frontier markets

Africa should target FDI from developing economies

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This article first appeared in my column with the Business Daily on February 24, 2019

Often when the term Foreign Direct Investment (FDI) is said in Africa, images of investors from Europe and North America are the first to come to mind. And this is with reason; according to UNCTAD, the top three sources of FDI for Africa are the USA, the UK and France. China holds the fourth largest stock of FDI in Africa followed by South Africa, Italy, Singapore, India, Hong Kong and Switzerland. And while FDI flows to Africa slumped to USD 42 billion in 2017, a 21 percent decline from 2016, UNCTAD forecasted inflows to Africa to increase by about 20 percent in 2018 to USD 50 billion. UNCTAD notes that while companies from developed economies still hold the largest FDI stock, developing economy investors from China and South Africa, followed by Singapore, India and Hong Kong (China), are among the top 10 investors in Africa.



Clearly African governments want more FDI, and there is an opportunity to diversify FDI strategies from targeting just Europe and the USA. While it is important to retain the interest of the top investors, there is also room to better consider the requirements of investors from developing economies such as China, India, South Africa as well as other African countries such as Nigeria (who focus almost exclusively on Africa). Thus while the anchor investors from the US and Europe are crucial, it is also important that Africa leverage at least two unique advantages that investors from developing economies bring with them.

The first advantage of investors from developing economies, is that they understand the reality of investing in countries with governments who are not very transparent. The reality is that it is difficult to find an African government where investors will not, as some point, have to contend with rent seeking behavior of some government officials. Often the perception of corrupt governments can put off traditional investors, but when one comes from a country where that is also a visible reality, this factor is less of a deterrent. This is not to say that corrupt requests from government should be entertained, but rather, the fact that this reality is faced in their own countries means that such a culture in much of Africa will not serve as a shock and limit interest.

Secondly, Africa’s private sector is highly informal, a reality that is also reflected in Asia and other regions with developing economies. According to the ILO, the workforce employed in the informal economy is over 85 percent in Africa; this figure is 68.8 percent in Arab States, 68.2 percent in the Asia-Pacific, and about 55 percent in Latin America. This is an advantage because it means investors from these regions understand the challenges that come from investing in a country where most of the private sector labour functions outside formal structures. Used to negotiating contracts and performance expectations in a culture dominated by informality, investors from developing economies are used to planning for unforeseen events linked to informality, and may possibly have a higher appetite for risk because informality is a part of the reality in their own economies and thus not labelled as an unusual risk factor.

In short, the multipolarity of FDI sources targeting Africa is likely to grow as developing economies expand their capacity to invest outside their economies. Thus, Africa has to develop its capacity to meet the investor requirements of an increasingly diversified source of investment and leverage the unique advantage each brings to the table.

Anzetse Were is a development economist

Toxic public debt a chance for African firms to raise capital

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This article first appeared in my weekly column with the Business Daily on November 25, 2018

Kenya’s public debt stands at over KES 5 trillion. Both last year and this year, international finance institutions and development banks such as the World Bank, African Development and the IMF cautioned Kenya over the pace, composition and terms of public debt accrual. But the appetite for debt continues unabated. And Kenya is not alone. The Brookings Institution makes the point that since 2008, public debt in Africa countries has been rising at an increasingly rapid pace and by 2016, the continent’s gross public debt to GDP ratio had doubled. Countries such as Chad, Sudan, South Sudan, Zimbabwe, Cameroon, Ghana, Eritrea, Ethiopia, Djibouti, Zambia, Zimbabwe, Mozambique and of course Kenya have been warned that their fiscal path and debt pile up is unsustainable.

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The composition of debt is of particular concern. Kenya for example has a domestic to foreign public debt split of about 50-50. With the strengthening dollar, the cost of servicing foreign debt will be increasingly onerous. This is in a context of chronic subpar revenue generation with revenue targets routinely revised downwards year on year. Thus, not only is government unable to raise planned levels of revenue, it will have to figure out how to raise even more local currency to service foreign debt as the dollar strengthens.

Another favourite of African governments has been sovereign bonds, and these too are becoming more expensive. Last week Bloomberg reported that spreads on Africa’s sovereign bonds had widened to 506 basis points (bp) above U.S. Treasuries, the most in two years. Te Velde, an analyst, makes the point that at the current rate at which African countries issue sovereign bonds (USD 14bn in the past year), a 2 percent (500bp-300bp) increase in cost of financing, means an increase in future cost of servicing newly issued bonds at more than USD 250 million a year. Let that simmer for a while.

