'African nations will likely tap capital markets to plug shortfall in development aid'

Standard & Poor's Ratings Services recently said it expected an increase in African countries requesting credit ratings over the coming months, as development assistance falls short of the amount required for infrastructure investment.

This increase would also be driven by African nations looking to benefit from a globally accepted benchmark of creditworthiness, while not necessarily seeking to issue cross-border debt, said the firm.

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Speaking at the Investing in Africa conference in London, jointly hosted by Standard & Poor's and Standard Chartered Bank, Standard & Poor's credit analyst Farouk Soussa said that while Official Development Assistance (ODA) was a crucial source of financing for African development, current levels fell "well short" of the amount required to achieve the Millennium Development Goals.

According to World Bank and United Nations estimates, ODAs in the order of $100-billion a year would be required to achieve the Millennium Development Goals.

However in reality, ODA (excluding debt relief) has averaged under $70-billion a year, leaving a cumulative shortfall of almost $240-billion between actual ODA levels and the lower bound of what these reports estimated was needed.

The challenge of filling this shortfall to fund development has led some African countries to turn to the international capital markets.

Ghana became the first post-heavily indebted poor country to issue a global bond in 2007, with a highly successful $750-million issuance. Gabon followed in late 2007 with a $1-billion global bond.

Other countries contemplating issuing bonds in the near term included Kenya and Tanzania.

"As the successful Ghanaian and Gabonese global bond issues in 2007 have demonstrated, international capital markets are increasingly meeting the demand for international financing in Africa, a process that is being propelled by continued reforms and increased transparency in African countries, as well as the acquisition of international credit ratings," said Soussa.

"Continued adverse liquidity conditions in capital markets may delay any issuance plans in the near term, but long-term demand appears solid," he added.

Standard Chartered Bank head of global markets Africa, Fred Lee, agreed on the long term future of Africa's markets.

"Despite the global financial slowdown, Africa's investment landscape remains largely resilient. International investors looking for alternative investment destinations are now turning to Africa. The commodities boom, peace, relative political stability and progressive economic management continue to set the foundations for more businesses to make more money in Africa," commented Lee.

Further, Soussa added a note of caution to private financing plans, stating that much of the shortfall in ODA financing had not been owing to a lack of funds on the part of donors, but because of a lack of absorptive capacity in recipient countries.

"Microfinance institutions and the donor community will continue to play the key role of capacity building in African nations, which, together with better financial transparency and the increasing use of international credit ratings, would provide a degree of comfort to the investment community," he explained.

S&P Ratings Services said the outlook for sovereign ratings in Africa would be mixed over the coming year, with high food prices threatening African sovereigns' economic and political stability.

It explained that, on the one hand, despite recent softening, high commodity prices worldwide and the continued demand for Africa's raw materials would bolster investment in resource-rich countries and fuel economic growth.

However, high global food prices presented significant risks to economic and political stability.

"The main beneficiaries of the commodity boom over the past few years have clearly been the oil-producing countries, namely Nigeria, Gabon, and Cameroon," said Soussa.

He added that widespread reliance on oil imports had meant that booming commodity prices had not been such a welcome development for the remaining sovereign countries.