Road Africa are renowned for their terrible state, so high-quality highway from Ndola to Kitwe (two cities “copper belt” of Zambia) seems to be something incredible. Construction of roads in this African country is financed via Eurobonds in the amount of $750 million issued in September 2012.
The time of release was perfect: the fed was planning indefinitely to buy Treasury securities to maintain low rates, and investors in America and Europe sought to acquire debt in dollars, expecting a large profit. Zambia attracted $12 billion in ten-year bonds with a rate of 5.4%. Even Spain couldn’t borrow in that period of time under such a low percentage.
The release of the Zambian Eurobond confirmed that the funds in the rich countries are ready to leave home territories to pass in emerging markets and to enter the “frontier markets” (or the markets, which are characterized by high risk or low income), writes the British magazine the Economist. Even when the fed announcement about the end of bond purchases has led to shock in emerging economies, African States continued to receive funds from the investment funds. Nigeria and Ghana sold Eurobonds in July. Mozambique attracted $850 million in September. Gabon issued a second Eurobond in December.
Frontier markets are generally small illiquid and risky, so many observers surprised that they almost reflected the recent turmoil in emerging economies. Exchange firm Exotix has calculated the difference in average interest rate on Eurobonds 50 frontier markets (compared to Treasury securities). The difference of the index decreased to 395 basis points. The gap between the Exotix figure and the index bond issuers markets of transition economies (EMBI) reached a historic low of 68 basis points this week. The same can be said about the index of stock markets of developing countries (MSCI), which began to catch up with the index frontier markets.
Copper mining in Zambia
More recently, frontier markets was seen as a subtle addition to focused on developing countries funds. Today, they are considered as a separate class, says Andrew was Brudenell from HSBC. Distributors and advisors to pension funds now regularly ask how much you should invest in frontier markets. The growing interest is partly due to declining GDP growth in China, Brazil and India. Positive mood, which was in relation to developing economies in the 1990s, is now observed with respect to border markets, says Charlie Robertson of Renaissance Capital.
Ongoing debate about where the border begins and ends with the market. If this is the country in which there is a developed or a developing market, 23 of the 25 fastest growing economies over the past decade can be attributed to frontier markets. But many of these frontier economies do not have full-fledged stock exchange, only Qatar is included in the frontier index MSCI financial markets. To obtain the necessary qualification stock exchange must have at least two stocks that have a certain size and liquidity. The exchange must also be “affordable,” or open to foreign ownership (when capital freely and quickly transcends borders).
Only 24 of the market in Eastern Europe, the Middle East, Africa and Asia meet these standards: their total market capitalization is equal to $146 billion, compared with the market capitalization 21 stock exchange index of emerging economies exceeds $4 trillion.
There is no doubt that increasing demand will lead to increase in supply of stock (this may happen through the private sale of shares or privatization). The expansion of the market stock shares are welcome. However, access to the debt market for some countries can be a double-edged sword. Ghana in 2007 issued its first Eurobond. Then followed a sharp increase in wages in the public sector, and for several years the budget deficit has soared to 12% of GDP. Mozambique was in a similar situation.
Zambia is trying to use the money much wiser than directing them exclusively to specific projects. New road in the “copper belt” is very necessary for the country’s economy, as it transported a large number of goods. But easy money leads to a weakening of discipline, growth of salaries of civil servants, and the budget deficit may rise to 8% of GDP this year. In order to bridge this gap, Zambia is considering issuing new bonds.