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Now this would perhaps be fine if there were assurance that African governments were using the debt effectively and in an economically productive manner. But even that is not clear. What is clear is that the rapid accumulation of debt by African governments, partnered with serious questions about fiscal accountability will translate to a massive drop in the popularity African governments have been enjoying in local and international debt markets. And this is good news for the African private sector.

Africa’s private sector continues to be under-capitalised and the past decade or so of considerable appetite for public debt from Africa has left most of the African private sector in the shadows. However, creditors are beginning to understand that debt owed by African governments can be toxic. And this presents the perfect opportunity for private sector in Africa to better position itself to domestic and international players for financing. Let the African private sector grab this opportunity and show the world that much of Africa still has its head on right.

Anzetse Were is a development economist;

Banning Used Clothing a Bad Idea

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This article first appeared in my weekly column with the Business Daily on April 15, 2018

Ripples of concern spread over Africa when Rwanda was punished by the USA for their ban on the import of used clothing from the USA. In response, the USA announced a 60-day suspension of Rwanda’s AGOA duty free privileges on clothing and footwear.

The Rwandan government is of the view that a prohibition of second hand clothes band is crucial for the Rwandan economy. The argument is simple and argues that a ban all imports of second-hand clothing is necessary to strengthen their textile industry. With textile and apparel a key component of their industrialisation strategy, the ban on used clothes seeks to tap into domestic demand for clothing to strengthen the domestic textile industry.

Mitumba (used clothes) sellers in Nairobi help customers to pick items at a market in Nairobi. FILE PHOTO | NMG


The view here is that beyond the loss of livelihood issue, the ban on used clothing is a bad idea, not so much because of the ire it will draw from the USA, but because it’s bad economics. Firstly, used clothing allows Africans to buy a wide range of clothes and shoes affordably. At the moment, the price point at which local manufacturers sell their clothes and shoes are too high, particularly for low income Africans who have very limited funds. With a poverty rate of 35.6 percent, the reality is that many Kenyans have to pinch their pockets to clothe themselves. The used clothing market allows millions of Kenyans to buy clothes for as little as KES 30; these price points do not exist in the clothing produced by the domestic textile industry. Thus, in banning used clothing, government would essentially be imposing a fine on the poor, forcing them to put even more of their limited income to basic items such as clothing.

Secondly, local clothes and shoes manufacturers do not have the capacity to meet the demand for clothing and shoes in the domestic market. Thus, a ban on used clothes presents the very real risk of excess demand pushing the price of new clothing even higher.

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Thirdly, a ban on used clothing in a context where used clothes are the most cost effective and preferred channel for clothing will create a black market. This shadow market will operate outside legal parameters and will penalise consumers in terms of price point because the risk of peddling contraband will have to be priced into the clothing on sale. Thus, there is the risk that a ban on used clothing will create a shadow market from which many will be forced to buy their clothing, because it will likely still be the cheaper option, but a price point higher than that which existed when the sale of used clothing was legal. Thus again, the poor will be unnecessarily fined due to government policy.

What would make sense is to start a gradual ban on new clothing imports and encourage local manufacturers to make clothes for that domestic new clothing market segment first. This should be coupled with government support to local manufacturers so that local companies can make a wide variety of clothing and shoes available at reasonable prices. A ban on used clothing would only make sense when local manufactures are able to produce clothing and shoes at a price point similar to that in the used clothing market.

Anzetse Were is a development economist;

Key Concerns with Kenya’s New Eurobond Issue

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This article first appeared in the Business Daily on February 13, 2018

The Government of Kenya has announced that it intends to issue a new Eurobond of between USD 1.5 to 3 billion mainly to retire key debts that consist of USD 750 million for the first Eurobond as well as a USD 800 million syndicated loan. There are key concerns with a new Eurobond being issued by the government at this time.

The first issue is Kenya’s current debt status; our current debt to GDP ratio stands at about 60 percent. Please bear in mind that just over five years ago, this figure was around 40 percent. It is important to note that while debt in itself it not objectionable, the use of the debt is important. Given concerns with the financial management record of the Kenyan government at both national and county levels, any new debt issued ought to be scrutinised.

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This links to the second point; debt sustainability. Kenya’s debt stood at KES 4.48 trillion as of September 2017. Several entities have expressed concern with Kenya’s debt status; the World Bank made the point that a rapid build-up of public debt in the past few years has put the Kenyan economy at the risk of turbulence adding that borrowing to finance infrastructure projects should be balanced with the dire risks of over-borrowing. The African Development Bank made the point that Kenya could struggle to meet its public debt obligations as more long-term loans mature and the IMF stated that the rising public debt is a concern that needs to be checked to avoid any shocks to the economy in the future.

