Nigeria’s stock market rally is not built to last
Nigerian stock market valuations rest on interest-rate levels which can’t be sustained indefinitely.
By David Whitehouse
Posted on Tuesday, 15 December 2020 12:47
The paradox of democracy is that while investing in African dictatorships brings reputational risks for Western financial institutions, competitive democracy comes at a high cost.
Ghana’s recent polls show the need for governments to bolster popular support through public spending and loose fiscal policy in the run-up to an election. That runs counter to the requirements of international debt markets.
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Elections in Ghana have become the most competitive in Africa, REDD Intelligence argues in research published in December. The winning margin in presidential elections fell from 28 points in 1992 to 0.4 points in 2008 and 3 points in 2012. This has meant greater pressure on incumbent parties to increase public spending in the run-up to polls, says REDD Intelligence.
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Competitive elections are a “major factor” in debt sustainability, says Mark Bohlund, senior credit research analyst at REDD Intelligence in London. “Africa is becoming more democratic, but the downside is that parties in power will spend more” to stay there. “The political imperative is to spend.”
The IMF forecast in October that Ghana’s government debt will rise to 76.7% of GDP in 2020, having stood at 59.1% in 2018.
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Part of that is due to a clean-up of the banking sector, but PwC Ghana estimates that the exercise accounted for only about three percentage points.
Charles Robertson at Renaissance Capital estimates that Ghana’s interest payments as a percentage of government revenues, at 50%, will be the highest in Africa this year, above even Zambia. “We should be more worried than we have been” about Ghana, he wrote in November.
Ghana is the riskiest African debt that Renaissance says investors should consider, so long as it is balanced by safer bets such as Egypt and Kenya.
According to research from REDD Intelligence in December, Ghana is likely to return to the eurobond market in the first quarter of 2021, though the risk premium demanded by investors is likely to increase. Bohlund expects Ghana to be able to raise about $3bn. There’s a “lot of goodwill” towards Ghana among emerging-market bond investors, he says.
Neither does increased borrowing from China, even if the money were available, provide a way out.
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Loans from China to African governments are typically tied to an infrastructure project. They don’t create liquidity or financial flexibility.
Western investors stuck for yield have yet to come to terms with the trade-off between competitive Africa elections and higher public spending.