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Frontier markets: Sub-Saharan Africa and the threat of success

>South Africa has been dubbed one of the ‘threatened three’ emerging markets (along with Brazil and Turkey),suffering from falling currency and commodity rates, the rising dollar, political uncertainty and the impacts of being fully emerged in the global economy. 

While it continues to be a popular investment destination, its decreasing growth and falling GDP figure have made frontier markets, such as its sub-Saharan relatives, very attractive to foreign investors.

One excellent example is that of Zambia. The country has had huge success from the surge in investor interest in frontier markets, with its debut Eurobond being issued in 2012, managed by Barclays and Deutsche Bank. Zambia drew USD 12 billion of orders for this ten year bond paying only 5.4 percent. Even Spain could not borrow this cheaply at the time. Last year saw Zambia grow on this success, selling USD 1 billion in sovereign debt bonds, which was hugely oversubscribed (four times) and at a rate of 8.5 percent. These bonds are bought up by rich foreign investors looking for an exciting opportunity. Consequently, frontier markets are now an asset class in their own right.

However, the recent fall in commodity prices has been detrimental to many African economies. Zambia has had to pay up large costs in bond issues accentuated by the six year low in copper prices, causing a deficit which exceeded government expectations. Zambia is therefore a clear example of a frontier market which, having gained huge initial support, is now vulnerable to the risks which a diverse market brings.

Investment in these frontier markets must therefore be approached with caution. Much like the emerging markets, the more that these economies are ingrained into the global economy, the more vulnerable they are to global financial shocks. Similarly, whilst they are developing more stable financial frameworks, these are relatively shallow and may suffer badly in waves of uncertainty.

We often expect frontier markets to be less popular than their emerging economy neighbours, but having recently visited South Africa for the RSM Africa Conference and reacquainted myself with the environment in which our African offices operate, it is clear that market understanding may fail to recognise the key differences between the economies in the vast region. Traditionally, frontier markets are countries with less established stock markets and lower liquidity than emerging and developed economies, thus they are pre-emerging economies. It is important to realise that the terms ‘developed’ and ‘emerging’ economies do not denote economic stability, nor the size, export, commodity or production output of a country. Each country should be analysed individually in order to appreciate its strengths and weaknesses.

Perhaps we should learn from the African example that success and potential are difficult to measure. Also, that by appreciating frontier markets as their own asset class, we can see the value of those economies and understand their potential impact on our clients across the globe.

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