Bellevue African Opportunities (Lux)

The global monetary tightening along with US dollar strength last year set a challenging backdrop for equity markets that was exacerbated by the Russia-Ukraine war and ensuing spike in food and energy prices. The latter led to a performance divergence between net importers and net exporters of commodities in our region. South Africa rallied 22% (USD terms) in 4Q 2022, pairing its annual losses to -2.8% yoy thanks to the risk-on mood towards EMs after China exited its zero COVID-19 policy. Further, its trade balance got a year-end boost from the recovery in the price of iron ore, gold and platinum, of which it is a net exporter. Net commodity importers like Egypt, Morocco and Kenya suffered losses ranging from -19% to -27% yoy in 2022, in line with those of emerging and frontier markets indices of -20% and -26% yoy in USD. At -17% yoy, the fund outperformed emerging, frontier and some of the main developed markets last year, a testament to the fall of opportunity cost to invest in Africa vs. developed markets with the removal of accommodative monetary policies.

Another highlight last year was the deterioration in external balances leading to a depletion of foreign exchange reserves across the continent as many issuers were locked out of the USD debt market due to elevated financing costs. Morocco and South Africa relied on their diversified sources of USD and flexible FX regimes to weather these headwinds whereas Egypt and Kenya turned to the IMF for new funding assistance in the face of growing macroeconomic pressures. The last two countries count on structural reforms together with the support from bilateral and other development partners to bridge their balance of payments needs. Ghana on the other hand had no choice but to suspend payments on its USD debt obligations and is the second African nation to default after Zambia in 2020.

In Nigeria, the availability of US dollars is unlikely to improve as long as the Central Bank keeps its unorthodox monetary and FX policies. The institution’s cashless policy and recent changes to cash withdrawals limits disrupted the flow of Naira in circulation and mechanically constrained the demand for USD. The stock index was up 4% last month and 16% yoy in 2022 (USD terms), well supported by local investors for whom equities are among the few avenues with an acceptable risk/return profile. For foreign investors, investing in Nigeria makes little sense as capital repatriation has not been possible for more than 6 years. Moreover, market returns in USD are misleadingly inflated as the official rate used in the calculations is non-transactional, the black market rate (NGN730/USD) which is a better reference for real transactions is 40% weaker than the official rate.

The IMF finally approved a new USD 3bn program for Egypt and expects USD 14 bn of additional fundings from other international partners to help the country meet its balance of payment needs. The same month, the government made some progress in preparing the ground for one of the main IMF recommendations: a more flexible FX regime. The authorities cleared more than USD 5 bn of imported goods blocked at ports while the Central Bank lifted the letter of credit requirement for imports financing. In light of the deterioration in inflation outlook, the Central Bank raised its main operation rate to 16.75%, a 300 bps hike vs. the Refinitiv consensus of 125 bps. Despite this hawkish surprise, equities pursued their Q4 2022 rally to add 10% last month, which pairs the index losses in 2022 to -19% yoy vs -27% yoy prior to the last October devaluation.

Kenya is also proactively looking to solve its balance of payment issues through the IMF assistance (USD 437 mn received in December) and a fiscal consolidation to reduce its reliance on external debt for budget support. Equities were flat mom and ended the year down 25% in USD terms.

Last month, we subscribed to the IPO of Akdital Holding. The company is the largest private hospital group in Morocco and is well positioned to leverage the ongoing healthcare reforms to deliver a strong and sustainable growth. 2022 showed that the performance gap between Africa and developed/EM markets disappeared with the removal of supportive monetary policies. Once the uncertainty in global rates clears, we expect Africa to deliver positive hard currency returns – particularly the structural growth stories – even in an environment of slower global growth.