Wednesday, 30 March 2016

Lies, Damned Lies, and FDI Statistics

The term “Lies, Damned Lies, and Statistics” was popularized by the great US author Mark Twain, who attributed it to the British Prime Minister Benjamin Disraeli. Weak arguments are bolstered by the use of statistics, to the point that the credibility of quantitative economics is often seen to be undermined by datamining.

It would seem that there is an even stronger form: Lies, Damned Lies, and FDI Statistics.

In recent work for the forthcoming African Economic Outlook 2016, my colleagues Birte Pfeiffer, Robert Kappel and I found that the statement applies to FDI inflows to Africa in particular. There are two main official sources for numbers on recent FDI flows: the IMF World Economic Outlook database, and the UNCTAD Global Investment Trends Monitor. Consider the differences provided by these prominent sources:

FDI inflows (USD billion) to Africa
                   - 26.8
                   + 23.5

The lower UNCTAD estimate for investment in Africa in 2015 reflects a sharp drop into Mozambique (-21%), Nigeria (-27%), and South Africa (-74%). FDI inflows form an important part of the roughly USD 200 billion financial flows (including remittances, the most important inflow ahead of ODA) to Africa. The reported differences are so striking that, according to the FDI source chosen, total net financial flows in 2015 to Africa rose by 5.9% (IMF-based), that total inflows dropped by 12.8% (UNCTAD-based) or that inflows dropped by 7.4% if erratic FDI data are ignored altogether.

Choose the Africa narrative you like, the poor quality of FDI data is a convenient element for your more or less fairy tales…

Monday, 7 March 2016

Africa´s Frontier Markets are Cheap Again

Africa ´s equity portfolio flows have experienced consistent volatility during the past two decades. From a net equity outflow recorded for 2009 they jumped to a massive net inflow in 2010, to almost USD 20 billion. Since then, they have levelled off, to a mere USD 1.2 billion recorded for 2015. Volatile portfolio equity flows were reflected in most African equity markets indices that produced negative returns amid a challenging economic environment. While many observers see the beginning of the US Fed’s policy tightening cycle as the culprit for the recent retrenchment, domestic factors also seem to have contributed to reduced investor appetite for EME assets. A slowdown in growth added to investor concerns, particularly against the backdrop of the commodity price slump. 

Figure 1: MSCI Emerging Frontier Markets Africa ex South Africa Index vs MSCI World

Figure 1 compares the MSCI Emerging Frontier Markets Africa ex South Africa Index (blue line) with the MSCI World Index (green). It covers six countries (Egypt, Kenya, Mauritius, Morocco, Nigeria and Tunisia), with 38 constituents. The three largest, by index weight, are Egypt´s Commercial International Bank, Maroc Telecom and Nigerian Breweries. No industrial exporter figures among the ten top constituents, reflecting Africa´s industrial weakness. 

Figure 1 shows that Africa´s frontier markets held up well until early 2015 compared to advanced stock markets. Actually, African stock markets performed better than the emerging markets benchmark index (MSCI EM) in 2015.  The Bourse Regionale des Valeurs Mobiliers (BRVM), the regional stock exchange for the West African Economic and Monetary Union member countries, achieved strong positive returns on the back of stronger economic performance in Côte d’Ivoire. East Africa´s stocks did pretty well, as did their underlying economies. Commodity dependent Africa, by contrast is exemplified by Nigeria where uncertainty related to the presidential elections’ outcome and lower oil price contributed to lower returns.

From Spring 2015 to January 2016, however, the MSCI Emerging Frontier Markets Africa ex South Africa Index has almost halved.  With a dividend yield of 4.6% and a P/E ratio of 9.5, the index seems cheap now compared to the MSCI EMF index (3% div yield; 12.6 P/E ratio). In February 2016, the index has started a forceful countertrend rally of 20%, and perhaps even more: a turnaround. 

Thursday, 18 February 2016

Who is Funding Africa´s Infrastructure?

