believe that the government is willing to relinquish control of such critical national assets, or that it is ready to open up its books to full public scrutiny. Angola is notorious for its corporate opacity. Transparency International ranks it as one of the world’s most corrupt countries. Many firms—and entities holding shares in corporate ventures—are registered as Sociedade Anônima (SA), which means their ownership is not publicly known. Banks now publish audited financial statements in the local press, a legal obligation, but this requirement does not apply to other firms.

Tracking down company reports and accounts can be a challenge at best and is often next to impossible. The problem is that a company cannot list on an equities exchange unless it can produce audited reports and make them public. But after three decades of war that ended in 2002, some firms do not have sufficient book-keeping skills to produce these documents. Analysts have often cited this absence of a reporting culture as a reason for the delays in setting up equity trading. According to this view, the government had wanted a big launch with a full exchange befitting the country’s economy, rather than one on which only a handful of companies traded—which could have been branded a low-value flop. But Mr Pinto rejects the narrative that Angolan companies are unable or unwilling to list. On the contrary, the option of raising capital on a local stock market would act as an incentive for more disclosure and adherence to best reporting practices, he said. The Angolan exchange is being held back because the country’s government and corporations have little knowledge about equity trading, he conceded.

The general lack of appropriate knowledge and skills has created high levels of caution and risk aversion among companies that might otherwise consider listing. “There are very few people who understand how capital markets work [and] on the back of that, there is an extremely high fear that the capital markets will crash,” Mr Pinto said. The poor performance of markets in former colonial power Portugal, still a major economic reference for many Angolans who do not speak English, has added to this sense of risk aversion in the public and private sector. Another potential barrier to the 2017 launch is Angola’s current economic climate. The country showed good signs of recovery following the 2008-09 crisis, though it never managed to repeat the double-digit growth of the years before. Now Angola’s outlook is grim because oil prices have collapsed. Government revenue between January and May this year is down 85% on the same period in 2014 and the kwanza, Angola’s national currency, has plunged from 98.5 to the dollar in September last year to 126 as of mid- August.

This has put enormous strain on liquidity, which in turn is forcing more currency devaluation. After several years of downward movement, inflation is creeping back up. In February, the government announced an austerity budget, slashing public spending by some 25%. The private sector has also put projects on hold and cut back staff. The mood in the country is doom and gloom. The economy’s vulnerability to oil price shocks is a loud reminder of the need to grow a strong and diversified private sector. A stock exchange could breathe new life into small and medium-sized companies outside the oil industry, which in turn would create badly needed jobs. Introducing capital markets when an economy is in a rut might even be a clever way to ensure a good appreciation of assets in the future. “The bond sales have likely moved forward because the government desperately needs to mobilise more financing for its debt,” noted Søren Kirk Jensen, an associate fellow at Chatham House, a London think-tank.

“Also, some of the people who were behind the exchange back in 2008 have recently returned to central positions in government and that could be another reason why things are finally progressing,” he added. Imara set up in Angola in 2009 hoping to be a first mover on the exchange. Mr Pinto agrees that the equities market may finally open. “I think the stock exchange is definitely back on the agenda and I think it is taking shape, albeit at an Angolan pace,” he said. “We are headed in the right direction and with a little patience we will soon have a formidable market.”

Louise Redvers is a freelance journalist who has reported from Angola, Swaziland and Zambia for the BBC, the Mail and Guardian, The Africa Report and other media. After five years in Africa, she recently relocated to the Middle East.

Huge potential, wrong time?

Mineral continent

African mining development is challenged by a shortage of investment funding

Africa’s buried treasure: phosphate mining in Togo © David Stanley

By Jade Davenport

Africa’s mining sector has proven to be something of a mixed blessing. The continent’s mineral resources offer enormous possibilities of wealth, but they are also hard to reach. Sub-Saharan Africa, along with the inhospitable Arctic, remains the most under explored region on earth, geologically speaking. Yet the continent accounts for approximately 30% of the world’s mineral reserves. The geographical and logistical difficulties involved in locating and accessing Africa’s resource wealth have been exacerbated by the constrained post-2008 macroeconomic climate. Investors have been reluctant to fund new projects in far-flung geographies despite the rich rewards such projects offer in the medium to long term. One lingering consequence of the 2008 global financial crisis has been that equity markets have largely closed up, says Wickus Botha, a mining and metals expert at EY, an accounting and professional services firm. Companies in high-risk, long-term industries such as mining have a harder time finding funding. This applies even more for projects in more remote regions. Two factors have compounded the decline of interest in mining investment, Mr Botha says.

