Leave it to the locals!
OECD upgrades and local currency finance were placed on the centre stage at Exporta’s recent Africa Trade & Investment 2007 conference in Cape Town, writes Namakando Wani.
US Ex-Im Bank president James Lambright was upbeat about OECD ratings upgrades for Sub-Saharan Africa at Exporta’s Africa Trade and Investment 2007 forum in Cape Town in February, while also referring to his organisation’s increasing willingness to consider backing local currency financed projects. Indeed, he observed that if every deal he had heard about on a recent trip to Lagos was realised, they will together “strain the capacity of local and international banks”.
Lambright echoed opening remarks by Mike Hart, CEO of Standard Chartered in South Africa, concerning structural improvements in Ghana and Nigeria that include increased foreign exchange reserves and much-improved positions with the Paris and London clubs, as well as banking reform and privatisations. Both pointed to elections in the two countries as key junctures.
“I’m not making any predictions but my sense is that ratings will reflect better data in due course,” said Lambright. “There will be a remaining desire to ask questions and watch the repayment record continue to strengthen.”
The comments came in response to pressure from bankers present, who pointed out that commercially-available finance was undercutting export credit agencies (ECAs) both in category 6 and 7 countries – for which premia can extend into double figures – and in category 3-rated South Africa.
The potentially huge implications of an upgrade for South Africa were discussed with both US Ex-Im and Coface confident their agencies could handle the capacity increases this would bring. Richard Hodder, director, Middle East & Africa, at HSBC in London pointedly stated that this would “make ECA finance competitive for South Africa”.
Marc Murcia, director of the medium and long-term department, at French ECA Coface, counselled patience, pointing to a trend that had already seen Senegal, Mali, Tanzania and Ghana upgraded, with few downgrades.
Lambright said that Ex-Im had already responded to Nigeria’s central bank recapitalisation by allocating US$300mn among 14 local banks in order to enhance local credit capacity. He suggested more ECAs learn to gain comfort from local company’s contracts if operating histories and financials alone do not suffice, and cited a US$9.3mn guarantee for Xechem Pharmaceuticals Nigeria to build its Nicosan plant. Nicosan is a new drug to treat sickle-cell anaemia.
In response to a question by Gabriel Buck, director at Barclays Capital in London, Lambright volunteered the option of US Ex-Im backing local currency-funded projects in Africa, especially in areas such as power and telecoms where revenues are in local currency.
He recognised that Ex-Im has yet to fully embrace local currency funding and – along with other ECAs – uses a crystallisation clause to fix defaulted exposures in hard currency. Yet Coface’s Murcia pointed to his agency’s first local currency deal to be free of such a clause – a 2006 transaction denominated in Mexican pesos. He significantly added that the agency was close to competing its analysis for relaxing crystallisation clauses in South-African rand-denominated transactions.
Indeed, Alasane Ba, the African Development Bank’s direct lending division manager, was actively hostile to foreign currency denominated funding, insisting that the costs are being passed on to consumers. He referenced mobile operator MTN’s expansion in Cameroon, financed through a CFA franc-denominated issue.
In light of this, a delegate questioned the action of the Botswana government in devaluing the currency 72 hours before repayment was due on a large pula-denominated issue – causing “big portfolio losses” to international investors in Sub-Saharan Africa’s only A-rated sovereign bond market.
Konrad Reuss, newly-created regional manager for Standard & Poor’s , said that to the best of his knowledge the unhappy timing of the devaluation was a genuine mistake and not to be repeated. He reminded the audience that the event did not have a bearing on S&P’s rating, which in the absence of a default remains distinct from currency fluctuations.
South-African banks’s continued interest in originating local currency issues supports the view that the Botswana losses were an aberration.
“In Africa, the backing of large corporate finance transactions in local currency as opposed to dollars is just starting to take off,” says Macer Gifford, Africa head at Standard Bank Global Markets. “The development of projects with a significant local earnings stream – such as power and telcoms – creates the demand, while supply comes from regulatory changes to create local investment pools and, particularly, the increased attraction of African local currency assets to international portfolio investors.”
He puts this down to “strong currencies, capital account deregulation and relatively high yields”.