July 15, 2008
HP-1081

Assistant Secretary for International Affairs Clay Lowery
Remarks to the African Growth and Opportunity Act Forum

Washington - Good afternoon. First, allow me to convey the regrets of Secretary Paulson, who had been looking forward to addressing you today. I had the privilege to accompany the Secretary on his visit to Africa last November, and so know first-hand how impressed he was by Africa's economic progress and how much he wanted to share his enthusiasm about Africa at this Forum. I will attempt today to convey to you his strong sense of optimism for the progress he has seen on the continent as well as his recommendations for maintaining this positive momentum.

It is wonderful to be here to speak at an event that helps to deepen the economic ties between Africa and the United States. I am also honored to be joined by Ngozi Okonjo-Iweala and Tom Gibian, both leaders and innovators in promoting African capital market development. The presence of so many people dedicated to supporting Africa's next steps forward is inspiring to all of us who recognize the promise of Africa's future.

Over the past 18 years, I've had the privilege to represent an NGO as well as the U.S. government – from the Treasury Department and the Millennium Challenge Corporation – in about 15 different African countries. I have worked with governments, NGOs and the private sector in those countries, and no matter the issue – my experience has always been fascinating and rewarding. I am especially pleased to be here today since I intend to make another trip to Africa in the fall. This forum – including the breakout workshops – provides the U.S. Treasury a chance to discuss financial sector development with African leaders and with private sector representatives keen to expand into the continent.

Again, I had the privilege to join Secretary Paulson and many of you last November at the U.S.-Africa Business Summit in Cape Town. I also accompanied the Secretary on memorable stops in Ghana, Tanzania, and South Africa, where we met with government representatives and business leaders. We were impressed by the major economic achievements that Africa has realized as well as the opportunities for continued advancement, and the Secretary expressed his desire to continue shining a light on your progress.

Investment flows to sub-Saharan Africa have been increasing at an astonishing rate. As a result of better macroeconomic policies, high commodity prices, and a renewed interest by investors seeking opportunity on the continent, private capital flows to the region have increased from just $11 billion in 2000 to $53 billion in 2007 – almost five-fold over seven years. As investors expand their horizons, more and more countries in Africa are being transformed by the flow of capital. Oil-producing countries continue to attract the bulk of foreign investment, but there are many other well-managed economies – such as Ghana, Zambia, Tanzania, Mozambique and Uganda – which are also reaping the benefits.

I would like to take a moment to highlight just a few of the successes that Africa has achieved.

Just since 2000, annual growth in sub-Saharan Africa has accelerated from four percent to over six percent, while inflation has declined markedly. External debt levels have plummeted, due in part to generous debt relief. And, foreign exchange reserves have almost doubled relative to imports.

And last month, the Kenyan government successfully sold a quarter of the shares of Safaricom – its joint venture with Britain's Vodafone. The IPO raised $800 million for the Kenyan government and was four times oversubscribed. Safaricom's shares are now trading well above their issue price. The inflow of capital allows the company to invest in new technologies to serve the Kenyan people.

Ghana is another country making great strides. The country issued an external bond last September. This was the first such issuance by a sub-Saharan African country – outside South Africa – in nearly 30 years. The $750 million, 10-year bond was four times oversubscribed and continues to trade well above par. More important, this landmark transaction will enable the Ghanaians to invest in infrastructure -- the kind of investment that so much of Africa so desperately needs.

Gabon also issued its own Eurobond in December 2007, and other countries, including Kenya, are developing bond initiatives to help finance infrastructure development.

And, in our view, most promising of all is that private capital flows to Africa now exceed official development assistance. This transformation has changed the conversation on African development. Last April, Secretary Paulson had a chance to meet here in Washington for a discussion with six African finance ministers. What he heard he found most impressive: not requests for more aid, but instead questions about how to better attract private American investment. Some of these questions are being answered in the Forum's panel discussions today.

Of course, while the growth of capital flows to Africa has been impressive, the continent's share of total global capital inflows – $6.4 trillion in 2007 – remains tiny. African nations can take additional steps to attract private investment that fuels growth.

What reforms are most critical in the eyes of private investors? We believe three areas should be the focus of African governments:

• First, maintaining macroeconomic stability;
• Second, developing local financial markets with sound regulatory systems;
• And third, removing obstacles to foreign investment in the financial sector.

