Speech

Sustainable Investing in Sub-Saharan Africa: Better Data, More Knowledge, Using Technology

May 6, 2021

It’s a pleasure to join you here today, and to share some thoughts on one of the highest priorities in international development: how we can help promote more substantial long-term capital flows into Sub-Saharan Africa.

Encouraging more capital to flow into the region—or to remain in the region and effectively utilized—is a critical factor in spurring sustainable growth over the long term—both in the Sub-Saharan region and in the African content more broadly.

As my colleague Abe Selassie pointed out during the recent Spring Meetings of the Fund and the Bank, Sub-Saharan Africa is projected to be the world’s slowest-growing region in 2021—and, as the global economy rebounds, the area risks falling further behind.

To support future growth and to encourage transformational reforms, about $425 billion in additional external funding will be needed over the next five years or so.

Meeting this challenge is certainly not going to be easy. Alongside various efforts that are underway at the international level to assist Sub- Saharan Africa,

An effective growth plan must include a significant role for long-term private investment.

Need for improved knowledge of the market

Private investors should recognize the region’s tremendous upside potential. Sub-Saharan Africa offers a spectrum of debt, equity, and fund investment opportunities that should encourage both the international and the domestic investor.

Let us remind ourselves how the prospects for long-term investment are changing for the better in the Sub-Saharan region:

• The economic landscape is changing profoundly—as the region undergoes rapid urbanization, promotes more effective technology absorption, and has a growing labor force.
• The region is also becoming financially more accessible, with a gradual relaxation of capital account restrictions, and with an increase in non- official capital flows.
• Countries that have made sustained efforts to promote political and macroeconomic stability and implement essential structural reforms have begun to attract long-term investment flows.
• The adoption of sound fiscal and monetary policies—supported by an appropriate exchange-rate policy and a pro-active approach to reforms that encourage private-sector activity—has positively affected investor sentiment.

Despite these positive trends, however, long-term investment flows have not kept pace with the region’s potential, or with the investment flows that are occurring elsewhere.

Various surveys suggest that investors have an interest in investing — and have an intention to invest — yet the actual levels of long-term investment have remained modest.

Several studies have examined the question of why investment flows remain sluggish, despite the clear potential for solid returns over the long run. Those studies all suggest that a critical mass of mutually reinforcing measures is needed for Sub-Saharan Africa to become a “go-to” investment destination for long-term investment.

Data, data, data

One specific aspect of attracting and retaining investment flows is access to reliable data and information. This must become an urgent priority: It is a sine qua non for encouraging investment.

Of course, good data cannot replace sound fundamentals. Therefore, improvements in the quality of education need to continue, infrastructure needs to be upgraded in cost-efficient ways, and product and labor market reforms continue to be urgent.

But only with reliable data investors will be able to test how a specific investment fits into their strategic asset allocation models and assess regularly how a sector’s or a region’s evolving fundamentals change the market value.

Obviously, such long-term fundamental analysis goes beyond studying the income statements and balance sheets of an individual company or sector.

Investors seek a wide array of information, some of which is exclusively in the hands of the public sector, to help them make informed and timely decisions about market values and the prospects of long-term investments

And yet, we are frequently told that the data and information architecture in the region is weak, dated, not user-friendly, and unreliable. That view is mindful of the tremendous efforts made by the various investor-relations and trade-promotion agencies in the Sub-Saharan region.

Investors have often pointed to the benefits of higher-quality public- sector data and information provision. Long-term investors expect policymakers to commit to providing data and reliable information on a sustained basis—something that private- sector providers tend not to offer, and something that can be very costly.

What is a long-term investor looking for?

Investors and markets seek a more substantial commitment by public authorities to provide data, allowing the private sector to analyze and distribute it, as this would enable investors to distinguish one market from another.

It is also essential in building trust: reliable data helps boost transparency in such areas as accounting practices, leverage, and debt sustainability.

On the macro side, investors would be eager for the public sector to provide information about the investment regime and its track record.

