One of the benefits of more integrated capital markets in Africa is that governments in the continent can borrow from each other at a better cost of capital.
This was the submission of Eugene Tawiah, a Ghanaian capital markets expert and CEO of SecondStax, a capital market startup targeted at institutional investors.
In an interview with Nairametrics, Tawiah highlighted some of the benefits of more integrated capital markets in Africa, including increased access to long-term capital for small African businesses, lower interest borrowing rates for African governments, easy source of fundraising for mature African companies, and easy way for investors to balance their investment portfolio.
He noted,
- “Most governments rely on local and international bond markets to service their infrastructure needs. And today, most of that capital is coming at a [pretty] significant cost. If we had more integrated capital markets, I think those interest rates would come down, and ultimately, governments can borrow from each other at better cost of capital.”
- Considering the macroeconomic imbalances that affect African economies as well as investors, integrated capital markets could help to “balance investment portfolio”. Eugene noted, “With the possibility of a unified capital market, you can diversify, have your assets in multiple jurisdictions, and balance the risk. It’s a better way to soak up pressure.”
Currency Disparities and Unified Capital Markets
Currency disparity has always been a big impedance to cross-border trade in Africa, and this is not a unique problem for cross-border capital market traders in Africa.
Tawiah noted that as a solution to the problem, cross-border capital market traders have adopted a system where they eliminate the need for third-currency settlement systems.
He said,
- “What we’re doing is finding innovative ways to operate in the capital markets cross-border and removing the need for settlement systems in different currencies.”
- “For instance, when I’m in Ghana and need to buy something in Kenya, where I need Shillings, rather than first looking for US Dollars and sending it to Nairobi to be converted to Shillings, I find FX partners who can take the Ghana Cedis, sell to me at a relative rate, and give me Shillings.”
- “There’s hope that if we build scale for these channels, we can alleviate some of the pains of cross-border trade.”
According to Afrexim Bank, intra-African trade was 17% of total African trade in 2022, in contrast with 68% for Europe, 55% for Asia, and 33% for North America.
While some of the regional communities in Africa have payment systems that facilitate intra-regional trade, most settlements across Africa usually require a third currency, the US Dollar.
In 2021, Secretary-General of AfCFTA, H.E Wamkele Mene, noted that currency convertibility was costing Africa $5 billion. Eugene noted that if systems could be developed to reduce the dependence of the USD for currency conversion in Africa, there would be reduced pressure on the USD, allowing more FX to flow in the direction of critical goods and services across the continent.
Speaking about the Pan-African Payment and Settlement System (PAPSS), he noted that his platform is working at leveraging the advantages that PAPSS provides. Note that the settlement systems currently available in the ecosystems are targeted at retailers, while PAPSS allows for larger sums of settlement.
Tawiah noted,
- “The payment settlement systems currently available are more focused on retail and individual-type transactions, and considering a situation where I’m buying a bond that is equivalent to $1 million, I can’t use these platforms to do that transaction.”
- “We think PAPSS is one of the key solutions that has emerged in recent years.”
What you should know
African countries have been at the eye of the storm concerning foreign debts, with key economies not left out. For instance, this year, Ghana secured a debt restructuring deal with its official creditors, while the country is still in negotiation with its dollar-denominated bondholders.
Egypt, another significant economy has been in the news due to its high debt figures, causing the country to seek assistance from the IMF.
Zambia and Ethiopia are other countries that have defaulted on their debts even as the risk premium on dollar-denominated bonds by African countries continues to rise in the international bond markets.
