The Republic of Ghana recently made a debut $750m (£366m) sovereign bond issue. The 10-year bond issue, which was listed on the London Stock Exchange and sold into both the US and European markets, was hugely oversubscribed and reflects international investors' interest in and appetite for the rapidly growing African capital markets.

This growing investor interest is driven by several factors which can be grouped into two categories. Firstly, the improved picture of Africa – stable economies underpinned by regulatory change, structural reforms, higher growth rates, lower inflation, foreign debt relief, stable exchange rates, increased foreign reserves and the general economic revival of many African countries. Secondly, global liquidity conditions (which have driven down returns in certain – benign – markets), increasing demand and higher commodity prices (as illustrated by Sino-Africa trade flows), have meant higher returns on investments and lower capital costs in Africa.

The above combination of factors has led to investors seeking higher returns in the African markets. Initially, investors' focus was primarily on the government debt market in countries such as Ghana, Nigeria and Zambia. Success in these fixed-income markets has increased investors' appetite, which has now progressed to private and listed equities as well as other capital markets products. The success of Ghana's issue is an illustration of international investors' interests in the African markets.

Paving the way

Ghana is the first sub-Saharan African country (excluding South Africa) to have successfully tapped the international capital markets and this marks a huge vote of confidence by international investors in what Ghana has achieved (e.g. stable growth, economic reform, reduced inflation and the successful introduction of policies that have improved the environment for investment) and, more importantly, the direction in which it is travelling. The issue also paves the way for further sovereign issues and there is an expectation that other sub-Saharan African countries will follow Ghana's lead.

Debt relief and donor funding does not generate funds with the certainty and immediacy that is needed to plan and pay for real infrastructure development, thus making the capital markets more attractive. Used wisely, capital markets have the potential to stimulate development in emerging market countries. In the case of Ghana, it plans to use the issue proceeds to fund much-needed infrastructure and energy projects, the absence of which have a negative impact on development. Currently in Ghana, inadequate road links, power shortages and other infrastructure bottlenecks remain the most immediate constraints to growth within the country and to regional integration. Secondly, the Government expects that the bond issue will galvanise the development of the country's local capital markets and encourage leading Ghanaian corporates to adopt international standards to enable them to access the international markets.

Alternative funding

Why are African governments looking to the capital markets now? Increasingly, African countries are looking to these markets because they provide them with alternative sources of funding and the freedom from having to satisfy the often stringent conditionalities that come with World Bank funding. Secondly, as mentioned above, debt relief does not provide funding for development. It must be noted that accessing the international capital markets in a transaction such as a sovereign bond issue exposes a sovereign issuer to regulatory and reputational concerns which are far more likely to encourage transparency and accountability than domestic and other forms of international financing.

In a transaction such as this, it is crucial to understand and address particular sensitivities that might arise, particularly when dealing with the prospectus. For a first-time sovereign issuer who is, not surprisingly, keen to present as positive a picture as possible, it is important to manage expectations and to guide the issuer so that it understands the importance of accurate information as well as of
complying with the securities regulations and restrictions of the various countries in which the securities are to be placed, particularly the US. To ensure a smooth and timely process it is important for a first-time issuer to be fully prepared and Ghana's issue was an example of how to do it right. The Government of Ghana was committed to the process and that made a huge different. Country data was fully prepared, reasonably up to date and available, thus assisting a smooth due diligence process; ministers and government officials were readily available for questioning and discussions and local lawyers addressed previously unchallenged local tax and regulatory issues efficiently.

The achievement of this issue needs to be set in the context of the current activity in the financial markets. Many prospective borrowers are finding it difficult to get issues away and many banks are finding it hard to distribute debt in the marketplace. The success of this bond issue cannot be underplayed and, if Ghana uses the proceeds wisely, this bond issue will be hugely beneficial.

Taking centre stage

Africa is gradually advancing onto the financial markets centre stage and is set to become a key destination for international capital markets. Over the past four to five years, we have witnessed the gradual development of African capital markets and the continued development of both plain vanilla products and structured products including asset-backed securities, derivatives products, exchange-traded funds and much more.

Over the next five to 10 years we would expect the capital markets in Africa to grow almost exponentially as they have done in Russia over the previous 10 years.

Mary Boakye is a partner in the banking department and head of the Africa financial markets group at Denton Wilde Sapte.