These include:

• Data on non-official capital flows—by asset type, as well as by investor residency, helping investors weigh its evolution over time.
• Knowledge of the main drivers of flows, and what the consequences of flows might be—in terms of macrofinancial risks and in terms of potential benefits (such as domestic investment and economic growth).
  
• This information reassures the careful management of capital flows and brings transparency to the nature of monies coming into the region (Foreign Direct Investment, portfolio investment, or a loan).

Investors, both residents and foreign investors, also need to be mindful of the attendant consequences for exchange rates—such as instability and misalignments that could hurt the tradable sector and undermine competitiveness.

Moreover, investors need to know how resources are being used and their impact on productivity, jobs, economic growth, and repayment capacity. A higher level of transparency on the structure and composition of the debt portfolios goes a long away to allow investors to better understand the risks they are taking. Effective pricing of sovereign risk helps reduce any premia stemming from the uncertainty around some of these data and helps support stable capital flows.

I should note here that, of course, capital account liberalization should proceed in a cautious and orderly manner, as set out in the Fund’s Institutional View on Capital Flows. Debt transparency also speeds up workouts in those cases where restructuring is needed, allowing countries to re-access markets sooner. Both debtors and creditors need to ensure full transparency around public debt.

Information is also needed about the legal framework and its enforcement. This extends to the all-important question of the protection of intellectual property.

Let us not forget the climate agenda when attracting investment flows

As we look at ways to bring long term investment capital to Africa, the “ESG”—environmental, social, and governance issues must be made an integral part of the investment framework.

In the post-Covid phase that is coming up, it is critical that investments help towards reducing emissions and boosting resilience. We know that the private sector is already adjusting to a low carbon economy, and the financial industry is seizing this opportunity with a range of products that take account of “ESG” issues.

For Sub-Saharan countries to take full advantage of this economic transformation: Countries need to set up environmental information disclosure, green finance standard systems, and other finance support policies to mobilize green investments from the private sector. If they do not, then investors will look elsewhere.

Such reforms will go hand in hand with ongoing efforts at the global level. An immediate global priority is to improve the quality of climate disclosure, to harmonize global green finance standards, and to promote sharing best practices across borders. A recent contribution by the IMF in this field is a new dashboard that helps in providing data for macroeconomic and financial policy analysis.

Making Sub Saharan Africa "Investor Fit"

How can we help protect Sub-Saharan countries from investors’ behavioral biases against the real long-term investment potential in the region?

One way is to harness technology in data access and data modeling techniques—to help the official sector and the investor disentangle

meaningful financial, and macro- and micro-economic relationships from the data that is collected less formally or regular. Long-term investors require reliable guideposts.

The provision of timely, accurate data by individual country authorities often points to problems with official data because the statistical services may be under-resourced or come under pressure to deliver “encouraging” data. That often shows through in the quality of the data.

Data and technology would help inform the mathematics of long-term investment flows. In fact, some private providers are experimenting with similar arrangements—commercial investment gateways.

But the time has come for the official sector to set up at national levels

—or perhaps with some multilateral support, and in partnership with the private sector—perhaps, even a dedicated regional data and information system to meet investors' requirements for long-term investing.

To help rapidly shift perceptions, and to send a clear message that the market potential is significant enough to make long-term investing worthwhile—and to do it at a scale where its economics will make sense — another factor seems essential: a digital repository of data and information—perhaps as a regional initiative.

It could even be a portal, perhaps, where investors can learn about investment conditions—such as the available asset classes, the relevant investment rules and regulations, and the necessary investing procedures.

Replacing traditional statistical methods to determine investment potential, with a deep “machine learning” approach, could help deepen the understanding of the Sub-Saharan market. Initially, perhaps, only a fixed number of data and information inputs would be available—but that would, of course, grow over time.

An alternative would be an approach to data provision that would facilitate the use of technologies to deliver. For instance, if the authorities commit resources to allow for the timely publication of accurate statistical data, and allow private sector providers and analysts to participate, then there could be a range of systems providing data to meet varying needs.

