An exclusive interview with Ismaël Cissé, CEO of Sirius Capital.

The health crisis caused by the implosion of the Covid-19 pandemic has put global activity at half-mast. A situation that obviously affects all sectors of activity. In this interview, Ismaël Cissé, CEO of Sirius Capital, talks about the impact of this health crisis on the financial markets and gives some solutions that could help the global economy rebound.

You are an informed economist, awarded last February 2020 by the English magazine "African Leadership Magazine" as personality of the year in South Africa. So as an expert, what do you think is the impact of COVID-19 on the global economy in general and the African economy in particular?

Due to the scale of the pandemic (3.3 million cases including more than 2 million active cases) and especially the rapid expansion of COVID 19, we have seen since the beginning of the year a gradual lockdown of economies worldwide. This has a direct impact on trade and international trade and, therefore, gives us a glimpse of a huge economic impact with a decline in global GDP of 7% in the first quarter of 2020 and 3% in 2020 according to some experts, which is 3 times more than during the global financial crisis of 2008.

According to the World Bank, growth in Sub-Saharan Africa is expected to shrink sharply between 2019 and 2020, from +2.4% to -5.1%, plunging the region into its first recession in more than 25 years. Production losses related to the Covid-19 pandemic are estimated at between $37 billion and $79 billion in 2020, under the combined effect of several factors: the disruption of trade and value chains, which penalizes commodity exporters and countries highly integrated into global chains; the reduction of foreign financing flows (remittances from migrants, tourism receipts, foreign direct investment, foreign aid) and capital flight; the direct impact of the pandemic on health systems; and disruptions resulting from containment measures and public response.

African countries are also significantly impacted by the fall in the prices of raw materials, especially oil, whose price has fallen by nearly 54% in the last three months and which affects both directly and indirectly our economies. Another challenge at the level of Africa is linked to the fragility of our entrepreneurial fabric, which is still mostly informal, which is not equipped both financially and operationally to deal with shocks of this nature.

How is this impact felt in the financial markets?

Overall, covid-19 has led since the beginning of the year to a fall in financial markets overall of more than 16.000 billion US dollars, or nearly 120 times the GDP of the WAEMU zone. A logical fall given the rise in investor pessimism in relation to the economic outlook in the short and medium term. The MSCI World Index (measuring the performance of stock markets in economically developed countries) fell 21.44% in the first quarter of 2020 after rising more than 25% in 2019. 30 countries saw a drop of more than 20%, including Russia and Australia with more than 30%, the United States 19% and the UK 26%. All major European indices are in the red with more than 25% down.

THE PARADOX OF THE BRVM DUE TO A CERTAIN LACK OF INFORMATIONAL EFFICIENCY

In the Africa region, our main stock exchanges have recorded sharp declines in their indices (The stock exchanges of South Africa, Nigeria, Casablanca and Egypt have all fallen by more than 20%). Paradoxically, the sub-regional financial market (the BRVM, which brings together the 8 WAEMU countries), is doing relatively well. Indeed, the technical indicators of the first quarter of 2020, compared to those of the same period last year are up. The same applies to securities traded in volume and value. This factor is due in particular to a certain lack of informational efficiency at the level of the BRVM and that the evolution of the BRVM is not directly correlated with the evolution of the region's GDP. However, we need to prepare for falls in the coming months as companies adjust their forecasts related to the impact of COVID-19. We should therefore see a growing risk aversion at the level of investors that will cause a fall in prices that could create opportunities for sophisticated investors.

So what could be the role of financial markets in response to this global crisis?

We have seen strong positions taken by our regional and international financial institutions, which very quickly set up substantial funds to stem the impact of the crisis on our economies: the AfDB has mobilized social bonds to the tune of $3 billion on the international financial markets, a record for social bonds. The operation was a great success with subscription intentions exceeding more than one and a half times the mobilization objective and this in a record time. Similar initiatives have been undertaken by the IfC (International Finance Corporation) and Inter American Development Bank with similar success.

THE WAEMU STATES HAVE SET UP A PUBLIC SECURITIES ISSUANCE PROGRAM OF 846 BILLION CFA FRANCS SINCE APRIL 27

These success stories show us the role of financial markets in mobilizing financial resources for both social and economic causes. Our regional market is not to be outdone, the UEOMA States have set up a program of issuance of public securities of 846 billion FCFA since April 27, the success of the first tranches issued suggests another great success. Financial markets therefore have a key role to play in structuring operations capable of financing high-impact projects capable of minimizing the economic and social impact of such a crisis. The BCEAO has put in place measures to stimulate the participation of institutional investors in public and private securities issues, in this case refinancing at floor rates.

