Profiles - May 25, 2018

African Emerging Market Frontiers

May 25, 2018

20 min read

It was Michael Bloomberg who said “People are worried about the unknown. They are worried about things that they are unwilling to invest some time in and learn about. I don’t think most of these people are going to be automated out of existence.” It is a tragic reality that the image of most investors in the United States and other European countries of Africa is still mainly that of hunger, total breakdown, lawlessness, high political risk, and corrupt depots. I have heard arguments and read articles from the so called “market analysts” and “investment gurus” who have spent time criticizing and have nothing good to say about Africa. Sometimes, I can’t help but question how one reached a conclusion without the knowledge or inability to discern the nuances of a large and multifaceted continent.

As I leaf through the pages of articles, journals and literatures from renowned investors of our time, I could not help but understand why China has turned to Africa by increasing their investment in Africa from $2billion in 1999 to $109billion in 2009; yet other countries neglect the disguised economic hub and run to China. The Chinese understand the investment puzzle “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful (Warren Buffet).

African Economic Watch

“If there is any part of the globe with the potential for record growth over the next few years, it’s Africa,” South African President Jacob Zuma said recently. Sequel to the economic meltdown that slowly broke down the economic fabric of many strong nations of the world, investors have around the globe are seeking for save haven for their wealth or financial assets. The strong involvement of China and other countries in Asia in Africa leads many investors to believe that the continent of Africa is a gold mine despite the negative press about investing in Africa. The question becomes, if china is the place for tolerable risk and high returns, why is China concentrating all of its investments in the African continent.

The pundits are now shifting their base and recognizing the growth in Africa despite the world’s negative economic slope. The positive developments in Africa ushered in by political stability, improvement in infrastructures and country specific economic policies are garnering attention from some countries in Europe like Germany.

It is also note worthy to state that the Sub-Saharan Africa’s growth performance in the last decade has been that of an upward slope. Recent studies and research have shown that there are positive developments in African politics: better governance, lower inflation and a stronger focus on private business. Although we cannot but say that the continent of Africa is not totally void of uncertainties and cleaned from its associated risk, there are still a lot of problems; however the outlook is positive. The increased interest of countries like Brazil, China and India in Africa is also making German companies consider opportunities in Africa.

African Economic Resources

Are the resources in Africa the reason for its attraction? Could one attribute the cheap source of labor and increase transparency in the economic policies of the African continent? A look at the economic statistics and data published by the USTDA shows that growth in Africa is back on track, and not just because of oil or mineral wealth. Rather, Asia’s hunger for competitive exports and need to sustain the resource demand has spread to the African continent. Meanwhile, governments are modifying their policies and encouraging private investment in viable and profitable projects with a lasting impact on development. As the Outlook has pointed out, this trend must continue if African leaders are to put their economies on a fast track to growth. And that means more opportunities for investment are bound to open up.

A look at centers of business hubs in Africa reveal an impressive flow of capital investments in places like Lagos (Nigeria), Johannesburg (South Africa), and countries like Ghana, Kenya, and Botswana. Why are investors in the emerging equity markets of the world suddenly developing the appetite for risk in Africa? Research has shown that global emerging market funds are deploying nearly 10% of their portfolios in the African continent.

Africa is home to 12% of proven oil reserves and 6% of proven gas reserves and other mineral or natural resources. Below is a list of few countries in Africa and major export for the identified countries:

Major Exports from Selected Countries in Africa

Ghana: Gold, Diamonds, Manganese, Fish, Cocoa, Timber, Aluminum
Nigeria: Oil, Minerals, Cocoa, Rubber
Kenya: Tea, Coffee, Horticulture Products, Petrolium Products
South Africa: Gold, Diamonds, Metals, Minerals, Machinery and Equipment
Angola: Petroleum, Diamonds, Manganese, Uranium, Gold
Botswana: Diamonds, Copper, Nickel, Livestock
Cameroon: Timber, Oil, Coffee, Cocoa, Cotton, Aluminum
Côte d’Ivoire: Coffee, Cocoa, Banana, Palm Oil, Cotton, Fish, Tropical Wood
Senegal: Fish, Phosphates, Cotton, Peanut, Petroleum Products

