Developing Capital Markets: Financing the Future in Frontier and Emerging Markets

Panel Context and Objectives

• The Milken Institute, in partnership with the IFC and developing country governments, convened the panel to address capital markets development as a primary constraint on economic growth in frontier and emerging markets.
• Key barriers identified include a lack of access to long-term finance for private sector growth and government deficits in funding infrastructure, healthcare, and education.
• The panel aims to catalyze international capital inflows and develop local institutional investor bases in frontier economies.

Key Panelists and Backgrounds

• Stephanie von Friedenberg: IFC Chief Operating Officer (92 days tenure), with prior experience at JP Morgan, tasked with developing human capital in these markets.
• Megan McDonald: Head of Investment Banking at Standard Bank Group (largest bank in Africa by assets), with 17 years of experience in African debt capital markets.
• Clever Gatete: Minister of Infrastructure of Rwanda (2.5 weeks tenure), formerly Minister of Finance and Governor of the Central Bank.
• Afsaneh Beshlas: Founder of Rock Creek Group, previously at Carlyle and World Bank (Chief Investment Officer/Treasurer).
• Hedi Ben-Mluqa: Founder and CIO of FIM Partner, an alternative asset manager focusing on frontier and small emerging markets.

Rwanda's Capital Markets Strategy

• Rwanda prioritized capital market development to shift from government-dependent growth to a private-sector-led model to avoid unsustainable donor dependency.
• The Ministry adopted a 10-year Capital Market Master Plan, developed with IFC assistance, to create a modern market capable of attracting international capital.
• Rwanda successfully issued a sovereign bond in 2013 that was oversubscribed 8.5 times, validating the market's potential.
• The government is establishing a regional financial hub by interlinking national stock exchanges and payment systems within the East African Community.
• Rwanda has launched a commodities market and the Rwanda National Investment Trust to allow informal sector participants to invest with small capital amounts.

African Market Dynamics and "Two-Speed" Reality

• Sub-Saharan Africa's local currency markets are dominated by three countries: South Africa ($100+ billion), Nigeria ($14 billion), and Kenya/Ghana ($5 billion).
• Eurobond issuance has grown significantly, with 14 African countries accessing international markets; Nigeria's recent $11 billion order book was driven primarily by US and European investors.
• Corporate issuances in Africa remain under 5% of total emerging market volumes but are rising, led by resources, infrastructure, telecom, and consumer sectors.
• A "two-speed" reality exists where sovereigns account for 60–90% of local currency issuance, though corporate issuance is increasing in nations like Ghana and Zambia.
• High exposure to foreign currency debt creates vulnerability to exchange rate volatility and commodity cycles; local currency markets are critical for stabilizing debt-to-GDP ratios.

Frontier Market Investment Opportunities (Hedi Ben-Mluqa)

• Frontier markets offer high growth, with 8 of the 10 fastest-growing economies globally located in frontier spaces, many in Africa.
• Investment themes focus on secular transformations, including:
  • Healthcare spending: Rising from $16/capita in frontier markets to $40 in emerging and $700 in developed markets.
  • Retail modernization: Organized retail represents <10% in frontier markets versus 40% in emerging and 80-90% in developed markets.
  • Insurance penetration: Ranges from <1.5% of GDP in Saudi Arabia to 6-7% in developed markets.
• Investment criteria require high liquidity and consistent regulatory frameworks, which remain the primary barriers for long-term capital.
• Investors engage constructively with family-owned firms to improve corporate governance and balance sheet efficiency.

IFC 3.0 Strategy and Institutional Role (Stephanie von Friedenberg)

• IFC 3.0 strategy shifts from project financing to "creating markets" by correcting upstream policy and regulatory environments to generate investable pipelines.
• The IFC leverages its AAA balance sheet in select markets (e.g., Rwanda, Zambia) to create risk-free benchmarks, extend yield curves, and establish local currency transparency.
• The IFC has mobilized approximately $7 billion under the Markets Capital Markets Partnerships (MCPP) funds, crowding in pension funds and insurance companies.
• Local currency financing is proven to potentially double private sector infrastructure investment compared to foreign currency financing.
• The IFC launched the Joint Capital Markets Initiative (JCAP) with the World Bank to provide advisory services in West Africa, Morocco, and Bangladesh.

Human Capital and Regional Integration

• The IFC-Milken Institute partnership created the "Milken Fellows" program, training mid-career government officials through a four-month GW University academic course followed by four months of practical institutional placements.
• Rwanda is navigating regional integration by allowing countries to interlink capital markets (depositories, clearing systems) without requiring a single unified regional currency, prioritizing interoperability.
• Mobile technology is disrupting traditional banking, with Rwandans increasingly using mobile phones for trading, investing, and payments, challenging regulators to adapt.
• Saudi Arabia's rapid regulatory reforms (e.g., T+2 settlement cycles, governance standards) have positioned it for inclusion in the MSCI Emerging Markets Index, potentially attracting $35–45 billion in new capital.

Challenges and Solutions

• Liquidity: Identified as the "holy grail"; solutions require more active broker-dealers, transparent pricing mechanisms, and consistent policy frameworks.
• Supply Constraints: A lack of corporate bond supply hampers market development; issuers need confidence in demand and tax incentives.
• Informal Sector: Rwanda addressed this by creating collective investment schemes allowing small savings to be pooled for market investment.
• Infrastructure Financing: Rwanda utilizes Power Purchase Agreements (PPAs) with government purchase guarantees to de-risk private sector energy investments (e.g., methane gas, solar, hydro).

Q&A Insights

• Broker-Dealers: Standard Bank emphasizes that lack of information transparency and price discovery mechanisms perpetuates liquidity issues; corporate citizens must sometimes absorb losses to support market stability.
• Private Sector Infrastructure: Government guarantees (PPAs) are essential to mobilize private investment in energy when the private sector is risk-averse.
• Regional Barriers: Rwanda suggests that faster-moving countries should proceed with integration first to demonstrate benefits, encouraging slower partners to join later without waiting for consensus.