First, many investors claim they did not substantially benefit from mining portfolio investments during the commodities super cycle of the early 2000s, which saw a boom in prices for food stuffs, fuels and other resources. Second, commodity prices have fallen considerably since 2008. A significant drop in demand for metals and minerals, particularly from the Asian market, followed the commodities boom. This was followed by a general slump in commodity prices. As a result, willingness to invest in exploration and mining projects has waned considerably, he says. Energy-related commodity prices decreased by 41.7% between the first quarter of 2014 and first quarter of 2015, according to an April World Bank report. Those for metals and precious metals decreased by 13.4% and 3.4% respectively over the same period. If the price of a commodity drops, even by a few percent, mining companies will notice the difference in their profit margins. This influences the amount of money they can make available for other things. “Although there is still funding available for brownfield expansion and some for acquisitions, there is virtually no investment capital for greenfield projects,” Mr Botha says.

Mining companies now have to pay far more for project financing than they did a decade ago because investment capital is scarce, says Tony Zoghby, a mining industry expert at Deloitte & Touche South Africa, an auditing firm. When investment funding is scarce, it costs companies more to access it. “This of course drives up the cost of the investment and reduces returns, which might then lead to the project not meeting the hurdles and requirements set.” Mining companies around the world are encountering reluctance from investors, but African mining companies face additional obstacles to finding funds. One of these is a lingering perception that African governments may nationalise resources that mining companies spend huge amounts on extracting. Others are unhelpful legislation, a lack of infrastructure and logistics, insufficient skills, corruption and a dearth of geo-mapping and mining data. As a result, the continent’s mining sector has experienced limited growth since the downturn in the super cycle. Yet investment in African mining projects has not fallen away.

About 30 large-scale projects are expected to be commissioned between 2015 and 2018, including nine in copper, four in gold, four in diamond, three in platinum and two in uranium, according to a Deloitte & Touche February report. These projects alone will account for $18 billion in investment across the continent. Given the current economic climate, low commodity prices and investor scepticism, mining companies need to find alternative methods to raise capital. Innovative approaches are crucial when it comes to funding projects in financially constrained times, says Nivaash Singh, international mining finance head at Nedbank Capital, based in South Africa. If a company cannot turn to a traditional source of investment funding, such as a large bank, it could go to a private company, such as a venture debt provider that will lend it the money it needs under strict conditions, including a fixed pay-back period. Such a loan may also involve a promise to allow the lender to buy shares in the company at a favourable rate if the borrower does not repay the loan. If a mining company does not want to risk a promise to sell shares in its business, it could also raise money by taking out other kinds of loans, known as subordinated and mezzanine debt.

But these come with a higher risk to the lender because they will only be paid after other creditors have been paid. This makes them more expensive. “Senior debt providers always have the ‘first bite’ of project cash flows before mezzanine and lastly fully subordinated debt providers,” Mr Singh says. “Second- and third-ranking debt providers often take more risk than senior debt providers.” This may require them to demand a share in the business in addition to repayments on the debt. Development finance institutions from the developed countries are another possible source of funding for African mining companies, he says. They may be willing to provide funding for such projects because they have an interest in the strategic nature of the commodity or because they see a substantial developmental benefit. African banks may also have a bigger appetite for mining risks if a solid development case exists. In contrast, their counterparts in the developed world might feel that their understanding of African funding is too limited to justify such risks. African banks, according to Mr Botha, can allocate more funds to mining than other areas because they understand the continent’s environments.

