Summary of "Frontier Markets: Prospects and Opportunities"
Summary: Frontier Markets - Prospects and Opportunities
Presenters: - Ian Mitchell (Center for Global Development) – Moderator - Ian Close (Deputy Chief Economist, World Bank; Director, Global Economic Prospects Report) - Kurt Chala (Partner & Head of Power and Infrastructure, Boundary Advisory; ex-Morgan Stanley) - Samantha Atridge (Senior Fellow, Center for Global Development; expert on private capital mobilization and institutional investors)
Key Themes and Business-Relevant Insights
1. Frontier Markets Overview and Economic Context
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Definition & Scope: Frontier markets are economies with better financial market access than other developing countries but less than emerging markets. The number of frontier markets has increased from 39 in 2012 to 56 today. They represent approximately 5% of global GDP but over 20% of the global population, and are expected to supply the majority of the new labor force by 2050.
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Growth Performance: Historically, frontier markets have experienced modest per capita growth. Some improvement was seen in the 2000s and 2010s, but growth slowed post-pandemic. The top quartile of frontier markets grow about three times faster per capita than others (e.g., >3% vs. ~1%).
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Investment & Debt: Investment growth (~4% per capita in fastest growers) is critical for development. However, debt accumulation—especially foreign currency debt—is a major challenge, leading to increased default episodes notably between 2020-24. Faster-growing frontier markets tend to have better debt management, with lower debt levels than in the early 2000s, while others face rising debt distress.
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Financial Market Integration: Frontier markets exhibit idiosyncratic financial cycles, offering diversification benefits for investors. However, financial integration remains partial and volatile.
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Demographics & Resources: Large youth populations present a demographic dividend opportunity if education, health, and skills improve. Many frontier markets are rich in natural resources, offering growth potential if managed well.
2. Investor Perspective: Institutional Investors and Barriers
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Current Exposure: UK pension funds have very low allocations to frontier markets (e.g., around 1% invested in Africa).
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Structural Barriers (Plumbing):
- Higher transaction costs due to thin capital markets and prevalence of private (vs. public) market opportunities.
- Liquidity and scale mismatch: pension funds prefer large, liquid, diversified public assets; frontier investments are often smaller, bespoke, and less liquid.
- Risk perception vs. actual risk: institutional investors often overestimate risks due to lack of data or familiarity.
- ESG requirements and regulatory changes (e.g., Solvency II) increase complexity; lack of ESG data in frontier markets is a challenge.
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Systemic Issues:
- Behavioral investment conservatism limits allocations despite no hard regulatory barriers in some cases (e.g., UK pension funds).
- Insurance companies face stricter rules (Solvency II restricts sub-investment grade assets; many frontier markets are rated below investment grade).
- Benchmarking and index inclusion matter: the MSCI frontier market index is small and niche, limiting passive fund exposure.
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Product Design & Risk Mitigation:
- Need for investment products aligned with institutional investors’ requirements: liquidity, currency stability, risk mitigation.
- Importance of secondary funds and exit strategies for private equity to improve liquidity.
- Local capital mobilization can reduce foreign exchange risk exposure.
- Greater collaboration needed between Development Finance Institutions (DFIs), asset managers, and pension funds to co-design risk mitigation and investment products.
3. Policy and Government Role
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Financial Market Development: Deepening local capital markets (equity, bond markets) is critical for sustainable private capital mobilization. Credible macroeconomic frameworks and fiscal/debt management capacity building are essential.
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Risk Mitigation & Guarantees: Consolidation of Multilateral Development Bank (MDB) and DFI guarantee products into unified solutions (e.g., World Bank’s initiative) can reduce risk perception and unlock private capital.
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Regulatory Reform: Review and reform of regulatory frameworks (e.g., Solvency II) to better align risk calibration with actual frontier market data. The UK’s post-Brexit regulatory flexibility offers precedent for reforms to encourage frontier market investment.
