Markets in Sub-Saharan Africa: Prospects for faster growth in the remainder of this decade

…A brief note on financing and policy alternatives

The answer to questions about how to unleash a long period of high sustainable growth in Sub-Saharan Africa remains largely elusive. What we do know is that access to capital in the private sector remains problematic, and the public sector, in many cases, crowds out funding opportunities for burgeoning enterprises in the private sector.

While some efforts have been made in recent years to open channels of funding to the private sector, those opportunities remain too limited and uncoordinated to make a significant difference in growth rates.

Of course, any effort to deepen and expand capital availability will require macroeconomic stability and healthy sovereign balance sheets, which also remains challenging for natural resource dependent economies.

In 2023, macroeconomic fundamentals in Sub-Saharan Africa (SSA) reflected the challenging conditions in developed markets, with slower growth in China and policy rates elevated in response to higher inflation.

According to the IMF, a 1% change in China’s GDP has a 0.25% impact on growth in SSA, and with over $250 billion of annual trade relations (20% of SSA’s exports got to China) it is not surprising that growth slowed in 2023 to 3.3%, down from 4% in 2022.

The IMF is forecasting growth of 4% in 2024, a view with which we at Ghana International Bank (GHIB) concur – although resource rich countries could perform better if geopolitical tensions lead to higher commodity prices. In 2023, commodity prices failed to provide the lift needed to boost incomes and reduce fiscal imbalances.

Supply chain impediments also contributed to higher consumer prices due in part to the ongoing disruptions caused by the war in Ukraine and structural rigidities in local distribution channels. Indebtedness (debt/GDP) and fiscal balances did not materially change from 2022 to 2023, as several countries took positive steps to discontinue costly subsidies and create fiscal space for critical spending elsewhere.

According to data from the IMF, eight countries are expected to end the year with indebtedness ratios exceeding 80%, which exposes them to potential external shocks with no meaningful buffers (especially with an increased reliance on higher priced commercial debt in recent years).

With current borrowing costs (using yields on outstanding Eurobonds as a proxy for funding costs) significantly higher than the coupon rates available at the time of issuance, refinancing some of this debt at current yields will be onerous and, in some instances, fiscally impossible. The global multilateral institutions will need to play a more significant role in supporting the funding needs of many of these countries in the next few years.

Access to the Eurobond market for sovereigns and corporates in SSA has been very challenging with less than a handful of issues coming to market in 2023. In the last four years from 2020 through 2023, only $49 billion was issued across all SSA issuers – according to JP Morgan (or an average of $12.2 billion /year, which is hardly enough to meet the annual financing needs of the countries in the region). That figure can be contrasted with the $1.2 trillion issued across all emerging markets (excluding Asia) in the same period, and the $16.5 trillion issued globally.

Actual access to financing in 2023 has been problematic for many sovereign issuers, with expected yields well in excess of 10% for 10 year money. As rates across the developed world rose in response to inflationary pressures, borrowers in SSA markets had to grapple with efficiently funding high deficits, addressing serious inflationary pressures, and coping with slower growth.

The multinational financial institutions in SSA have an important role to play, especially in supporting local financial institutions with loans, guarantees and other credit enhancement arrangements.

Three of the major pan-African financial institutions in SSA currently have a combined equity base of $9 billion, which is a pittance in relation to the commercial and development needs of the region. Their role in promoting trade and credit expansion should be a priority for policy makers and international multilateral institutions, given Africa’s share of global trade is currently only 3%.

Ghana International Bank (GHIB), the 65-year-oldUK based Pan-African trade bank has continued to play an important role in promoting trade, and punch above its weight by supporting financial institutions and public entities with trade finance solutions, and other types of creative structured arrangements.

The main multinational commercial financing institutions in Africa, for example, despite having investment grade or high-quality ratings in most cases, are currently able to borrow at about 7% (for 10 years, according to Bloomberg and JP Morgan), but can only deploy those funds at spreads of 300 basis points to cover their costs and provide a reasonable return to their shareholders.

So, while these institutions provide a much-needed alternative to other lending sources, the cost of this type of funding remains relatively expensive. It is worth noting that even as capital trickled down very sparingly to SSA markets in 2023, interest in overall emerging markets debt investments remains strong heading to 2024, with oversubscriptions to bond issues exceeding 2x on average in the latter part of the year, according to JP Morgan data.

Funding assistance for these regional and indigenous institutions through term facilities and equity support would be a welcome addition to the arsenal of options to address the woeful lack of funding for trade and the private sector, and would provide a meaningful boost to GDP growth in the region.

With high financing requirements resulting urgent social and development needs, and having to rely on relatively less effective tax mobilisation mechanisms, heavy reliance by the public sector on foreign sources of financing can be expected to continue in the medium term.

For this not to be overly burdensome, support from official donors and concessional assistance will need to a key part of any credible fiscal program, especially among the more fragile economies in the region.

Thankfully, the IMF has provided financing of over $55 billion since the onset of the pandemic, and has provided $4 billion in assistance so far in 2023. While these figures are not trivial, spending on development programs need to be more efficiently allocated to achieve the desired social returns on investment.

Reliance on local capital markets can also be problematic, given the high rates investors expect in an environment of fluctuating exchange rates and elevated inflation, as well as the shallowness of many government securities markets in the region.

With an estimated GDP of just over $2.1 trillion, Sub-Saharan Africa’s 4% overall fiscal balance in 2023 (IMF) implies a net new financing need of about $80 billion for the region, by my estimates. Current yields mean borrowing costs in excess of $8.0 billion just to service that incremental debt.

Growth rates in SSA will also need to meaningfully exceed the average 4% rate delivered in the last decade, in order to lift millions more out of poverty and create the conditions for a more sustainably high standard of living. That means trade there needs to be an area of focus (both intra-market and with the rest of the world).

In fact, it will take a combination of factors in a mutually reinforcing process of: 1) increased capital flows at below market yields; 2) massive funding support for pan-African financial institutions like Ghana International Bank (GHIB); 3) a more progressive and creative approach to managing the region’s critical mineral reserves; 4) boosting intra-regional and global trade volumes; 5) more effective tax mobilisation; 6) renewal and expansion of energy and transportation infrastructure; 7) raising educational standards and expanding access; 8) significantly improving governance standards in both the private and public sectors; 9) harnessing digital technologies including artificial intelligence in education, healthcare and the public sector; and 10) development and support for early-stage and/or venture funding opportunities for start-ups and small businesses engaged in trade and other growth-stimulating enterprises.

It is a herculean task, but good progress can be made in the medium term with relentless focus and an uncompromising stance from policy makers, development and commercial finance institutions and partners in the private sector.

We at Ghana International Bank will continue to do our part in providing critical trade and funding support to the financial institutions and firms in the private and public sectors in West Africa, and increasingly in East Africa as well.

.Adansi is Chief Executive of Ghana International Bank plc (GHIB), a Pan-African bank focused on trade finance in West and East Africa. GHIB is a regulated financial institution with a 65-year operating history in the City of London.