Data on lending sources for bank credit to Africa are hard to come by. Notably the People’s Bank of China, the China Development Bank, and the Export-Import Bank of China (Exim Bank of China), have supported large-scale investments in African infrastructure but do not publish up-to-date information (Pigato and Tang, 2015). For other bilateral and multilateral lenders, ECN (2015) lists the World Bank, African Development Bank, Development Bank of Southern Africa, Export-Import Bank of the United States, African Export-Import Bank, European Investment Bank, Agence Française de développement (AFD), Japan Bank for International Cooperation (JBIC), Islamic Development Bank and Kreditanstalt für Wiederaufbau as largest creditors.

Despite steady growth in private sector funding in the past decade, official development finance backs 80% of infrastructure funding,  with China heading the list of investors, according to a report released late 2015 (ECN, 2015). An important source of foreign finance for Africa stems from official creditors, including export credit agencies. According to the Infrastructure Consortium for Africa Report 2013, grants compose around 30% of the funding extended, while 67% are based on bank credit and export credit flows.
 The Infrastructure Consortium for Africa (ICA) acts as a platform to increase infrastructure financing, help remove policy and technical barriers, facilitate greater cooperation, and increase knowledge through monitoring, reporting and sharing best practices. In its annual reports, it provides some evidence on funding commitments for Africa´s infrastructure in four sectors—energy, transport, water, and information and communication technology (ICT). Table 1 provides data for the biggest creditors with annual commitments above USD 1 billion per year reported. The table gives a hint to the sizeable deleveraging by the various bilateral Chinese lenders already in 2014.

Table1. Funding commitments by origin, USD billion
Europe (incl. EIB)
United States
World Bank
Arab Coordination
South Africa (DBSA)
Source: ICA, various years.

Net official credit flows (disbursements minus amortisation) have declined in 2015, mainly due to a heavy amortisation schedule on bilateral liabilities. Amortisation payments to bilateral official creditors jumped to USD 13 billion in 2015 and are projected at that level also for 2016. This compares to much lower amortisation payments in former years during the 2009–14 period, when amortisation to bilateral s averaged USD 5.4 billion. Northern Africa has seen net official bank credit flows curtailed, as bilateral credit to the region has turned negative from 2014, mostly as a result of Egypt´s heavy amortization schedule over recent years. Main borrowers of bilateral loans in Sub-Saharan Africa were Republic of Congo and Côte d´Ivoire, reflecting bilateral loan agreements with China. While in 2013 bilateral official lending (53.7% of total) to Africa outpaced multilateral lending, it fell back below multilateral lending in 2014.

In terms of net official bank credit inflows to Africa, therefore, multilateral development banks currently provide the most significant volume of bank credit resources to Africa (World Bank, 2016). While net bilateral bank credit flows have dropped since 2014, the rise of net multilateral bank disbursements to Sub-Saharan Africa has continued unabated. New gross multilateral disbursements for African borrowers have risen to record levels, USD 17.3 billion in 2015.  They are projected to rise further in 2016 as AIIB lending to Africa´s east coast will start to contribute.

ECN (2015), Spanning Africa´s Infrastructure Gap: How development capital is transforming Africa’s project build-out, London: The Economist Corporate Network, November.
ICA (2015), Infrastructure Financing Trends in Africa – 2014. Infrastructure Consortium Africa 
Pigato, M. and W. Tang (2015), China and Africa: Expanding Economic Ties in an Evolving Global Context, Washington, DC ; World Bank. 
World Bank (2016), International Debt Statistics.

