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How risky are frontier markets?

For all the political and economic turmoil associated with individual countries, overall frontier market equities on an annualised basis consistently produce less volatility than emerging or developed markets, and with lower correlation to global shocks.

But isn't there a much higher risk of debt default? When it comes to entrusting governments with big ticket loans for major infrastructure projects, Middle East and African nations have by far the best record, surpassing the US and European nations with the lowest default rates globally, according to Moody’s data. 

One reason is that overall borrowing levels are lower. Most African countries have debt equivalent to 40-60% of GDP while developed countries often owe more than 100%. 

Despite this, investors demand higher interest rates on debt and assign lower valuations to equity, particularly for investments in Africa.

This has a devastating impact. "If an African country is paying rates four or five times more than in the developed world then, as a business, fundamentally you are already at a huge loss before you even start to try and get a return on whatever you are using the bond or the funds for," Kojo Annan, Chairman of Vector Global, and son of Kofi Annan, said at one of our recent client webinars titled Anti-Africa Bias: Does Presumption of Risk Colour Investment. 

Africa's lower default rates have had little bearing on the inflated rates charged by bondholders. “Argentina reneged on its debt nine times and yet three years ago became the first junk-rated country to sell bonds with no repayment required for a century,” Elizabeth Rossiello, CEO of AZA, said at another of our client webinars. “Angola hasn’t defaulted since the end of its civil war in 2002 and yet bondholders charged a higher rate of over 9% for shorter-dated bonds. So is there some sort of truth in bad behavior, or is it more of a bias against African markets?”

A big part of our discussions at events and with media is focused on truly understanding the nature of risk in business and financial markets. Comments from the anti-Africa bias webinar, for example, prompted an article exploring the issues raised on CNBC: ‘Enormous bias’ clouds international approach to African debt relief, experts say

At New Markets Media & Intelligence, we have deep experience of driving effective strategic analysis and informed discussion of risk on behalf of governments and some of the world's biggest investors, companies and research institutions, such as Bloomberg, Reuters, Amundi, Africa Finance Corp. and Singapore’s President, Prime Minister and sovereign wealth fund.  

For the full range of discussions aimed at unlocking investment opportunities in emerging markets and resolving challenges, please view our Media, Intelligence and Events pages.