Abdoulaye KARAMOKO, Partner and Senior Portfolio Manager at Enko Capital Management
Based in London since 2014, Abdoulaye is a Partner and Senior Portfolio Manager at Enko Capital Management, an Africa-focused investment fund with offices in London, Abidjan and Johannesburg and over USD 500 million in assets under management. Previously, he was Head of Africa Trading in Société Générale’s investment banking division and Head of Africa Trading at HSBC plc. Abdoulaye started his career in Côte d’Ivoire with Standard Chartered Bank as a trader before being transferred to Ghana as a regional trader in charge of the West and Central African markets (Nigeria, Ghana, Gambia, Sierra Leone, WAEMU and CEMAC). He has to his credit the creation of Standard Chartered Bank’s trading hub for West Africa. He also set up and developed the Africa Fixed Income and Currency business at Société Générale London and HSBC plc. He is a Statistical and Economic Engineer (ISE) with a degree in Finance and Actuarial Science from ENSEA in Abidjan, class of 2003.
1. Diversifying the investor base on the Public Debt Market (PDM) remains a challenge. As regards international investors, in your opinion, what are the obstacles to their more active participation in issues on the WAEMU Government Securities Market?
During the 2000 – 2010 decade, there was a wave of Afro-optimism that led to an acceleration of foreign direct investment and portfolio investment in Africa. This trend was accentuated by the financial liberalization observed in most African countries and the strong economic growth linked mainly to the surge in commodity prices following China’s accession to the WTO. Foreign capital flows reached a peak of 6% of GDP in the 2000s, whereas they represented less than 1% in 1990.
In the Government Securities Market, Nigeria, Egypt and Kenya are rapidly becoming leading markets for foreign investors since 2005. These three markets are differentiated by:
- a favorable macroeconomic situation: strong growth and stability of the current account with improvement in commodity prices;
- a comprehensive monetary and exchange rate policy by the authorities ;
- attractive interest rates;
- a functioning secondary market.
From 2007 to 2010, Ghana, Uganda and Zambia joined the list of African markets international investors prefer. At that time, very few foreign investors were interested in the WAEMU Government Securities Market. A few had invested in the zone with the aim of ticking the diversity box in their portfolio but encountered many difficulties in execution.
The reasons for the lack of interest were many and varied:
- Unattractive interest rates: before the subprime crisis, American and European interest rates were around 5% and 4% while WAEMU Government Securities Market offered around 5% to 6%. The exchange rate risk on the XOF was not sufficiently remunerated from the point of view of the foreign investor whose base currency was euro or dollar.
- The mechanism of the XOF peg to the euro was considered a bit complex for some investors (the understanding of the mechanism has evolved a lot in recent years).
- The non-existence of the secondary market and the opacity of the charges related to the repatriation of investment proceeds.
Today, with the global context marked by almost zero or even negative interest rates on the European and American markets, WAEMU Government Securities Market interest rates should be attractive for medium and long-term maturities. However, the monetary policy adopted by BCEAO in response to the COVID-19 health crisis has led to a decline in bond yields.
This is a challenge that must be met, and rightly so, because the WAEMU zone has still not succeeded in taking advantage of the massive flows of portfolio investors in Africa since the beginning of 2021, which saw the participation of these investors reach 6 billion dollars in Ghana, 600 million dollars in Uganda and about 30 billion dollars in Egypt, representing about 20% to 25% of unmatured government securities.
Foreign investors specializing in emerging markets are quite familiar with certain economies in the WAEMU zone, notably Côte d’Ivoire, which has just had its rating upgraded by S&P to BB-, Senegal and Benin (due to their presence on Eurobonds). For these three countries, macroeconomic strength is no longer a blocking factor. The reasons for their reluctance are operational and communication related.
2. Does ENKO CAPITAL invest in the Government Securities Market and if so, for what reasons?
ENKO CAPITAL is an asset management company with an African focus founded in 2008. ENKO invests in debt (including government securities), equity and private equity on the African continent. The group manages just over USD 800 million through various funds. Some of our funds are partially or fully invested in the WAEMU Government Securities Market.
ENKO CAPITAL’s main fund – ENKO AFRICA DEBT FUND (EADF) – invests solely in the Public and Private Securities Market in both local and foreign currencies (Eurobonds). It was launched in 2016 and to date manages $ 688 million. Since its launch in 2016, it has achieved an average annual return of 18% in US dollars with an annual volatility of 3.4%.
ENKO believes it has a very good understanding of the macroeconomic picture of countries in the zone and the various risks associated with investing in the zone’s Securities Market. With solid fundamentals compared to other sub-Saharan African countries, Côte d’Ivoire and Senegal stand out and offer relatively acceptable returns given the level of inflation and the stability of the XOF.