Monday, 8 February 2016

SWF divestment, oil prices and Shifting Wealth in reverse

From a total of $ 1.8 trillion in 2000, global foreign exchange reserves reached a peak of $ 12 trillion by mid-2014. China alone stockpiled reserves from $ 170 billion in 2000 to $ 4 trillion in August 2014, in order to contain appreciation pressures. High oil and metal prices, a result of China´s rapid industrialization and urbanization, funded not only the build-up of FX reserves mostly invested in US Treasury bills but also fueled real assets recycled into world equities, property, and collectibles.  So oil-loaded sovereign wealth funds (SWFs) became an alternative to merely accumulating official foreign exchange reserves, with the explicit mandate to invest “excess” reserves in higher-yielding assets (Reisen, 2008)[1].  Surging exports and oil prices produced a significant shift in the world’s net wealth in favour of those emerging economies running surpluses; mostly held by governments, assets were also de-privatised. In 2008, I had dubbed this process ´Shifting Wealth´, a term still popular at the OECD (OECD, 2010)[2].
´Shifting Wealth´ is going into reverse these days. Since mid-2014, both emerging economies´ FX reserves and SWF assets have dropped a result of lower commodity prices and lower gross capital inflows. The slowdown and rebalancing in China and tumbling commodity prices have started to produce a gradual melting of foreign assets being held by the world´s nouveaux riches. China´s FX reserves a now down by $ 800 bn to $3.2 trn, still the world´s largest. Saudi FX reserves have tumbled from $ 2.8 trn to $ 2.3 trn, Russia´s from $ 0.6 trn to $ 0.37 trn. From their peak reached in mid-2014, these three countries alone have lowered FX reserves by $1.5 trn. While everybody worries about a US Fed in tightening mode, it is largely ignored that the shrinking balance sheets of emerging economies´ central banks have tightened global liquidity considerably, especially since mid-2015.
Since then, the broader markets for risk assets have stalled and are nowadays tumbling.  The FT cites asset managers who find that “Sovereign wealth funds drive turbulent trading”, to explain sharply lower stock markets since early 2016: “We know that sovereign wealth funds are under pressure to sell and that is contributing to the market pressure we are seeing”. And “Sovereign wealth funds have become forced sellers”. These statements are in strong contrast to those who have hailed SWFs as ideal long-term investors for infrastructure finance or development banks, not least for their long-term liabilities. SWFs as forced sellers were not conceived to happen. In a 2008 speech, the World Bank president, Robert Zoellick, had called on SWFs from the Middle East and Asia to invest 1 percent of their assets in Africa.

Table 1: SWF assets, end 2014 v end 2015, $bn
* China Investment Corporation, SAFE, HK Monetary Authority, National Social Security Fund
** Abu Dhabi Investment Authority, Investment Corporation Dubai, Abu Dhabi Investment Council
*** Gov´t of Singapore Investment Corporation, Temasek

Table 1 tries to shed some light on the obscure world of SWFs. Except for Saudi Arabia and Norway, there is little evidence for melting SWF assets until end 2015. This finding may be due to incomplete records, dollar movements and hide developments up to and since mid-2015 as only year-end data are available. And the table doesn´t reveal whether SWs have already withdrawn from equities and driven up their cash in the wake of higher risk aversion and tightening global liquidity. Although it seems to confirm the stability of SWF assets despite commodity headwinds, Table 1 hides a big warning for holders of risk assets worldwide: You ain´t seen nothing yet!

Table 2: Fiscal breakeven Brent prices, $/barrel
2014 (avg $/b 99.9)
2015 (avg $/b 53.6)
2016 (avg. $/b 42.5)
Memo: Nigeria
Source: Deutsche Bank Research, Updating fiscal breakevens for EM oil producers, 29 January 2016

Oil dependent governments may start to raid their SWFs to prop up their economies and political survival as tax receipts fall on the back of the fall in the price of oil. An interesting analysis by Deutsche Bank has calculated the fiscal breakeven points for various oil-producing countries. It shows that fiscal adjustments have happened and are expected for the future in those countries. But the fiscal adjustment is just too painful and limited to stem the fiscal breakeven Brent price above the estimated brent price/barrel. Note that the current Brent price hovers around $30/barrel and is thus far below the price that Deutsche Bank estimate for the average of 2016. So beware of those “anti-cyclical” “long-term” investors, the oil-loaded SWFs.