Thirdly, these are not the only voices with concern; Kenya’s current debt portfolio has made credit rating agencies anxious. Kenya’s debt generally sits in the ‘high speculative’ space in credit rating, one tranche above the ‘substantial risks’ tranche. Indeed, Moody’s expects the government debt burden to continue rising due to high budget deficits and interest payments. Moody’s is concerned by Kenya’s debt accumulation rate and has started considering Kenya for a downgrade. A downgrade in national credit rating would make it difficult for Kenya to access cheap funds from international markets- yet here is Kenya trying to issue a new Eurobond.

Some argue that despite current credit rating, the fact that Fitch shifted Kenya’s rating from ‘negative’ to ‘stable’, Kenya’s overall rating should be viewed positively, especially in the African context. But the view here is that, if Kenya expects to issue Eurobonds affordably, every effort should be made to improve credit ratings. Yet such effort is not being made in that direction.

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Indeed, over the past 5 years, three key trends in the fiscal policy of the current administration have been made evident: Expenditure is higher than anticipated than in the Budget Policy Statement (BPS); revenue generation targets are generally not met and thus, borrowing is higher than expected in the BPS. Bear in mind that the Eurobond and concerns by international finance institutions as well as credit rating agencies are not the only point of concern as these understate the presence of a very important creditor; China. As of September 2017, Kenya’s debt to China was the highest of any nation, and stood at USD 4.7 billion; two thirds of Kenya’s bilateral debt.

In addition to the factors elucidated above, it is important to note that Kenya’s bond issuance this year is operating in a very different context than that in which the first bond was issued. During the first bond issuance, interest rates in Europe and North American were very depressed with weak economic growth, and Africa was riding on a commodities boom, which made the continent a bright spot in the global economy. At that time, yield hunters turned to Africa as a key income growth market to viably compensate for subpar growth in other parts of their portfolios.

Since then, the commodities bust occurred which crippled key African economies, there is notable recovery in Europe and North America, and Africa is, once again, viewed with scepticism in global markets. When one adds Kenya’s debt warnings and credit rating status to the picture, it is easy to see the concern being raised here about the prudence and affordability of a new Eurobond issue.

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Further, if one looks at the current Eurobond objectively, while it is true that in January 2018 the bond yields stood at 3.7 and 5.5, the country has paid far more in the past. Around 2015, the opposition party in Kenya raised concerns about how the first Eurobond was being used and alleged embezzlement. The allegations and speculation during this time drove Eurobond yields up to 9.4 percent. Thus, while the government Eurobond currently enjoys relatively low yields, domestic dynamics could change the context quite quickly raising issues about the affordability and sustainability of Eurobond debt once more.

The final concern with the current Eurobond issue is that it will saddle the country with substantial future debt. It seems as though, through the new Eurobond issue, the current administration is pushing debt maturity to 2024, when it will no longer be their headache to address. Well aware that their tenure ends in 2022, it is fair to ask whether the current administration is pushing debt repayment to a point beyond their tenure.

Anzetse Were is a development economist;

TV Interview: The effect of the elections on the economy

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On September 7 2017, I was on a panel on Citizen TV discussing the effect of the elections on the Kenyan economy.

Is the mall economy in Kenya viable?

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This article first appeared in my weekly column with the Business Daily on September 3, 2017

Over the past few years the hype of the emerging African middle class has made headlines across the world. The Harvard Business Review (HBR) makes the point that consumer spending power in Africa has risen from USD 470 billion in 2000 to over USD 1.1 trillion in 2016. In Kenya we have seen investors angling for a piece of that pie evidenced in the rise the mall economy. Kenya has about 53 malls of which about 30 are in Nairobi; another 19 are under construction. This mall obsession begs the question as to whether the aggressive growth of mall space is sustainable. HBR states that some multinational companies (many of whom sell products in malls) are finding that their business in the region is underperforming. In a survey of 20 senior executives working in Africa, 6 said they struggled to hit revenue targets. So, what’s going on?


