Umeh points to the recent fine issued to MTN in Nigeria as an example of regulation coming of age Credit: George Osodi/Bloomberg
By Afamefuna Umeh, Head of Fixed Income, SSA, Exotix
editor's pickTuesday 06, November 2018
The investment banking sector in West Africa is beholden to a large number of external market dynamics, everything from the state of the global economy to the presence of a reliable legal and regulatory framework and political stability on a local and regional level.
In general, the strengthening of the economies in West Africa, the GDP growth prospects and improving capital markets architecture, coupled with rising oil prices, bodes well for corporate investment banking prospects.
Macroeconomic backdrop and changes in the regulatory environment
Nigeria, Ghana and Senegal are the biggest economies in West Africa. They have a long list of regulatory authorities, and although there have been cases of regulatory dispute with large foreign companies in West African countries, the regulatory environment remains broadly friendly.
The tax environment is also stable. In Ghana, the general corporate income tax (CIT) rate is 25 per cent, while CIT in Nigeria and Senegal are charged at 30 per cent. These rates have been in place in Nigeria and Ghana for the past decade, however the rate was raised in Senegal from 25 per cent in 2014.
Macroeconomic variables in the top West African countries are looking good. Inflation has greatly reduced in Nigeria (currently at 11.32 per cent compared to its 12 year high in January 2017 at 18.7 per cent) and Ghana (at 9.9 per cent compared to almost 20 per cent in 2016) but increased in Senegal (at 0.3 per cent in August 2018 against -0.3 per cent in July 2018). Real GDP growth forecasts for 2019 are 2.3 per cent (Nigeria), 7.6 per cent (Ghana), and seven per cent (Senegal). Also, the general government net lending/borrowing (per cent of GDP) forecast for 2019 is more meaningful now that there is an outlook for higher revenue compared to expenditure in 2019 versus 2018. Furthermore, the Monetary Policy Rate (MPR) of Nigeria has been held constant at 14 per cent. The benchmark interest rate in Senegal was last recorded at 4.50 per cent. The interest rate in Senegal averaged 3.92 per cent from 2010 until 2018, reaching an all-time high of 4.50 per cent in December 2016 and a record low of 3.50 per cent in September 2013. The Bank of Ghana kept its prime lending rate steady at 17 per cent at its July 2018 meeting, as widely expected, and after trimming it by 100bps in the previous meeting. Policymakers said the decision is consistent given the circumstances and especially regarding the global outlook. The Committee noted that the inflation rate trended up in recent months boosted by the cost of petroleum and transportation, remaining well-anchored and retaining its trajectory over the medium-term.
MTN recently faced an $8 billion fine relating to ‘illegal’ dividend repatriation claims by the Central Bank of Nigeria. This was attributed to a change in the capital structure of the firm from 2006 to 2007 (different from what was originally stated in its Certificate of Capital Importation). The problem is not the change in capital structure but the lack of approval of repatriated dividends from the CBN. The bigger picture is that due to foreign exchange instability, a refund of this amount which is in foreign currency (US dollars) may be required to be done at the current exchange rate which will lead to an estimated loss of $4 billion. Despite the dispute in Nigeria, the company is preparing for its IPO in Ghana. A predictable and reliable regulatory framework coupled with a strong, independent judiciary encourages investor confidence in the country over the long term.
West Africa Monetary Zone and cross border business opportunities
The West African Monetary Zone (WAMZ) is a monetary and customs union with a common currency, the CFA Franc, launched in 2015. Unified West African investments have implications for foreign investors as they now have access to more countries by just investing in the zone. This helps the investor to take advantage of some under-developed sectors in some of the countries and get good ROI while also helping to develop the countries themselves.
Some of the very attractive cross-border opportunities include investing in infrastructure (which remains one of the under-developed areas). Importantly, investments in education and human capital development will be game changing for the region, although they may not be as attractive to foreign investors as the payback period is longer. Real estate may be an appealing option, as development tends to increase the value of property and assets in the category act as a good inflation hedge. The challenge for investment banks in the region is the need to maintain a strong understanding of the region as a whole, the strengths and weaknesses of the individual markets, as well as the dynamics which the WAMZ creates for cross-border opportunities. Having a narrow expertise on one local situation will no longer cut it.
The ‘Africa rising’ rhetoric has not materialised
West African countries (especially oil producing ones) have seen some economic downturn in the past few years due to dwindling oil prices, corrupt practices of the ruling government and also an increase in terrorist activity. This has distorted some of the forecast/fundamentals that were considered when some investors committed their funds years ago. The impact of this is that investor returns would have been distorted, discouraging some from continuing business, leading to the exit of their investment. There have however been some persistent investors who stood with their investments amidst the economic downturn. These investors may not have reached their initial expected ROI but they have definitely had good returns and have the potential of getting even better returns in the coming years.
Africa as a whole remains a very attractive high growth region for foreign investors, particularly Nigeria and Ghana. Even in light of regulatory hassles and currency risks that may affect business, investors have not relented in their bid to invest. It is also worth noting that the exchange rate has been relatively stable in the past few months and the outlook looks even more attractive. Local investment banks should be well placed to take advantage of this appetite.