Rout could continue after a year to forget: Africa markets in 2019
Traders in African markets have had a year to forget, and there are signs the retreat’s not over yet
Africa’s stocks and bonds have performed worse than those of all other emerging-market regions in 2018, reversing their outperformance of last year.
The sell-off has left equities in nations such as SA, Egypt, Nigeria and Kenya at, or near, their cheapest levels in years. And the yields of Eurobonds issued by governments have soared to a point last seen in early 2016, when investors fretted China’s economic slowdown was gaining momentum.
However, bargain-hunters won’t necessarily jump in next year. Risks abound from tense elections in the two biggest economies — Nigeria and SA — to low oil prices, potential credit-rating downgrades and the prospect of sovereign defaults.
Here’s what investors should look out for:
The oil cartel Opec member is desperate to boost an economy that will contract for the third year running in 2018, according to the International Monetary Fund (IMF). This month, its government signed a $3.7bn three-year loan with the Washington-based lender that it hopes will end severe shortages of foreign exchange, which have forced the central bank to devalue the kwanza by almost 50% against against the dollar since January. State energy company Sonangol, meanwhile, is trying to attract foreign investment in oil fields and increase production that’s at the lowest in about a decade.
Its central bank took a big step early this month when it ended a repatriation mechanism guaranteeing foreign-exchange availability for overseas investors. This will leave the Egyptian pound more exposed to market forces next year as bond and stock traders switch to using the interbank market. Their response so far has been “extremely positive” and few are exiting their positions, according to Citigroup, which recommends that clients buy three-month T-bills yielding almost 20%. With a fiscal deficit of about 10% of GDP, Egypt needs the investment.
Abiy Ahmed has pledged a raft of reforms since becoming prime minister in April, including opening up the telecommunications and power industries to private investors. This could further boost an economy the IMF reckons will grow 7.5% this year, the most in Sub-Saharan Africa. Still, foreign-exchange shortages are acute, putting pressure on the birr. Issuing another eurobond would increase the Horn of Africa nation’s low reserves, but the IMF warned this month that it’s at high risk of debt distress.
West Africa’s second-biggest economy is set to exit a bailout programme with the IMF at the end of this year. This has helped fix the nation’s finances and drive the inflation rate down to its lowest since 2013. Still, investors are wary about the finance ministry’s plan to sell billions of dollars of century bonds and hope it isn’t a sign the government will revert to unsustainable spending without the guiding hand of the IMF.
With growth of about 6% expected next year, the Kenyan economy remains one of Africa’s most buoyant. But Moody’s Investors Service has warned about the government’s rising debt levels and said it will probably reach 60% of GDP in the medium term. The IMF has also said that, due to central bank meddling, the shilling is almost 20% over-valued and no longer a floating currency, which governor Patrick Njoroge has denied.
The country may have been in default for almost two years, but its eurobonds are the best performers in emerging markets in 2018, making a price return of 15%. Much of this is down to the government agreeing, in principle, a restructuring deal with most of its bondholders. If other investors give their consent early in 2019, it could pave the way for Mozambique to get an IMF bailout.
Nigerians go to the polls in mid-February, with President Muhammadu Buhari trying to fend off a challenge from Atiku Abubakar, a former vice-president. Buhari says he’ll continue to fight against corruption. Abubakar’s long been dogged by allegations of graft. But many foreign investors think his policies — including ending a system of multiple exchange rates and selling part of the state oil company — are more likely to revive an economy still reeling from the 2014 crash in crude prices.
The West African nation has presidential elections in late February but investors aren’t perturbed, given its history of political stability. This is one reason, along with economic growth of 7%, Citigroup says its eurobonds could be in for a rebound after selling off heavily this year. The Wall Street bank’s analysts recommended to clients on December 11 that they buy the government’s 2024 dollar notes, which yield about 7%.
SA faces a bumpy 2019, not least because of general elections in May. Should President Cyril Ramaphosa’s ANC fail to win a significant majority, he may be forced to delay market-friendly reforms, such as revamping debt-laden state companies by retrenching workers or selling assets. Conversely, he could accelerate others that investors are nervous about, including changing the constitution to make land expropriation easier. Crucial, too, will be an assessment by Moody’s — the last ratings company to judge SA as investment grade — soon after the February budget. A downgrade to junk would trigger the country’s exclusion from the World Government Bond Index and outflows of as much as $7bn, according to Citigroup.
Next year could be make or break for Zambia, whose eurobonds have tanked more than those of any other sovereign in emerging markets in 2018 and trade at spreads of about 1,200 basis points above US treasuries. Bank of America Merrill Lynch says there’s an “increasing risk” it’ll be forced into a debt restructuring if it can’t negotiate friendlier terms on bilateral loans from China or get an IMF bailout.