Work and Establishment Mobility in Sub-Saharan Africa

With the rise of neo African nationalism  a question which is seldom raised but is crucial to  the economic development in sub-Saharan Africa  is the  question of work and establishment mobility in sub-Saharan Africa.  A region with a drastic skills deficit.

Work and Establishment Mobility in Sub-Saharn Africa

Exchange Traded Products in Africa

e-Ghana-Stock-Exchange-in-Accra-Ghana-June-15-2006.-Photo-Jonathan-Ernst-World-Bank-Photo-ID-JE-GH060615_30020-World-BankWorldwide assets held in exchange traded funds (ETF) have reached US$2 trillion. This milestone should be seen within the context that the US$1 trillion milestone was obtained in 2009 after almost 19 years. Notwithstanding the growth in the ETF industry, the relative low barriers to entry have given rise to significant competition. ETF fees have been reduced (the average fee is 30-40 bps in Europe) and there have been an increase in delisted or merged ETF.

As a further illustration, 1,200 exchange traded products (“ETP”) in Europe have assets of less than US$50 million. Blackrock’s recent purchase of Credit Suisse’s ETF arm is thought to be the beginning of significant consolidation in Europe which could give rise to a reduction of 30% of ETP providers. The economic rationale for the industry and their products is sound and universal but US and particularly European ETFs require new investors.

Africa with its unprecedented growth provides wonderful opportunities for ETFs. Many African countries are experiencing growth not seen since the first years of independence. Average GDP growth in Africa is expected to exceed 5.8% with some economies witnessing double-digit growth. The economy of Nigeria is due to be the largest in Africa by 2016. Africa is therefore at the point where institutional and high net worth investors need, and are interested in, opportunities beyond the current narrow categories of government bonds, real estate and local equities, which have an inverse correlation with the risks from local infrastructure fund investments.

Exchange traded products (“ETPs”) provide a transparent, flexible and arguably efficient exposure to different asset classes. They are therefore suitable for local money managers in Africa, which wish to reduce credit risk, obtain liquidity, portfolio diversification and exposure, which cannot be obtained locally. Several exchanges have already expressed a genuine interest in listing ETPs such as ETFs, commodities (“ETC”) and currencies (“Currencies”).

This presents a significant expansion opportunity for large ETP providers willing to invest in what is still a relatively nascent financial market. The benefits are obvious. It would: (1) increase assets under management (“AUM”) from a non-industrialised world correlated market and (2) enhance brand recognition where a first to market premium is still available.

Due to liquidity problems many large investors are keen on reducing exposure to local equities and consider plans to develop an equity futures market too limiting. High domestic inflation and currency pressures also dilute values in local currency denominated on shore investments, such as bonds. Unfortunately, there are few local currency denominated opportunities for institutional investors seeking liquid, strategic and tactical opportunities to invest in equities/fixed income or commodities within their own jurisdictions as well as obtaining underlying exposure to other jurisdictions in Africa, US, Europe or Asia etc.

Current estimates indicate that Nigerian pension funds, which are limited to poor performing equities and government bonds, would invest hundreds of millions of USD into first generation ETFs. With the exception of South Africa, Botswana, Nigeria Ghana and Egypt there are no equity ETFs in Africa.

Many African pensions are cautious about investing on overseas exchanges due to low offshore exposure caps . Moreover the listing process in many exchanges in sub-Sahara is slow and convoluted. South Africa which has a relatively efficient listing process has currency control restrictions which mitigate against offshore ETFs listing and currently has very few ETPs, the major diversity being brought by exchange tradable bank issued debt securities which carry issuer risk. Moreover, a lack of technology in all exchanges in sub-Saharan African with the exception of the JSE, make it difficult for market makers to trade in real time to satisfy local exchange demand.

What is required is an opportunity for ETP providers to reach a new market, using technology which would enable real time trading through local exchanges in domestic currencies.

Download the full report of Exchange Traded Products in Africa