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Africa: Pandemic could be dawn of a new day for the continent

By Xolisa Phillip, in Johannesburg
Posted on Tuesday, 20 October 2020 23:20

Virus Outbreak South Africa Long Exit
Sunrise in Sea Point, Cape Town, South Africa. (AP Photo/Nardus Engelbrecht, file)

In Africa, the impact of COVID-19 is not only widespread, but it is also devastating and has the potential to have a deeper and longer-term impact on the growth trajectory of the continent, investment banker Yvonne Ike tells The Africa Report.

That potential includes plunging 40 million people on the continent into poverty, out of 100 million globally projects the World Bank.

In addition, about 300 million youth in Africa will be negatively impacted one way or the other, points out Ike, managing director and head of Sub-Saharan Africa (except South Africa) at Bank of America Merrill Lynch; the third largest investment bank in the world.

A new dawn

Ike, who has been in financial services for more than 20 years, reflects on the current COVID-19 crisis as it pertains to the region and potential solutions as sovereign debt defaults loom because of a liquidity crunch. Ike also touches on why she believes the present, challenging moment sparked by the pandemic could signal a new start for Africa. 

“One of the solutions – and one of the tools – that governments have, is access to financing from capital markets. In the first instance, there is an urgent need to agree a way to restructure sovereign bond debt,” says Ike.

But “we really should be talking about access to liquidity – like everyone else,” says Ike.

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She adds: “The access to liquidity, in the first instance, which gives fiscal space stems from being able to negotiate with capital markets some restructuring that supports some deferral in funding current financing obligations, which is about $40bn for this year.”

“So far, that has been one of the more challenging things the capital markets need to address,” adds Ike.

We are no longer able to isolate Africa’s problems from the rest of the world.

On the positive side, Ike says: “We are seeing stronger credits out of Africa. … There are real opportunities to raise money in the international capital markets … interest rates are at their lowest levels in over 30 years.”

“They are able to raise debt on tighter terms than has been done in the past. We have seen African entities raise more than $5bn since March 2020. There are real opportunities. But I think the urgent work we all need to do is to find ways for the capital markets to agree to a delay in payment terms to help create urgently needed fiscal space for some African countries,” Ike said.

The urgency stems from the fact that “we are no longer able to isolate Africa’s problems from the rest of the world.”

“The scale of the challenges we face in Africa at the moment does require collaboration within Africa and with international communities. There are mutual benefits to doing that, which will support a faster recovery from the current global recession,” she explains.

Addressing the quanta of funding made available to the continent – and the range of tools available to access liquidity – is a good place to start.

Road to growth and recovery paved with out-of-box thinking

Ike views digitalising Africa as a gateway to revolutionising growth.

The first port of call for this to happen is through bridging the digital divide on the continent. “African governments, and international governments, need to come together, agree [on] policies and initiatives that make it easier to implement broad-ranging digital services across the region,” she says.

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Doing that would have multiple effects on the economies within and outside Africa.

Ike thinks technological developments will be the single-largest contributor to economic growth on the continent, particularly in facilitating healthcare, food production, manufacturing and financial services. In terms of the latter, think innovations in payments and access to credit.

“We can be much more intentional about collaborating with the developed economies and how we finance those kinds of opportunities,” she says.

The African Union has some great envoys, some of the finest minds in Africa who are working on optimising intra-regional trade and to foster deeper regional integration. “At Bank of America, we’re looking at ways in which we can support those initiatives where it makes sense to do so.”

Bank of America’s horizon

Another aspect COVID-19 has thrown up is uncertainty, which has had some investors reviewing their commitments.

However, “in our organisation, we have a long-term view on any market we decide to play in,” says Ike.

  • “Whenever we go into any market, we go in with two lenses – always. We go in with the lens of doing commercially relevant transactions we are able to deliver to a high level of excellence – that is relevant for our clients and … the market in which we are operating.”
  • “The second lens is through ESG [Environmental, Social and Governance]. From our commercial lens, we are still very committed to doing deals that make sense. The focus at this time is doing deals that have some value-add for the region, so leveraging our platform to do those types of transactions is important.”

On the ESG side: “We are even more committed to making sure we continue to focus on areas that we have invested resources in,” says Ike.

That includes job creation through the bank’s Africa recruitment programme; and supporting healthcare through the Global Fund, including supporting education through Teach4All: Teach4Nigeria and Teach4Ghana in particular.

“We also support the creative sector. Those are the main areas of intervention where we commit considerable resources every year,” adds Ike.

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Bank of America has also played an important role in the development of green, social and sustainability bonds.

“We were the first company to issue a benchmark-sized corporate green bond and we co-authored the original version of the Green Bond Principles, a voluntary set of guidelines to promote integrity in the development of the green bond market,” Ike says.

Most recently, “we issued a $2bn Equality Progress Sustainability Bond designed to advance racial equality, economic opportunity and environmental sustainability,” says Ike.

She says it is the first offering of its kind in the financial services industry. In addition to the $2bn sustainability bond, the bank issued a $1bn corporate social bond to support the fight against COVID-19 pandemic – “the first such offering by a US commercial bank.”

“As the region continues to see [a] push towards decarbonisation and the growth of more sustainable business practices, we expect to see Green Bond issuances to flourish across the region,” she said.

Africa, your move

“I really do believe this is Africa’s morning,” says Ike. “The severity of the situation has created opportunities that we must leverage.”

“There are real gaps in terms of supply and demand within the region that need to be met as a result of the breakdown in global supply chains,” says Ike.

Many countries are supporting the local production of personal protective equipment (PPE) on the continent. There is an AU portal set up to facilitate the buying and the selling of PPE within the region.

“It’s also a function of the fact that we have far less liquidity and far less foreign currency. Also, there are a lot of initiatives for supporting the development of factories in the region.”

In the geopolitical situation between China and the US, there is a massive opportunity for Africa “to be the innocent bystander that provides fertile manufacturing ground in Africa.”

  • “We have got the resources, including human capital. Africa has the largest amounts of some of the world’s best natural resources and we also have low-cost labour, among other things. To achieve this, Africans need to organise themselves to be more user-friendly as a region to deal with. And the AU is dealing with that.”

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Fast-tracking the implementation of the African Continental Free Trade Agreement would be key. A statistic often cited to highlight the lack of adequate intra-regional trade on the continent is the fact that only 16% of trade takes place among African states. Contrast that with the European Union, whose intra-regional trade is estimated to be above 50%.

The free trade agreement is the optimum instrument for this goal.

Ratings rethink

The dangers of sovereign debt defaults have been exacerbated in some instances by credit ratings downgrades or adverse reviews. Ike is critical about the wisdom of this approach.

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“The way that the international ratings agencies assess the same issues that come out of Africa compared to other regions, needs to change. The methodology of assessing credit and the language they use, needs to change. For example, the ratings agencies can use risk assessment methodologies that might be more relevant and, therefore, likely to work better,” she says.

“This is not a, ‘Oh, poor Africa, help us here’.”

“This is more about using methodologies, using language and reacting in ways that are similar to what is happening in the more developed regions. Ratings agencies have the obligation to find out more information about what’s really going on, use less desktop analysis to make decisions and share more reflective ratings information, given the long-term financing implications for African countries,” she adds.