3. International investors have a well-established investment strategy regardless of the country in which they invest. Can you give us a brief overview of ENKO CAPITAL’s investment strategy in the Government Securities Market?
ENKO’s investment strategy has three main components:
- Offer investors the opportunity to capture high yields available on the Sub-Saharan African debt market in US dollars.
- Benefit from a macroeconomic environment that is structurally favorable to debt due to the high yields it offers because of a structural weakness in the level of credit expansion in Sub-Saharan Africa, especially in the private sector.
- Allowing risk diversification compared to traditional bond funds, without an inordinate increase in credit risk.
4. It is worth noting that some States successfully exited Eurobonds. This reflects the appetite of international investors for the creditworthiness of WAEMU issuers. Indeed, international investors should logically find an interest in investing locally given the interest rate levels offered rather than in Eurobonds for example. In your opinion, and taking into account your knowledge of the market, how can the participation of international investors be improved and what could attract these investors?
Investing in Eurobonds or local currency government securities depends on a number of factors, not necessarily the level of return offered. Some investors have mandates/strategies that require them to stay in Eurobonds. However, there are investors who specialize in investing in emerging and frontier markets. They can invest in local currency debt as well as in Eurobonds. The two sub-asset classes represent completely different risks, although they are all sovereign risks.
For example, investing in Eurobonds involves a pure credit risk with no exchange rate risk for the foreign investor, whereas local currency securities have a low credit risk but the investor is exposed to the country’s exchange rate risk (devaluation risk for the WAEMU zone, for example).
In general, international investors will have a preference for Eurobonds from African countries when:
- The yields (credit spread) are in line with the country’s rating.
- The investor does not want to be exposed to currency risk or believes that this risk is not sufficiently rewarded by the yields on local currency debt.
- The size of the local market is small in terms of primary and secondary issues.
In addition, operational issues are less costly and easier to manage with Eurobonds: settlements are made through Euroclear.
5. Government Securities Market, with its much higher returns, should be an attractive investment pole for foreign investors and capital. But we have to admit that this is not the case. In your opinion, what is the reason why our markets do not attract more foreign capital today? What are the reasons that hinder a persistent and massive presence of these foreign capitals on our local market?
It is true that in the current context, the Government Securities Market offers relatively better returns when compared to Eurobond returns for example. In absolute terms, yields in the WAEMU zone remain quite low compared to other African countries that are also trying to attract foreign capital. Long-term international investors are particularly interested in high real interest rates against a backdrop of currency stability. For countries such as Egypt, Ghana, Kenya and Uganda, the real interest rate is 6%, 9%, 4% and 8% respectively, whereas in the WAEMU zone, the real interest rate is about 0% or even negative for some countries (the WAEMU zone has been experiencing galloping inflation in recent months coupled with a drop in yields on sovereign issues). The international investor interested in the Government Securities Market tends to allocate his capital to countries with high real interest rates rather than to the zone.
In addition to the structural difficulties related to interest rates, the language barrier has been a hindrance to constant communication with international investors, most of whom are from the English-speaking world. The BCEAO website does not have an English version and information is disseminated with a delay. UMOA-Titres is making up for this with an English version of its website, but does not disseminate information related to the conduct of monetary policy.
Finally, the crucial issues of the Secondary Market depth, transparency and market integrity need to be addressed in order to gain the confidence of investors.
The ease of repatriation of investment proceeds in foreign currency has also been a constraint for some investors. This issue is not unique to the WAEMU zone. In Egypt, the Central Bank had to put in place a specific mechanism for international investors to ensure the repatriation of their proceeds when they so desire at transaction costs known in advance. Ghana and Nigeria also have a mechanism for repatriating the proceeds of foreign investors.
6. What do you think of the scope or relevance of certain initiatives of UMOA-Titres such as the electronic trading platform which should contribute to improving market liquidity by improving price transparency and promoting competition on the secondary market, or the establishment of the Association of Government Securities Market Stakeholders which will serve to establish a framework for exchanges with stakeholders on the challenges and development prospects of the Market?
The initiatives of UMOA-Titres have led to a remarkable increase in bond activity in the zone. Since its creation, we have seen a better organization of primary issues and a sharp increase in secondary market volumes. As investors, we have an interlocutor who listens to the market, who understands our needs and who tries to develop the bond activity in the interest of the States, the regulator and the investors. With the establishment of the Association of Market Actors and the provision of trading tools, we believe that UMOA-Titres will be able to achieve its objective of making the market even more transparent and dynamic.
We would also like to thank UMOA-Titres for its work in communicating and disseminating information and statistics on the bond market. However, as far as international investors are concerned, it would be desirable for UMOA-Titres and BCEAO to look into the issue of repatriation of investment products in foreign currency, the applicability of the Tax on Transfers out of WAMU (TTHU) to investors in the Government Securities Market or the setting up of a special repatriation window, as other African countries have done.
