The largest financing gap for the achievement of the Sustainable Development Goals is in low-income countries, where additional $4.5 trillion per year will need to be mobilized by 2030, according to recent data from the World Bank.
More than $ 2 trillion out of this amount relates to infrastructure investments specially in African continent, where important projects within Utilities, Sanitation and Transportation sectors, among others, need to be implemented with urgency. Governments alone won´t be able to fund this gap, nonetheless, as many of them face fiscal concerns nowadays; while stricter banking regulation might limit their appetite for providing long-term debt. A well-developed capital markets in African countries, thus, is not only desired but utterly needed, as it can play a critical role by mobilizing capital from institutional investors into strategic sectors.
The problem we face, nevertheless, is that the capital markets in such economies is still very restricted, as there are many challenges for its development, often aggravated by heavy-handed government regulation and lack of an investor friendly environment. Besides the limited supply of suitable companies, the investor base is somehow undersized, there is deficient market infrastructure most of times as well as poor financial regulatory and supervisory environment.
In a recent online course led by the World Bank called “Unlocking investment and finance in EMDE”, there were some interesting discussions about the role of capital markets in helping to mobilize institutional investor´s money to strategic sectors. One of the main takeaways from this topic and that I would like to share with you was the 5 lessons brought by the multilateral Bank that refer to the development of capital markets. The first one is the need to ensure that pre-conditions are in place for that progress to happen. There are some important prerequisites a country must meet in order to develop its capital market, such as the need for a robust enabling environment, sound banking system, macroeconomic and political stability, for example. On top of that, strong judiciary institutions must be in place, in order to provide confidence to investors, as well as neutral tax regimes, so that foreign investors feel incentivized and willing to bring their capital.
The second lesson is to establish a focused and well-sequenced strategy for capital markets development, considering sectorial needs and actions to be implemented in each sector. The third lesson touches on incorporating non-traditional market solutions, for example looking at innovative ways to unlock or mobilize capital (relying on crowdlending platforms to fund a project, for instance). The fourth lesson is to build sustained commitment, keeping focus as developing capital markets is a long-term endeavor. Lastly, the fifth point stresses the need for establishing robust regulation and supervision in those markets. Regulation must align with international standards but, at the same time, need to be proportionate (so that it does not stifled the market) and provide space to innovation. Once regulation is in place, there is the need to ensure a robust supervision system so that investors feel safe and protected.
The good news is that almost one third of the $ 80 trillion in assets under management held today by private investment funds globally are already allocated into Socially Responsible Investing (SRI), and even though the amount allocated directly in impact investments totals a bit more than $ 500 billion, this number is doubling each year. Additionally, the Sustainable Development Goals are driving a lot more interest by impact investors in finding investment opportunities in low and middle-income countries.
The message is then clear to me: the investors have plenty of appetite to invest in Africa (especially considering this lower-yield new normal in developed countries) and are therefore keen to help closing the funding gap mentioned above. What need to be done, then, in order to fully develop the capital markets in lower income countries? It´s all about the governments! Politics must be truly committed to ensure the minimal conditions for a consistent growth of their capital markets. Once it is addressed, the invisible hand will do this part and the sky is the limit for investments in Africa.