Monday, 4 January 2016

Boom, Doom, Gloom & Africa

"Africa´s Boom is Over", pronounced an article in Foreign Policy on New Year´s eve. One of the conclusions: "Without the commodities boom, the actual failure of Africa’s development has now been laid bare". The gloom echoes recent forecasts by the IMF, notably its Regional Economic Outlook: Sub-Saharan Africa 2015, released last October. An often-used conceit, just as in the IMF´s WEO released the same month, is that of "headwinds" that Africa encounters as raw material prices have crashed and large emerging economies are slowing down. Africa counts 10 net oil exporters and 15 net nonrenewable exporters among its 54 countries. While these 29 countries do not constitute a majority of Africa in terms of country numbers, they command a large majority of Africa´s GDP and population.

While the winds of change connected to the slowdown in the majority of emerging countries (with the notable exception of India) may well imply considerable headwinds, the rebalancing of China in particular may also provide backwinds for Africa. China´s reforms aim at rebalancing the composition of growth in China toward consumption and away from investment. Such reforms are compatible with a rise of the real exchange rate (higher prices for nontraded services relative to tradable manufactures), of inflation-adjusted wages and of the level of domestic absorption in China. Such a process may affect Africa in several ways:

·         The price of energy and industrial commodities drops as a result of both the slowdown and the rebalancing. The biggest winners are those countries with either large energy import needs or relatively fewer commodity exports, such as Kenya and Tanzania (where the fuel share of imports exceeds 25%), and to a lesser extent Ethiopia and Mozambique. Africa’s centre of economic gravity is thus likely to shift from west to east, to the less commodity-dependent economies of Ethiopia, Kenya, Mozambique, Tanzania, and Uganda. Investment finance will follow this shift, reinforced by the peripheral outreach of China´s One Belt One Road initiative that includes East Africa for infrastructure finance[i].
·         Prices for soft commodities should be supported by China´s rebalancing as coffee, tea and protein-based (soya, for example) are consumed and imported more than before. However, the supply elasticity of soft commodities is higher than for exhaustible resources, so the price impact should be contained. Still, higher export volumes (at stable prices) will translate into higher export proceeds and government revenue in African soft-commodity producers.
·         To the extent that rising wages in China lead to higher labour unit cost, external competitiveness in low-end manufactures will be eroded. With incentives for some industries to move offshore, part of this relocation will involve sub-Saharan Africa (such as to the East African  garment-production). China could expand its current presence in sub-Saharan Africa’s pilot special economic zones, or encourage creation of new ones. The relocation of Chinese firms into Africa should lead to increases in factor productivity and shifts in global trade shares from China to Africa. Thus, all of Africa might experience positive effects as countries in the region are able to build domestic industries based on China relocating a portion of its manufacturing base permanently to the region. 

To be sure, the relocation process takes time, and it takes longer for the gains to be realized than the immediate income losses suffered by commodity exporters. But it´s not all doom and gloom in Africa.

[i] China’s new Silk Road Fund is an acknowledgement of this. It seeks to facilitate trade links with a number of frontier and emerging markets through a USD 40 billion infrastructure investment fund. In Africa, the fund is targeting the economies along the eastern seaboard, which suggests a shift away from China’s traditional focus on securing natural resources towards one more focused on exploring the opportunities for establishing a manufacturing hub in the region.


Tuesday, 1 December 2015

FfD3 Hopes Meet EM Slowdown in Africa

Just a little while ago (last July), they were so hopeful when adopting the Addis Ababa Action Agenda of the Third International Conference on Financing for Development (FfD3):

“We, the Heads of State and Government and High Representatives, gathered in Addis Ababa from 13 to 16 July 2015, affirm our strong political commitment to address the challenge of financing and creating an enabling environment at all levels for sustainable development in the spirit of global partnership and solidarity. We reaffirm and build on the 2002 Monterrey Consensus and the 2008 Doha Declaration.”

