Africa: New sources of finance energise economy

For African financiers, the start of trading at the Nigerian Stock Exchange on March 8 last year was a sweet moment. On that morning, the sugar refining arm of Dangote Group – Nigeria's towering industrial conglomerate – formally listed, completing a $420m initial public offering – the biggest in the country's history.

The stock issue – largely to local investors and 40 per cent oversubscribed – symbolised a growing trend: African companies, assisted by African advisers and floating on African stock exchanges or borrowing from African banks to raise African money on an unprecedented scale.

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Across the continent, indigenous businesses ranging from infrastructure giants to small enterprises are finding financing where once there was none. They are tapping young, vibrant stock markets, obtaining bank debt and turning to capital markets that are starting to come of age. At the same time, shaken into action by seismic changes in the economic landscape, African banks are leaping into new markets, led by an aggressive vanguard of Nigerian lenders.

Loan volumes have risen dramatically, from $5.8bn in 2000 to over $28bn last year. Mergers and acquisitions involving an African company reached $87bn last year – a ninefold increase over five years.

“There's been a very sudden maturing in the capital markets in the big countries,” says one senior South African banker. “As more and more investors, Nigerians say, get comfortable with investing in shares, they will create much deeper capital markets for local corporates to get financing.” The thousands of Kenyans queuing for shares at the initial public offering of Safaricom, Kenya's dominant telecoms company, is a case in point.

The International Monetary Fund expects Africa's economies to grow at about 6.5 per cent this year. Oilflush Angola and Equatorial Guinea expanded by 21 per cent and 12.4 per cent last year respectively. But like so many of the critical developments in Africa in recent years, the spark that lit the flame under African banking originated in Beijing.

The rush of Chinese cash – capped in October with Industrial and Commercial Bank of China's $5.5bn purchase of a 20 per cent stake in Standard Bank, Africa's largest bank by lending – caused western investors and hedge funds to look again at a continent where, in the words of one asset manager, people mistake their own ignorance for African risk.

Foreign funds began to gobble up African paper, which principally consisted of government debt. Those bonds had long been the preserve of the local banks. As demand rocketed, their
yields tumbled – bought lower, some contend, by sovereign debt relief – forcing indigenous institutions to find new ways of making money.

Ventures that would once have considered raising finance locally a risible prospect began to find liquid capital markets and willing banks at home. A corner was turned last September when a group of Tanzania's commercial banks and pension funds came together to fund a $240m bail-out of Tanesco, the country's stricken utility, in the biggest corporate finance package east Africa has seen. Yet equity markets remain small by worldwide standards. According to a UBS snapshot last year, the total market capitalisation was $870bn, of which South Africa accounted for some three quarters. Excluding Egypt, Morocco and Nigeria, the rest of Africa's combined market cap was $40bn – slightly less than that of Haliburton, the energy company.

The equity markets are growing fast, however. Angola plans to open a stock exchange this year, in which regional bankers expect intense interest, both foreign and local. Valuations in Nigeria have ballooned. Even in the likes of Malawi and Zambia, local corporations should have little difficulty raising $20m or so, according to the senior South African banker.

Bankers say there has been a slight slowing in foreign fund flows during the subprime mortgage crisis, as burnt investors lose their appetite for risk. A more important development in the longer-term, though, will be increasing the confidence of international investors in their ability to cash in their investments, according to one African banker with a leading Dubai-based investment bank.

That liquidity appears to be arriving. Sovereign wealth funds and others from the Gulf are pouring money in, the Dubai banker says. He also sees “deal potential” in the near future as international private equity firms combine with local investment boutiques to foster locally financed leveraged buy-outs of the kind that until recently were common in South Africa.

For those lower down the scale, the shift in the way Africa's banks work may prove the happiest news.

Jean N'Sele, an independent consultant based in Tunis and a former senior banker at Citibank, says diminishing returns on traditional lending to multinationals and holding government Treasuries mean the old ways are gone. “The only alternative for banks is to move downmarket and take more risks,” he says.

There is some way to go. Yvonne Ike, senior country officer for west Africa at JPMorgan, says: “Across sub-Saharan Africa, there is not enough lending to the sectors that will really fuel growth – agriculture, infrastructure and natural resources, for example. This is still a big challenge for the local financial institutions.”

Africa has seen its share of bursts of optimism that came to nought. But Colin Coleman, managing director for South Africa at Goldman Sachs, which brokered the ICBC deal with Standard Bank, says: “The fundamental economic activities and the democratisation of African countries, fuelled by resources, mean that this is a structural shift.”