Are we not heading towards a situation of over-indebtedness in Africa?

First of all, it should be noted that the debt situation in Africa is very contrasted with a debt of less than 40% of GDP in West Africa and nearly 75% of GDP in North Africa. It is undeniable that the measures mentioned above as well as the important lines of financing granted on favourable terms by the IMF and the World Bank will have a direct impact on the level of indebtedness of African countries and even more directly on the ability of States to meet debt servicing in a context of declining debt levels. budget revenue and growth in expenditure related to the fight against COVID19:

– decline in revenues from oil exports estimated at $100 billion in 2020

– increase in public spending on health estimated at $11 billion on the continent in 2020.

EVERY YEAR AFRICA SPENDS MORE THAN $365 BILLION ON DEBT REPAYMENT.

Thus, several States will face risks of default on their sovereign debt repayment deadlines. As a result, some heads of state have advocated either debt cancellation or moratoriums on servicing the bilateral public debt of African countries in order to free up the necessary resources. Indeed, these are measures that may be necessary in the short term for some states, each year Africa spending more than $ 365 billion to repay its debt. Moratoriums and debt cancellations will therefore release a substantial and immediate financial windfall to enable Africa to cope with the pandemic and return to growth.

However, these measures risk tarnishing the image and credit quality of the countries of the zone as perceived by international donors. The resulting interest rate hikes could subsequently be detrimental to the growth of our states in the medium term. I believe that a sustainable solution is ideally resource-efficient debt at concessional rates.

What is the state of play of the investment banking market and fundraising operations?

We are witnessing not only a slowdown in foreign direct investment but also unprecedented capital flight. Indeed, IMF indicators indicate that $83 billion has already been withdrawn from emerging markets by investors since the beginning of the crisis.

The evolution of fundraising and mergers and acquisitions transactions is directly related to the economic outlook of companies in the zone and will most certainly be negatively impacted by the uncertainty caused by covid-19. Indeed, financing institutions are less likely to provide financing to companies whose economic prospects are difficult to anticipate. -After a record 2019 that saw more than 1.3 billion investments by investment funds in more than 400 transactions, we are very pessimistic regarding our expectations for the year 2020. Some sectors are more impacted than others, including infrastructure, trading and tourism. –

In return, certain sectors such as health and public services have a growing need for financing in the implementation of emergency plans to deal with the pandemic, which offers fundraising opportunities for investment banks that will be able to identify priority projects and put in place rapid and effective strategies for the resource mobilization. –

In the medium term, however, during the recovery, we will be able to observe a sharp increase in M&A transactions linked to a wave of restructuring and consolidation of companies weakened by the global economy, particularly in the financial sector where several banks and financial institutions will have to recapitalize to cope with the deterioration of their portfolios. The impact is also felt at the operational level, restrictions in terms of travel affect due diligence processes and are likely to significantly slow down the outcome of certain transactions.

In your opinion, what steps could be taken to accelerate the recovery from this crisis?

First of all, it will be necessary to support the banking system by strengthening the liquidity of banks and the establishment of refinancing schemes that will allow them to extend maturities and restructure the financing lines granted to companies in difficulty. An unprecedented economic counter-offensive is also needed if we are to avoid lasting damage to our economies and our social safety net. -Certainly, massive investments in infrastructure will allow a restart of the economy but this will not be enough, we will have to seize this opportunity to accelerate the structural transformation of our economies. We must move towards the massive transformation of our raw materials, including, in particular, with regard to agriculture for example, by ensuring that the added value generated directly impacts the base of the population, starting with producers who represent more than 70% of our active population. We must also seize this opportunity to accelerate the establishment of the regional free trade area by stimulating intra-regional trade and the promotion of intra-African value chains to increase the resilience of our economies.

What role can investment banks like Sirius Capital play in this recovery process?

It is at this level that investment banks such as Sirius Capital must more than ever play their role by structuring financial instruments that will facilitate access to financing for both public and private actors. At the level of the public sector, we are already engaged with States in their efforts to mobilize capital on regional and international markets both in the form of bond issues and in the form of bilateral loans. We can also mention, for example, blended finance structures, which consist of the mobilization of capital jointly at the level of development institutions and the private sector, relying on the funds made available by development partners to de-risk investments at a level acceptable to private donors. This type of financing can have a multiplier effect on the resources allocated by DFIs (Finance and Development Institutions), and make it possible to fill the short-term financing gap estimated at several hundred billion dollars.