… and so on…  The SDG tanker had been set on course, and little attention seems to have been  given to the slowdown in most large emerging economies (EM) nor to the risk that ample liquidity driven by OECD monetary policy will not last forever. Poor countries´ challenging economic backdrop dominated by falling commodity prices, lower demand from China and the prospects of the Fed eventually hiking rates, all that was largely ignored in the official FfD3 documents

But consider the prospects of mobilizing foreign and domestic resources in Africa, which has become increasingly China centric over the last 15 years. According to the IMF latest (October 2015) Regional Economic Outlook on Sub-Saharan Africa, aptly subtitled “Dealing with the Gathering Clouds”, Africa´s recent good macro performance has rested on three pillars: high commodity prices; associated capital inflows; and better policies and institutions. Wasn´t the Fund consulted during the FfD process? Or was it simply ignored?

Figure 1: Commodity Prices August 2015, 2016 Projections
% change since January 2013

Source: IMF (2015), “Dealing with the Gathering Clouds”, October.

The first pillar, commodity prices, has broken over the last three years (Figure 1). Sub-Saharan Africa counts 8 net oil exporters and 15 net nonrenewable exporters. The prices of their main export staple - fossil fuels and metals - have crashed by between more than 60 and 30 percent during that period. Oil exporters are hard hit: If oil exports constitute 40 percent of a country´s GDP, an annual drop in oil prices by 25 percent translates into an income effect of minus ten percent. To be sure, commodity prices may fall even further; they may stagnate from now on; and they may rise again. Only the rise of commodity prices would alleviate African producers. Don´t bet on it, says Carmen Reinhard (2015)[1]: price declines typically retain downward momentum. By the end of the boom, many commodity exporters had already initiated investment projects to expand production. As these investments bear fruit, the increased supply will sustain downward pressure on prices. For minerals, short-term supply is price-inelastic: a result of near-insurmountable barriers to exit and a significant proportion of fixed costs.

The second pillar, net capital inflows, is so far surprisingly unaffected prima facie. The IMF WEO, released last October, still projects a small surplus (0.4% of GDP) in the capital account for Sub-Saharan Africa. DB Research[2] produces fresh evidence that Eurobond issuance by Sub-Saharan African frontier sovereigns (excluding South Africa) has held up remarkably well in 2015.

Figure 2: Change in Debt Service Cost, Sub-Saharan Africa 2015

However, issuers had to offer significantly higher yields than previously and yields on secondary markets jumped to multi-year highs (Figure 2):
·         While Emerging Market Bond Index Global (EMBIG) spreads have moved up since October 2014 by less than 100 basis points (bp), sub-Saharan sovereign bond spreads have risen by between 120 bp (South Africa) and almost 500 bp in Zambia.
·         As all outstanding sovereign Eurobonds in SSA are denominated in USD, any depreciation will have a direct effect on the local currency value of debt service payments. This is potentially even more harmful for interest burdens than rising spreads. The drop since summer 2014 against the USD has been most severe for the Zambian kwacha, the Angolan kwanza, the Namibian dollar, the Ugandan shilling and the Tanzanian shilling which lost between 51% and 20% yoy against the USD, as of November 2015. Zambia has been hit hardest: debt service cost rose in 2015 by 18 percentage points of GDP (left hand scale in Fig. 2) and by 106% in local currency terms (right hand scale).

The difference between rising local currency cost of Eurobonds – around 20% on average in SSA - and the drop in growth rates to low single digits makes for terrible debt dynamics, which is unlikely to be compensated by a corresponding surplus in the non-interest account.[3]

This leaves us with the third pillar, better policies. In the realm of development finance, this translates above all into improved tax collection. Recent IMF analysis (“Dealing with the Gathering Clouds”) suggests that the median country in sub-Saharan Africa might have a potential for another 3 to 6.5 percentage points increase in tax revenue. AID spel

[1] Reinhard, Carmen (2015), “The Commodity Roller Coaster”, Project Syndicate, 9 November.
[2] Masetti, Oliver (2015), „African Eurobonds: Will the Boom Continue?“, Deutsche Bank Research, Research Briefing, 16th November, Frankfurt/Main.
[3] Debt dynamics for a country´s local currency debt-GDP ratio eD/Y are driven by e(r-n)D + (G-T), with e the real exchange rate, r real interest cost, n real growth rate, D/Y the debt-GDP ratio and (G-T) the non-interest deficit. The same debt-dynamics equation can be applied to public finance.