They are also more likely to operate their lending business throughout the commodity cycle. Mr Singh agrees. Nedbank maintains its resources lending business throughout the commodity cycle, he says. “We hold the view that good, robust projects will always attract debt and equity finance. There is appetite for African mining risk where a solid development case exists.” But African banks will want to ensure that their criteria for financing are met, he adds. “Due to the economic climate, they may have to do so at higher rates and with fairly restrictive covenants,” Mr Singh says. “So the pressure is still on the mining companies to keep their cost of funding as low as possible in order that their returns still meet the investment return hurdles.” Development finance institutions represent the most prominent sources of capital for African mining projects. But companies in the sector have other possible sources of investment funding—including internally-generated funds and resources debt funds. The latter are professionally managed programmes that invest in resources related debt. Miners may also turn to large metal financiers such as royalty and streaming companies.  A company interested in royalties buys the right to share a producer’s annual revenue, while a streaming company makes a payment upfront in exchange for an annual slice of the miner’s production at a fixed, discounted price.

In both cases, the money received upfront could be used to pay for the technical development of a new mining project, for instance. Companies looking for investment may also be able to generate interest in African mining projects among commodity traders who have an eye on the strategic future of a particular resource, Mr Botha says. Mining companies interested in African projects face greater difficulties in raising project finance than their counterparts in the developed world, Mr Singh cautions. But this can have a considerable “positive effect”, as he sees it: the challenges involved will generally separate genuine project developers from the pure market speculators, whose main interest is in short-term profit. African miners face bleak prospects. Several major mining companies involved in operations on the continent have recently announced plans to scale back on their African operations and retrench thousands of workers. The consensus among African financial institutions, Mr Botha concludes, is that African mining projects will attract capital more easily when demand increases and rises in commodity prices are sustained enough to generate profit levels that investors regard as worth the risk.

Jade Davenport is the author of “Digging Deep: A History of Mining in South Africa”. Her work has been published in magazines and online news sites including Mining Weekly and African Business.

Mercurial market

Egypt: ups and downs

Political instability and unclear policies rock Egypt’s bourse

Abdel-Fattah al-Sisi © Kremlin

By Kristen McTighe

In the aftermath of the 2013 military coup that toppled Mohamed Morsi, Egypt’s former Islamist president, more than 1,000 anti-government protesters were killed, thousands more jailed and hundreds sentenced to death. A government crackdown on dissent sparked international condemnation. Militant attacks became routine and at least 600 security personnel were killed as the army and government struggled to restore security. The country’s economy, ravaged by years of unrest, was slow to improve, providing little economic relief for most of the country’s 90m citizens. Yet, paradoxically, its bourse began to boom. Between July 2013 and December 2014, the Egyptian MSCI index, a measure of large and midsize market segments, nearly doubled, producing a total return including dividends and share price rises of more than 30%. As a result, the Financial Times named Egypt the best destination for stock market investors in 2015. The accolade marked a change in fortune for Egypt, which was hard hit by the 2011 revolution that ended three decades of rule by autocrat Hosni Mubarak. Persistent unrest following Mr Mubarak’s removal battered important sectors of Egypt’s economy, such as tourism.

Foreign investment declined and financial markets suffered huge losses. Unfortunately, matters did not improve under Mr Mubarak’s successor, the democratically elected Mr Morsi. Critics accused Mr Morsi of lacking a coherent economic strategy and failing to make much needed reforms. With political instability continuing throughout his rule, frustration over the deteriorating economic situation fuelled the protests that culminated in the military removing him in July 2013. Then in late 2013, the Egyptian stock market—with a market capitalisation of 365 billion Egyptian pounds ($53.2 billion)—began to make headlines, thanks to a perceived increase in political stability. “The strong recovery in the second half of 2013 and first half of 2014 was a kind of relief, from the market point of view, that instability was over,” says Simon Kitchen, director of Middle East and north Africa strategy at EFG Hermes, an investment bank. “When Morsi was overthrown, it was pretty clear that there would be a sort of restoration, and so that gave the stock market a deal of certainty.” Financial aid from Gulf countries also buoyed investors’ optimism about Egypt’s direction, Mr Kitchen said.

