World investors and debt-rating agencies should rethink criteria for evaluating political and other risk. “Risk is up for developed markets (DM) and down for Emerging Markets (EM)” said Andrew Dell, CEO Africa and Head of CEEMEA DCM at HSBC Bank PLC. He was a key speaker at a conference on “Outlook for Emerging Market Debt in 2013”, organized by Thomson Reuters International Financing Review in London on 18 September. He suggested people could be more sophisticated and nuanced in pricing political and other risk in both EM and DM. In many parts of Africa and other frontier markets, political risk is “fairly benign” and stable government is growing.
A factor behind potential re-pricing is that a spread of 300-500 basis points (3-5 percentage points) might seem modest, but when the risk-free rate is only 1% then it is a significant difference and these gaps could keep investors switching to EM. EM external debt totals EUR322 billion ($420bn) but domestic currency issuances, increasingly popular with investors, more than double the total.
Dell said “a driver for EM debt will be the approach of Basel III and how different countries will regulate it”, as banks move to compliance they will not be able to invest as before. Another driver will be the lower cost of debt, which makes it easier for issuers to get the desired returns (social returns for government, commercial returns for enterprises). More debt issuance “will benefit growth and benefit the economies.. it will benefit people”.
Other speakers at the conference also noted changes in perception as African debt yields come down and the supply of debt increases, while Africa has “infinite” demand for infrastructure, (a World Bank figure cited was $75bn a year). Projects were often not created in an ideal structure for bond issues. African policy-makers may struggle to stop economies overheating as they push forward vast infrastructure investment.

Conference take-aways
• Giulia Pellegrini, Frontier Markets Analyst, JP Morgan, highlighted the potential of domestic reforms including the rise of domestic pensions, for example the Nigerian pension industry is now worth NGN3 trillion ($18bn) and pensions are looking to invest in longer-dated bonds, boosting the yield curve. Fabianna Del Canto, Director Emerging Market Syndicate, Barclays suggested that infrastructure bonds could advance as domestic long-term investors come to the fore, including the growing insurance investors.
• Nick Rouse, MD, Frontier Markets Fund Managers, said they do loans including to infrastructure and have so far lent $800m with no defaults. He said 40% of the portfolio is in Independent Power Producers (IPPs) in Africa. He pointed out there is huge demand for electricity which is critical for jobs and growth. Bonds offer huge opportunities. His team had also worked with the regulator to create the first credit-enhanced bond in Nigeria. They achieve their target of 18% internal rate of return on debt.
• Angus Downie, Head, Economic Research, Ecobank said that the structure of African economies is becoming more sophisticated with flexible exchange rates and other market structures now operational.
• Liquidity is still a key constraint on many African debt markets.
• African debt should not be traded on exchanges but there should be scope for intermediaries and back-to-back deals. The role of exchanges is to report bond trades and pricing.
• Stephen Bailey-Smith, Head of Research: Africa, Standard Bank PLC African policy-makers and regulators should be removing taxes such as withholding taxes and others that lead to differential pricing and other difficulties, when it would be easier to streamline and concentrate on corporate tax, which may also yield higher incomes
• Asian investors are growing in importance, and are already taking keen interest in debt, including in South Africa.
• Eurobond – hard currency – debt issues need to be at least $350m or $500m, partly because of the cost of intermediaries. Local currency markets are more cost-effective for smaller issues and most African corporate debt
• Islamic Finance: Dell said that there is a growing pool of dedicated funds seeking Islamic finance opportunities. Since general investors are also becoming more comfortable with Islamic finance and making investments, for some issuers the investor base is bigger, particularly if they can attract Middle East investors.

This is Reuters’ story: “EM debt issuance on course to hit nearly USD400bn” published today.