There are two sides to this story. On one hand, yes it’s true that growing incomes have increased spending power and some of that will be directed to spending in malls. Some consumers prefer the setting and security of malls as they can let children wander freely, buy items that probably cannot be found elsewhere (think golf equipment or high quality makeup) and enjoy the variety of products on sale in a mall space. Also as Johnson Nderi from ABC Capital points out, supermarkets in malls do well because of the convenience, variety and relative affordability of goods offered there. There is also the Kenyan customer who enjoys the exclusivity of the mall experience and feels that money spent in a mall is money well spent because the experience simply cannot be found anywhere else. Ergo, demand for shopping malls will continue to exist.

On the other hand, according to the Deloitte’s 2015 African Powers of Retailing report, approximately 90 percent of retail transactions in Africa occur through informal channels. Why is purchase in the informal economy so strong and how does this impact malls? There are several factors that inform purchase in the informal economy; the first is quality and variety. For example, most Kenyans prefer getting fresh food items from informal open air markets, not supermarkets in malls because there is a feeling the produce bought in open air markets are fresher and thus are of better quality. Most Kenyans buy clothes from informal second hand clothes vendors because the variety and quality of products on offer there often cannot be matched by shops in malls at that price point.

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This leads to the second issue which is pricing; malls have underestimated how sensitive Kenyans are to value for money. Kenyans don’t see why they should pay for expensive mall rent added to the purchase price of goods bought in malls. Why are we paying for the rent of stores in shopping malls? Kenyans are also ingenious in getting value for money. For example, Kenyans prefer to search online for furniture or go to a furniture shop in a mall and then go to an informal carpentry outfit to get a replica made at a fraction of the cost. Why pay the full mall price when there are alternatives? This purchase psychology eats into the appeal of shopping in malls.

Unpacking the spending habits of the African middle class and the psychology that determines that spending is complex. Sadly an oversimplification of this complex mind may be leading to some poor investment decisions.

Anzetse Were is a development economist;

What China’s One Belt, One Road initiative means for Africa

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This article first appeared in my weekly column with the Business Daily on May 21, 2017

Last week China announced a plan to build a vast global infrastructure network linking Africa, Asia, Europe and the Middle East into ‘One Belt, One Road’. China plans to spend up to USD 3 trillion on infrastructure in an effort that seems to be centred more on linking 60 countries in the world with China, not necessarily each other. This One Belt initiative is perhaps part of China’s determination to position itself as the world’s leader in the context of Trump’s insular USA. This initiative has two-fold implications for Africa: the opportunities and potential problems that it creates.

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In terms of opportunity, obviously African needs continued financial support in infrastructure development. The Africa Development Bank (AfDB) estimates that Africa’s infrastructure deficit amounts to USD 93 billion annually until 2021. In this sense any effort to support the development of Africa’s infrastructure is welcome.

Secondly, this is an opportunity for Africa to negotiate the specifics of the type of infrastructure the continent requires and create a win-win situation where Africa leverages Chinese financing to not only address priority infrastructure gaps, but also better interlink the continent.

However there are multiple challenges the first of which is that Europe, India and Japan seem edgy about this initiative and have distanced themselves from it. According to India’s Economic Times, India and Japan are together embarking upon multiple infrastructure projects across Africa and Asia in what could be viewed as pushback against China’s One Belt initiative. The countries have launched their own infrastructure development projects linking Asia-Pacific to Africa to balance China’s influence in the region.

Europe is also edgy because the initiative has not been collaborative and comes across as an edict from China; countries in the initiative were not consulted. Europe is also uneasy with the lack of details and transparency of the initiative seeing it as a new strategy to further enable China to sell Chinese products to the world.

Secondly, analysts have pointed out that from an Africa perspective, the One Belt seems to continue the colonial legacy of building infrastructure to get resources out of the continent, not interlink the continent. Will the initiative entrench Africa’s position as a mere raw material supplier to China and facilitate the natural resource exploitation of the continent?

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Additionally, there are concerns with how the financing will be structured and deployed. Will financing be debt or grants? It can be argued that China needs to increase its free aid toward Africa in order to build its image as a global leader. Further, who will build the infrastructure? Africa has grown weary of China linking its financing to the contracting of Chinese companies. Will this infrastructure drive employ Africans and use African companies? If not, then it can argued that Africa will merely be borrowing money from China to pay itself back.

Linked to the point above, is the fact that Africa is already deeply indebted to China. In Kenya, China owns half of the country’s external debt. Kenya will pay about KES 60 billion to the China Ex-Im Bank alone over the next three years.  Kenya and Africa do not need more debt from China, and if this initiative is primarily debt-financed (in a non-concessionary manner), it will cause considerable concern in African capitals.

Anzetse Were is a development economist;