1. Maintaining Macroeconomic Stability

In the first area, not surprisingly, countries with stable, well-managed economies with robust growth tend to attract greater foreign investment. There is an extensive body of academic studies that ties strengthening economic growth with increased capital flows. Sub-Saharan Africa is no exception. Many African countries are making progress, enacting monetary and fiscal reforms that have brought about macroeconomic stability and enabled the robust economic growth of recent years.

African economies are now facing new challenges, including steep rises in the costs of food and fuel. Understandably, governments are looking to mitigate the impact of these rising costs on their people. In doing so, they should avoid endangering their hard-won improvements in macroeconomic stability. Failure to protect these gains risks a return to high rates of inflation, expanding current account deficits and depreciating currencies, all of which would drain investor confidence and deprive these countries of the capital they need for their economic development.

2. Developing local financial markets and sound financial regulatory systems

Robust macroeconomic performance, however, is not the sole determinant of capital flows. The development of financial markets, and their appropriate supervision, is also a key factor. IMF research shows that `a more developed domestic financial sector both increases the volume and reduces the volatility of capital flows.'

Portfolio investment in sub-Saharan Africa, although increasing, remains limited, in part, due to underdeveloped capital and financial markets. In particular:

• Only half of sub-Saharan African countries have established equity markets, and of these, only 9 markets have more than 20 listings.
• Also, fewer than half of all of sub-Saharan African countries have established debt markets and where such markets exist they generally lack depth and liquidity.

In addition, excluding South Africa, most of the sub-Saharan African countries that have established capital markets have weak trading, settlement and custodial systems. For foreign investors used to trading large blocks of securities almost instantaneously, the small size and weak infrastructure of sub-Saharan African capital markets are a clear obstacle to investment.

So how do we bring about greater capital market development? Capital markets do not grow in a vacuum. Rather, their development is built on the foundation of transparent, reliable regulatory systems that have credibility with investors. Countries should focus their reforms in key areas, including banking supervision, credit reporting and accounting systems.

Technical assistance for financial sector development is available. The Treasury Department has provided this assistance in several African countries, including Ghana, Kenya, Malawi, Nigeria, Rwanda, Tanzania, Uganda, and Zambia. We have seen promising signs of capital market development in these countries--a lengthening yield curve and greater liquidity--leading in turn to greater levels of investment.

3. Removing Obstacles to Foreign Investment in the Financial Sector

Finally, foreign investment flows to where it is welcome; it follows, therefore, that African countries can attract greater investment by removing legal and regulatory obstacles to investment flows.

Again, a number of sub-Saharan African countries have made notable progress in strengthening their investment climates. And, some of these countries have taken steps designed to make it easier for foreigners to participate in their capital markets. Greater financial openness helps to attract portfolio inflows. Ghana, Nigeria, Uganda, Kenya, Botswana, and Zambia – all countries with significantly liberalized capital accounts – have attracted the bulk of portfolio flows to sub-Saharan Africa outside of South Africa. Investment in the financial sector can be particularly important in supporting economic growth.

Against such progress, we are seeing new restrictions on foreign investment in the financial sector with increasing frequency – both in Africa and elsewhere. While African governments may impose this restriction to protect and develop local financial institutions, keeping foreigners from investing in the financial sector has a detrimental impact on financial sector development. Allowing foreign participation in the banking sector promotes financial system efficiency and transfers advanced banking practices, thereby increasing lending capacity, improving lending practices, and raising standards for loan management. By opening their financial sectors to foreign investment, African countries can leverage the expertise of global banks to deepen their financial markets.

Maintaining macroeconomic stability, developing local financial markets, and removing obstacles to foreign investment – we know that reforms in these areas are challenging and will take time. However, the benefits are substantial for African countries willing to undertake these reforms. Increasing the flow of private capital will boost investment in infrastructure and enhance productivity throughout the economy. Moreover, a better developed financial infrastructure will enhance the capacity of African countries to withstand the shocks that confront them today.

Just as important, reforms needed to attract foreign investors should be seen as part of the broader economic reform efforts undertaken in many sub-Saharan African countries today. Foreign investors will certainly benefit from these reforms, but the greatest impact is on the domestic economy. Removing obstacles to foreign investment may appeal to foreign investors, but the real payoff is for African businesses that will gain access to the capital they need to finance their growth. Macroeconomic stability in Nigeria may comfort investors in New York or London, but the real beneficiaries of that country's low inflation and robust growth live in Lagos and Abuja.

That is the aim of these efforts and the issues I have discussed today – to develop the financial systems that assist Africa's people to achieve a prosperous, hopeful future. Thank you.