Edition: June / Aug 2017
PENSION FUNDS CAN PLAY A
PIVOTAL ROLE IN AFRICAN ASPIRATIONS FOR 2063
African equities have recently faced strong headwinds, despite the positive fundamental growth prospects
presented by the continent, writes RisCura Africa’s Business Development Executive, Gerald Gondo.
If one considers the negative return profiles of a number of the African
equity indices over the last two years, it would not be surprising if investors
questioned the much-vaunted tag-lines of “Africa rising” and “demographic
dividend”. Should they retain their confidence that Africa will master its
short-term challenges and look to the long-term prospects?
An important element of the African investment case is the oft-cited
demographic dividend – referring to a period where a country’s workforce is
young, willing and able to be integrated into the economy and thus continue
its economic growth. But, other elements such as rising disposable income,
urbanisation, untapped resources and agriculture also reinforce the need to
look beyond short-term challenges and rather to calibrate one’s expectations
towards the long-term. These drivers are set to continue to develop and
arguably present the prospect of compelling organic growth waiting to be
The questions investors should be asking are who and how will Africa
unlock this growth?
African governments and policy-makers appear quite clear and resolute
in their outlook. Evidence of this is the 28th African Union (AU) Summit held
in Addis Ababa, Ethiopia in January 2017 whose theme was, “Harnessing the
Demographic Dividend through Investments in Youth”.
This was perhaps a clarion call by Africa’s leadership to revisit its
investment case by focussing on possibly its most durable and resilient
growth proponent – its youth.
Turning to the AU’s “African Aspirations for 2063” – six aspirations aimed
at realising the continent’s potential by 2063 – Aspiration 1 reads as follows:
“A prosperous Africa based on inclusive growth and sustainable
development. We are determined to eradicate poverty in one generation
and build shared prosperity through social and economic transformation of
Critical to making in-roads in achieving this aspiration requires African
governments, policy-makers, and regulators to undertake a critical review
of inhibitors to effective inclusive growth and sustainable development.
Deepening, integrating and developing African capital markets is an obvious
and immediate area to target.
According to a Milken Institute – Centre for Financial Markets study, “Capital Markets in the East African Community – Developing the Buyside”,
these markets are fundamental to economic growth because they help to
channel domestic savings in a more productive way. Thereby enabling the
private sector to invest, produce and create jobs. African pension funds have
been cited as a growing pool of assets that can and should be channelled
towards deepening capital markets.
At RisCura, we continue to observe and record the growing asset bases
of African pension funds due to rising incomes, with emphasis on the need
for these funds to look to diversify their investments away from traditional
investments. Particular focus is given to the continued elevated levels of
exposure that many African pension funds still have to government fixed
income securities, which could largely be attributed to static regulation.
A separate Milken institute study in East African pension funds found that “preferential treatment generally given to government securities through
regulatory approaches – specifically, relatively high portfolio ceilings – may
induce funds to over allocate to this asset class at the expense of others.”
Business Development Executive,
If Africa is to progress towards achieving Aspiration 1, alongside the
remaining six and equally important Aspirations, the pace of capital market
reforms needs to be accelerated. RisCura has previously noted several major
African countries have revised pension regulations in recent years, with
many either considering or actually revising rules around investments such
as allowing investments into private equity and non-traditional asset classes.
However, the pace of revision remains slow.
Deepening of capital markets may take time, but the channelling of
savings towards productive sectors of the economy is not limited only to
listed capital markets. Allocations to private equity and infrastructure as
alternative assets classes through the burgeoning African private equity
and infrastructure funds, will serve as critical interventions to accelerating
economic development in Africa.
Regulatory reform will serve as a powerful driver for increased investment
that deepen and develop African capital markets. African pension funds and
institutional investors have an important and critical role to play in assisting
Africa (through prudent channelling of savings) with projects and initiatives
that can accelerate the fulfilment of Aspiration 1.