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Transparency & Data: Expansion and disaggregation of GEMS (Global Emerging Markets Database) data to include granular sectoral, asset-level, and returns data. Improve accessibility and public awareness of creditworthiness data among institutional investors.
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Direct Engagement & Co-Creation: Facilitating direct dialogue between frontier market governments/project sponsors and institutional investors to reduce information asymmetry and risk perception. Co-creation of financing solutions between DFIs, donors, and private investors to design instruments that meet investor needs.
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Job Creation Linkages: Emphasize sectors with high job creation potential (tourism, value-added manufacturing, agribusiness, health) to align investment with development outcomes and domestic political support in investor countries. Highlight potential for UK technology and sector expertise to support frontier market growth and create reciprocal jobs domestically.
4. Case Studies and Examples
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Successful Frontier Markets: Vietnam, Rwanda, Kazakhstan, Uzbekistan, and Panama have demonstrated strong growth, effective debt management, and progression toward emerging market status.
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Investment Events: The African Development Bank’s annual investment conferences in Rabat, featuring deal rooms and direct investor engagement, serve as a model for effective investor-government interaction. The UK government and DFIs could improve by hosting similar events to showcase frontier market opportunities directly to institutional investors.
Frameworks and Processes Highlighted
- Growth and investment analysis through statistical segmentation of frontier markets by growth performance and investment levels.
- Risk management and financial instruments including guarantees, risk mitigation tools, and blended finance to reduce perceived risk and attract private capital.
- Data transparency and creditworthiness monitoring via the GEMS Database to improve investor confidence.
- Regulatory review focusing on Solvency II and other regulations impacting institutional investor allocations.
- Private capital mobilization ecosystem emphasizing alignment of investor needs, product design, and policy frameworks for frontier market investment.
Key Metrics and KPIs
- MSCI Frontier Markets Index growth: +47% in 2024.
- Frontier markets represent ~5% of global GDP and over 20% of the global population.
- Top quartile frontier markets achieve ~3%+ per capita annual growth versus ~1% for others.
- Investment growth in fastest growers: ~4% per capita.
- UK pension fund allocation to Africa: ~1%.
- Average Emerging Market Debt (EMD) sovereign rating: BB- (sub-investment grade).
- Global private capital mobilization targets referenced: $300 billion climate finance, $1.3 trillion mobilization goals.
Actionable Recommendations
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For Governments in Frontier Markets:
- Develop credible macroeconomic and fiscal frameworks.
- Deepen domestic financial markets to reduce reliance on foreign currency debt.
- Engage directly with investors and co-create financing solutions.
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For Institutional Investors and Asset Managers:
- Advocate for regulatory reforms to ease frontier market investment constraints.
- Collaborate with DFIs to design risk mitigation instruments meeting liquidity, currency, and return requirements.
- Increase allocation via specialized funds with appropriate risk-return profiles.
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For MDBs and DFIs:
- Expand and publicize creditworthiness and returns data (GEMS).
- Consolidate guarantee products to simplify investor access.
- Support local capital market development and invest in sectors with job creation potential.
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For UK and Other High-Income Countries:
- Use G20 presidency and regulatory reform opportunities to address systemic barriers.
- Host investor-government engagement events to improve knowledge and reduce risk perception.
- Link frontier market investments to domestic job creation and economic benefits.
Conclusion
Frontier markets hold significant long-term promise due to favorable demographics, natural resources, and improving financial integration. However, their growth and investment potential remain under-realized due to structural, regulatory, and perception barriers. Coordinated micro-level interventions involving policy reform, data transparency, financial market development, and investor engagement are essential to unlock private capital at scale and translate growth into jobs and sustainable development.
Sources
- Ian Close, World Bank
- Samantha Atridge, Center for Global Development
- Kurt Chala, Boundary Advisory
- Ian Mitchell, Center for Global Development (Moderator)
Category
Business