The resolution of long-running disputes between foreigners and the Egyptian government—such as the repayment of $1.5 billion of the $6.4 billion Egypt owed foreign gas companies—helped too. Moves to ease the repatriation of money by foreigners, which had been implemented after the 2011 revolution, also pleased investors. New president Abdel-Fattah al- Sisi’s bold moves to reform the budget, including cutting energy subsidies, buoyed the market further and emphatically demonstrated Mr Sisi’s control of the country. “Partly because of the removal of Morsi and the end of a year of very bad economic management, there was initially a lot of hope things would get better,” says Angus Blair, president of the Signet Institute, a Cairo-based economic think-tank. “And because of capital controls, it meant the money had to go somewhere, so it went into real estate, high-end goods and, of course, the stock market.” The portents were so good that in April this year, Mohamed Omran, chairman of the EGX30, an index of the top 30 companies on the Cairo and Alexandria exchanges, announced that the bourse had raised 4 billion pounds (about $511m) in the first quarter of 2015 for six companies, twice the 1.9 billion pounds ($243m) raised in 13 initial public offerings in 2014.

“Egypt has seen a renaissance in listings this year,” confirms Moustafa Bassiouny, an economist at Inktank Communications, a Cairo-based investor relations agency. To reinforce the trend and reinvigorate trading in Egypt, the EGX30 announced in late May that it would reduce the minimum free float (the number of a company’s shares that are available for trade) required for new companies to be added to the top-30 list. But despite the hype over the Egyptian exchange in Mr Sisi’s first year, the index fell by 2.2% by June, and daily volumes were still well below their 2010 levels of $180m. That same month, the Egyptian bourse overtook Colombia as the world’s worst-performing exchange. Experts said a combination of domestic and international factors was behind the downturn of the Egyptian bourse. The surge in investor confidence that followed the 2013 military coup could no longer propel the market. “Internationally, investors are shying away from emerging markets, where growth is slowing down on the back of lower commodity prices, geopolitical risk and the financial situation,” Mr Bassiouny explained. “That, coupled with unresolved issues in Greece, is having an impact on the Egyptian market.”

In July this year, the International Monetary Fund projected growth in emerging market and developing economies to slow from 4.6% in 2014 to 4.2% in 2015. As the surge in investor confidence that followed the coup levelled out, domestic issues, many of them longstanding, also contributed to the stock market’s decline. These included “concerns of dollar shortage and capital controls, then the legislative overhang… and, to some extent, concerns over risks from the security situation”, Mr Bassiouny said. “All of this adds some measure of ambiguity to the market.” But the government could still reinvigorate the market. “The Egyptian exchange is a private vehicle, but what the government could do is address the macroeconomic issues, introduce reforms in the economy, tackle monopolies, bring down inflation, supply more energy, cut bureaucracy, get a real economic vision,” Signet’s Mr Blair said. The government’s inability to delineate a clear economic policy has also made investors wary. “At the end of June, the central bank began to let the currency weaken and they gave very good reasons,” Mr Kitchen said. “Then it stopped a little over a week afterwards, and people don’t quite understand why.

[investors] understand why and what the outcome for the currency is, they will be reluctant to invest and if they are reluctant to invest, the stock market isn’t going to do well.” Despite the decline, some remain optimistic. “The picture is looking good going forward,” Mr Bassiouny said. “We are seeing a direct play on the demographic fundamentals of the Egyptian economy with a focus on consumer stocks that seek to benefit from the country’s young, growing population and the proportionately large and comparatively inelastic expenditure on food and healthcare.” Beyond all else, the security situation could still pose a challenge to the long-term success of the Egyptian exchange. At the end of June, the country’s top prosecutor, Hisham Barakat, was assassinated in the highest-level political killing since 1990. Two days later, militants aligned with the Islamic State nearly overran a town in the country’s restive Sinai Peninsula, followed by the bombing of the Italian consulate in Cairo a week later. The wave of violence has led to questions around the government’s security policies and sparked concerns that Mr Sisi is losing control. “Right now, there is a sort of base level of violence that investors have gotten used to and they are more interested in economic issues like tax rates and the currency,” Mr Kitchen says. “But if you keep seeing car bombs in the capital, they become more pessimistic.”