A lot of good research exists in such areas as long-term systematic value investing, recurrent neural networks, and in the quantitative investment field of factor engineering. Technology would also help bridge the disconnect between the cost of investment capital and the value and market price of the long-term investment.

Micro-level data is a must

In this context, investors’ appetite for information goes beyond macro- level data. Micro data — such as surveys on consumer sentiment, labor markets, education, demographics, or health — help investors not only to form a view on the long-run prospects for a market, but also to assess shorter- term dynamics of capital investment.

While the public sector does not need to “go it alone” in this endeavor, it can have a catalyzing role by committing to collect and disseminate micro data — with due consideration to data privacy issues.

The use of technology can also open the possibilities of leveraging the enormous amount of informal and qualitative information at a local level.

That would help deepen investors’ understanding of the economic sectors and would make it more appealing for an investor who is not familiar with the realities of Sub-Saharan Africa.

Innovators and entrepreneurs in the region, in fact, have already shown new ways of leveraging technology to collect, process, and exploit micro-level data.

Policymakers could perhaps draw lessons from this use of technology and explore how data generated by businesses can complement public- sector data.

To illustrate the potential of such private-sector initiatives, let me point out some encouraging stories from around the region about the use of technology:

• We are learning about several financial intermediaries seeking granular and timely data on inflation and the impact of exchange-rate developments (especially in parallel markets). They rely on dozens of informal local sources who use smartphones to capture data from regional street markets. They verify data through geospatial location and check the data quality through standard analytical tools.
• Artificial Intelligence (AI) is helping develop an alternative credit-risk- assessment model that uses mobile phones, alternative data, and machine learning to close the critical data gap that prevents financial institutions from lending to credit-worthy smallholder farmers. That provides financial institutions with an agriculturally relevant and data- driven model to assess risk and develop loans that fit the needs of smallholder farmers.
• Impact investors can verify the source of cocoa production. They analyze it by each farmer, check it over time, and exchange feedback information with farmers on regional productivity and costs. Using QR codes, they shared relevant parts of the data with consumers, thus building confidence in the "sustainable" label increasingly crucial in the marketplace.

In all this, there is a clear need for trusted intermediaries. Here, new technologies can help provide the sort of verification that both consumers and investors seek. For instance, blockchain data collation can give some reassurance that the data has not been falsified.

These examples should inspire policymakers to invest in data infrastructure, possibly in cooperation with the private sector, to generate high-quality, verifiable data that can help reassure investors that they base their judgment on information that reflects country fundamentals.

Unlocking the trove of data that underpins each economy is ever more valuable in a world where—unlike a decade or two ago—artificial intelligence and "Big Data" allow us to make sense of it.

In conclusion

Some 65 years ago, the economist and investor Benjamin Graham wrote a seminal book on neo-classical investing, "The Intelligent Investor." Warren Buffett refers to it as "by far, the best book on investing ever written."

In that, Graham deftly employs Occam's Razor to cut through all the short-term distractions, fads, and misconceptions that try to lead the investor astray from the path to long-run investment returns. However, as is borne out by the experience of long-term investing in sub-Saharan Africa, Graham's wisdom has been difficult to practice.

By setting up a robust and reliable data architecture the official sector can help dispel doubts and misconceptions that investors, rightly or wrongly, may have about investment opportunities of the region.

By taking some practical, pragmatic, and technology-based steps, policymakers can help create the conditions that let more robust capital flows move toward their highest and best use.

I feel confident that, once the idea of marrying data and information with modern technology gets traction, then many actors—including the IMF—will be ready to partner with the official and the private sector, and contribute to the future of investing in Sub-Saharan Africa.

By fostering sustainable growth, driven by private-sector investments, we can better meet the challenge of spurring growth in Sub-Saharan Africa—thus helping fulfill the promise of Africa’s vast potential.

It’s been a pleasure to share these thoughts with you today, as we seek ways to promote one of the most vital challenges in international development. Thank you very much.