Africa Growth Story Unravels
June 14, 2016
Bloomberg
The continent was once so lauded as the next big investment destination that it lured the likes of former Barclays UK CEO Bob Diamond, who started a business focused on buying African financial-services companies. Now, Africa’s fading economies risk taking down more lenders with them. “Two years ago the ‘Africa Rising’ story was probably overblown,” said Ronak Gadhia, a research analyst at Exotix Partners, in London.“Those investors with hot money have been disappointed and are withdrawing.”
Evidence of the fallout is mounting. Kenya and Zambia are each grappling with a series of bank failures, and lenders in Nigeria and Ghana are struggling with declining profit and depleted capital levels.
Deals are also drying up, with initial public offerings and debt sales plummeting, when only last year bankers from Standard Chartered to Citigroup were criss-crossing the continent wrapping up mandates.
“Financial stability risks have risen across sub-Saharan Africa,” Adesoji Solanke, Renaissance Capital’s head of research in Nigeria, said last month.
A slowdown in China, Africa’s biggest trading partner, a commodity rout, depreciating currencies, widening government budget deficits, and an energy shortfall are all combining to change the playing field.
The International Monetary Fund cut its 2016 economic growth forecast for sub-Saharan Africa from 4 percent to 3 percent.
“The markets most at risk are those with loans highly concentrated by sector, for example the oil and gas sector in Nigeria,” said Andy Bates, head of Africa financial services for Ernest and Young, in Johannesburg.
Banks exposed to the copper industry in Zambia and the Democratic Republic of the Congo are also at threat, whereas in Ghana and Mozambique rising government debt and current-account deficits will “invariably place strain on banks,” Bates said.
A number of “red flags” are signalling the potential for crisis, Mahin Dissanayake, a director at the financial institutions unit of Fitch Ratings, said in Lusaka, Zambia, on Thursday.
“There’s a very close link between sovereign risk and bank risk,” he said.
“It is only a matter of time until the weaker operating environment catches up with even strong banks and, therefore, we might see pressure on earnings, pressure on capital and pressure on asset quality.”
Three Kenyan lenders have collapsed in the past year, mainly because the country’s biggest banks hold most of the cash in the system.
This despite the government forecasting gross domestic product growth of 6.1 percent this year.
Ghana, which last year expanded at its slowest in 20 years, has six banks struggling to make returns, and Zambian authorities have seized three financial services firms and another four are battling for income.
But for those willing to navigate the risks, expansion opportunities have opened. FirstRand and Nedbank have expressed interest in Kenya.
Gadhia said Africa’s growth story is not over because of its young and growing population.
“The dedicated money is still in Africa,” Gadhia said. “The opportunity remains. It is still under-penetrated with fairly fast-growing economies.
People forget what a frontier market really is – there are risks and cycles.”
Bloomberg
The continent was once so lauded as the next big investment destination that it lured the likes of former Barclays UK CEO Bob Diamond, who started a business focused on buying African financial-services companies. Now, Africa’s fading economies risk taking down more lenders with them. “Two years ago the ‘Africa Rising’ story was probably overblown,” said Ronak Gadhia, a research analyst at Exotix Partners, in London.“Those investors with hot money have been disappointed and are withdrawing.”
Evidence of the fallout is mounting. Kenya and Zambia are each grappling with a series of bank failures, and lenders in Nigeria and Ghana are struggling with declining profit and depleted capital levels.
Deals are also drying up, with initial public offerings and debt sales plummeting, when only last year bankers from Standard Chartered to Citigroup were criss-crossing the continent wrapping up mandates.
“Financial stability risks have risen across sub-Saharan Africa,” Adesoji Solanke, Renaissance Capital’s head of research in Nigeria, said last month.
A slowdown in China, Africa’s biggest trading partner, a commodity rout, depreciating currencies, widening government budget deficits, and an energy shortfall are all combining to change the playing field.
The International Monetary Fund cut its 2016 economic growth forecast for sub-Saharan Africa from 4 percent to 3 percent.
“The markets most at risk are those with loans highly concentrated by sector, for example the oil and gas sector in Nigeria,” said Andy Bates, head of Africa financial services for Ernest and Young, in Johannesburg.
Banks exposed to the copper industry in Zambia and the Democratic Republic of the Congo are also at threat, whereas in Ghana and Mozambique rising government debt and current-account deficits will “invariably place strain on banks,” Bates said.
A number of “red flags” are signalling the potential for crisis, Mahin Dissanayake, a director at the financial institutions unit of Fitch Ratings, said in Lusaka, Zambia, on Thursday.
“There’s a very close link between sovereign risk and bank risk,” he said.
“It is only a matter of time until the weaker operating environment catches up with even strong banks and, therefore, we might see pressure on earnings, pressure on capital and pressure on asset quality.”
Three Kenyan lenders have collapsed in the past year, mainly because the country’s biggest banks hold most of the cash in the system.
This despite the government forecasting gross domestic product growth of 6.1 percent this year.
Ghana, which last year expanded at its slowest in 20 years, has six banks struggling to make returns, and Zambian authorities have seized three financial services firms and another four are battling for income.
But for those willing to navigate the risks, expansion opportunities have opened. FirstRand and Nedbank have expressed interest in Kenya.
Gadhia said Africa’s growth story is not over because of its young and growing population.
“The dedicated money is still in Africa,” Gadhia said. “The opportunity remains. It is still under-penetrated with fairly fast-growing economies.
People forget what a frontier market really is – there are risks and cycles.”
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