Kristen McTighe is a Cairo-based journalist covering north Africa. Her work appears in the International New York Times and GlobalPost, an online news site.

Rising stock

African capital markets

While investor interest in the continent’s stock exchanges rises, liquidity and other regulations restrain this growth

By Simon Allison

Ironically, Africa’s chronic economic underdevelopment may now be its greatest opportunity. After so many decades of sluggish economic growth and lagging far behind other continents, Africa can be regarded as a place of unmatched potential. In the post-crash world, where economies everywhere are stalling and investment opportunities few and far between, the received wisdom is that Africa is the last great untapped market. This does not mean, however, that investing in Africa is easy. Quite the opposite. When it comes to attracting foreign investment, the continent’s real challenge is to connect cash with opportunities. How can African countries make it easier to invest in African businesses? Historically, most foreign investment in Africa has occurred through private equity and this trend continues today. But private equity works only for certain types of investors—those with large pockets and long-term goals. In this context, institutional investors are becoming more interested in other options, especially Africa’s capital markets.

The rationale behind any stock exchange is simple. At their most basic, they are a place where companies can go shopping for capital—the money they need to expand their business. At the same time, they are a one-stop shop for investors who can back a range of companies in a transparent, regulated environment. By most estimates Africa has about 30 listed markets. These range from the Johannesburg Stock Exchange (JSE), which trades in more than 400 shares and is consistently rated as one of the most competitive stock exchanges in the world, to the tiny Rwandan Stock Exchange (RSE), which boasts only seven listed companies and is open for just three hours a day. The RSE, however, is more typical of the continent. In its 2014 “Bright Africa” report, investment advisory firm RisCura rates the quality of African stock exchanges according to their liquidity level, availability of information, governance, regulation, openness to foreign ownership and ease of capital flows. Only the JSE gets an A grade.

The Egyptian Stock Exchange (EGX) is next with a C, while the Nigerian Stock Exchange (NSE) receives an E—despite the country having the continent’s largest GDP, and arguably its most attractive investment destination. Most African exchanges are in the lowest categories, F and G. “Looking at some of the exchanges in the F and G categories, a common trend of significantly lower values traded, as well as lack of information in efficiency, ease of capital flows and openness to foreign ownership were observed,” said the “Bright Africa” report. “To put this in perspective, the combined value traded for the 15 exchanges in categories F and G is approximately 0.57% of that of the JSE.” In other words: most African stock exchanges are simply not up to scratch. This is largely a function of size, but other related challenges also play a part. One is liquidity, or how easily stocks can be bought and sold. This is important for investors because they need to know that they can sell their shares when they want to. But only the South African and Egyptian exchanges can match global average levels of liquidity. This problem is compounded in many countries by domestic investment regulations, which encourage major domestic investors such as pension funds to buy and hold local shares.

A second challenge is the high transaction costs of doing business on many African exchanges. In Zimbabwe, for example, it costs approximately 3.3% of the value traded to buy and then sell shares, which thwarts regular trading. “It’s still quite expensive to trade in Africa,” said Rory Ord, head of RisCura Fundamentals and editor of the “Bright Africa” report. “Investors need to have quite a long-term mindset. African exchanges are not places where you want to buy in one day and sell the next. Your transaction costs are simply too high to do that. ” A third challenge is the type of shares traded, which typically focus on financial services, Mr Ord said. Some of Africa’s largest growth sectors—such as telecoms or manufacturing—are poorly represented on local exchanges. Investors wanting to access these markets will probably have to find another route. Investors also struggle to find large enough investments to justify the effort that goes into expanding into a new market. Despite these obstacles, Africa’s listed markets have made impressive progress over the last few years. Average growth for African exchanges between 2012 and 2014 was 16%, according to the “Bright Africa” report.