Sunday, 8 November 2015

Africa´s Resource Gaps are Tightening

The structural slowing of potential output growth in emerging market economies that led to lower commodity prices has been simulated in the latest IMF WEO, released in October 2015 (Scenario Box 1, p 25). In particular, the marked decline in investment and growth in China—together with the generalized slowdown across emerging market economies—implies a sizable weakening of commodity prices, particularly those for metals, resulting in a weakening of the terms of trade for commodity exporters. Lower expected growth leads to lower investment. Africa´s resource mobilization might tighten via the various resource constraints for investment and output. The Bacha (1990) three-gap model has highlighted the foreign-exchange constraint, the private domestic-saving constraint and the fiscal constraint[1].

Countries at early stages of development (optimally) pursue an investment-based strategy, which relies on existing firms and managers to maximize investment.  Most of Africa is still at that early stage. High domestic savings and investment rates have underpinned latecomer development in the 19th century in Europe and in the 20th century in Asia. In Africa growth after 2000 tended to be higher in countries with higher investment shares in GDP, as discussed at length in AEO 2014),and investment tended to be higher in countries with higher national savings. 

Table 1: Variables to Determine Financing Needs
Structural, rigid short term
·         Import content of investment
·         Crowding-in coefficient 
·         Global interest rate
Policy, rigid short term
·         Private savings 
·         Remittances 
·         Net factor payments abroad 
·         Net capital inflows: of which
direct foreign and portfolio equity investment
·         Private investment 
·         Exports 
·         Imports
·         Exchange rate, in monetary union
Policy, manageable
·         Public investment 
·         Change in FX reserves 
·         Exchange rate, unless monetary union
·         Net capital inflows, of which
Loans, foreign bonds and aid inflows

The gap model provides a consistent list of variables that matter for resource mobilization in Africa. To be sure, only some of those variables can be influenced by policy, at least in the short term. Therefore, the gap equations also provide the basis – as was their historical motivation 50 years ago already – to quantify Africa´s public financing needs. Table 1 attempts to classify the variables into three categories, although the underlying distinctions may be fluid and somewhat arbitrary: structural (rigid short term); policy (rigid short term); and policy (manageable). 

Investment in Sub-Saharan Africa has traditionally been constrained by low domestic savings. Only in the ´golden decade´ of the 2000s the region recorded a saving rate that averaged almost a fifth of its combined output.  Since 2009, Africa´s saving rate has been declining, and the IMF projects for 2015 the domestic savings rate to drop even further (Table 2), to a meagre 15.4 percent of GDP. This compares to an average saving rate of 31.9 percent projected for the total of emerging and developing countries in 2015. Sub-Saharan Africa is the developing region with the world´s lowest saving rate. First and foremost, investment and future output are saving constrained.

 Table 2: Financial Balances 2001-08 and 2015p,
SS Africa and Total Emerging and Developing Countries (EMDC)
- percent of GDP -

As domestic investment is projected to remain sustained at more than 20 percent of GDP in the Fund projections but savings are depressed, the current account is pushed into deficits, exceeding five percent of combined GDP in Sub-Saharan Africa. The projected deficit on Africa´s current account is consequently considerable, mostly financed by running down official reserves. This begs the danger of currency attacks, with subsequent currency mismatches and balance-sheet recession.

[1] Edmar l. Bacha (1990), “A three-gap model of foreign transfers and the GDP growth rate in developing countries”, Journal of Development Economics, Vol. 32, Issue 2, April, pp. 279–296, doi:10.1016/0304-3878(90)90039-E. While it can be objected that the gap model is too structuralist, it seems relevant in the current African situation as several constraints can be taken as given for short-term analysis.