But more can be done to make African exchanges more attractive, and so spur growth even further. One option is to work towards consolidating some of Africa’s smaller bourses into regional exchanges. A regional exchange is far more than the sum of its parts because it offers a much greater number of shares than those available on local bourses and improves liquidity in the process. “Setting up larger regional stock exchanges could provide the liquidity, security and ease of access that investors crave,” wrote The Economist in January 2015. “For this to happen, the continent’s leaders would have to set aside national vanity and instead focus on enriching the capital diet for all.” Easier said than done, of course. “Even with obvious rewards such as a bigger market size, low costs and more liquidity, the conditions for regional integration are yet to mature,” explains Masimba Tafirenyika, editor-in-chief of the UN’s Africa Renewal online journal. the UN’s Africa Renewal online journal. “According to financial experts, progress would require African countries to harmonise their trading laws and accounting standards, set up convertible currencies and establish free trade among members.

Also, nationalism still plays a part: countries tend to treat stock markets as national symbols and therefore are not rushing to relinquish control.” The idea of regional stock exchanges sounds like common sense, but the continent only has two regional bourses, and their experience suggests that they are no panacea. The Bourse régionale des valeurs mobilières (BRVM), based in Abidjan, serves Benin, Burkina Faso, Guinea-Bissau, Côte d’Ivoire, Mali, Niger, Senegal and Togo, while the Bourse des valeurs mobilières de l’Afrique Centrale (BVMAC), in Libreville, serves the Central African Republic, Chad, Equatorial Guinea, Gabon and the Republic of Congo. These exchanges are an improvement on individual exchanges for each of their eight and five members respectively, but neither exchange has really made an impact. The market capitalisation of BRVM, the larger of the two, is still less than that of exchanges in Botswana, Cameroon or the Seychelles. Another option is to improve liquidity by encouraging more intra- African trade. At the moment, this is minimal, with the major exception of South African financial institutions investing elsewhere on the continent.

This is partly because of the paucity of African investors with sufficient capital, while national regulations often make it difficult to invest outside the domestic market. This problem is particularly pronounced when it comes to pension funds. “Each African country has its own set of rules” for pension funds, Mr Ord explained. “Some allow investment in other countries, others don’t. For example, Nigeria has quite conservative rules and they don’t allow investment outside of their own country except in very specific circumstances. So while they’re building institutional capital in that market, you’re not seeing investment in other parts of the continent. Similarly in Kenya.” Countries such as Botswana and Zambia do permit foreign investment, he added, but they typically invest outside the continent. However, “most countries have been liberalising. This is one of the areas we’re going to see growing as the different sets of regulations get relaxed. We’ll see more intra-African investment over time.” The African Securities Exchange Association, the umbrella body for Africa’s stock exchanges, is the critical player driving these changes. Currently, it has 25 members. Its intended role is to act as a clearing house for information and technical expertise so that members can learn from each other.

The association also pushes for common standards, better regulations and improved professionalism from members. Its ability to play this role will have a major impact on making Africa’s listed markets more attractive and easier to access over time. Ultimately, however, the fate of Africa’s capital markets rests with individual exchanges and the governments that regulate them. Key to unlocking their potential is to improve systems and automate trade, to make them as efficient and user-friendly as possible. At the same time, corporate governance must be raised to match international standards so that investors can trust that the opportunities on offer are as good as they look on paper. Finally, if the continent’s stock exchanges are really to succeed, governments need to create an investor-friendly regulatory climate that streamlines trade and investment. The logic behind this is simple: if a country makes it easy for capital to enter, then more of that capital will end up in stock markets. Africa’s listed exchanges are clearly vital to the continent’s continued economic development.

Already, the growth in investment flowing in their direction is impressive. Given their small size and poor liquidity levels, this shows that there is enormous interest in investing in Africa, and a desire to find ways to do so beyond the traditional private equity route. The question that we should all be asking, then, is: how much money could be raised if Africa’s stock exchanges were all as well-regulated and crucially, as liquid, as the JSE?

Simon Allison is the Africa correspondent for the Daily Maverick website, in Johannesburg. He has reported from Egypt, Palestine and Somalia for the Asia Times and Agence France Presse.