Profits and policies
“Africa’s profitability is one of the best kept secrets in today’s world economy.”
— Kofi Annan, UN Secretary-General

Investors may question the profitability of any investment in Africa; published financial reports from foreign companies operating in the Africa market allude to the fact that Africa is a high profitable market. The profitability of foreign companies in Africa has been consistently higher than in most other regions of the world, reports the UNCTAD study. The upward slope of the profit graph is mainly due to the size of the market and lack of competition in the market. Most firms enjoy the benefits of dominating the market and commanding high price for their products or service. Profits from financial records of foreign firms in the Africa market shows that the rate of return on foreign direct investment (FDI) in Africa has averaged 29 per cent, and since 1991 it has been higher than in all other regions, in many years by a factor of two.

Between 1983 and 1997, the rate of return for US companies in Africa has been above 10 per cent. In recent years, UNCTAD notes, many African countries have significantly improved their policy environment, bringing both greater economic stability and growth and much more liberal conditions for foreign investors.

Recently, the International Monetary Fund (IMF) released its Regional Economic Outlook: Sub-Saharan Africa (REO). This report was prepared by a team led by Abebe Aemro Selassie, Robert Burgess, and Montfort Mlachila under the direction of Saul Lizondo. The results of the Regional Economic Outlook are summarized below:

Main Findings

“The economic slowdown in sub-Saharan Africa looks set to be mercifully brief:

Output is projected to expand by 4¾ percent in 2010, compared to 2 percent in 2009.
Most countries in the region are now bouncing back from the growth slowdown or contraction in
output experienced during the global recession. The brevity of the slowdown owes much to the
relative strength of the region’s economies heading into 2008–09, the expansionary macroeconomic stance then adopted by most countries, and the relatively quick recovery in global economic activity.
Although most low-income countries experienced only a small decline in growth, the slowdown has imposed some lasting costs on the region. Progress in poverty reduction has been held up. Some of the region’s oil exporters and middle-income countries have faced large
adjustments, including sharply rising unemployment.
The prospects for 2011 and beyond look good. Output growth is projected to accelerate to
5¾ percent in 2011, playing off the expected continued improvement in global economic conditions. Over the medium term, growth rates in most sub-Saharan African countries are expected to be only marginally below those enjoyed in the mid-2000s.
The main risks to the outlook are a possible hiatus in the global recovery (causing demand and
commodity prices to slip) and, internally, political instability or a deterioration in financial systems in some countries.

Perhaps one of the least noticed aspects of the global downturn has been the resilience of the sub-Saharan Africa region. The limited integration of many countries in the region into the global economy may have helped, but only marginally. Previous (milder) global economic slowdowns had a much more damaging impact. This time, the global downturn was much sharper, but the dislocation was far less. The main factor distinguishing this slowdown from previous cycles has been the stronger macroeconomic position of most countries in the region. As the global financial crisis started to unfold, economic policies were directed quickly and effectively toward ameliorating the impact of the external shocks. Most governments that anticipated the slowdown made plans to accelerate public spending growth, despite stagnant or declining ratios of revenue to GDP. The rise in their fiscal deficits helped to offset faltering private spending. On the monetary policy side, policy interest rates were also reduced except where this would have been counterproductive because of exchange rate considerations or inflationary pressures.

Moreover, most countries were able to shield pro-poor and pro-growth public spending. According to preliminary budget outturn numbers, health, and education spending increased in real terms in 20 of the29 low-income countries in the region in 2009. In a similar vein, government capital spending also looks to have held up in 2009, increasing in real terms in more than half of the countries in the region.

External financing proved to be much less of a constraint than feared. The boom-bust cycle in private financial inflows was less marked than in other regions, largely due to the high share in sub-Saharan Africa of foreign direct investment over other more volatile forms of private capital. Remittances also fell only slightly support in response to the crisis. Foreign investors are already beginning to return to the region’s more advanced economies, where macroeconomic policies will need to take into account these renewed flows to avoid overheating, unwarranted exchange rate appreciation, and asset price booms.

More than a third of countries in the region, however, remain on the margins of international capital markets and dependent on official forms of external financing. For these countries, the same reforms that are needed to raise productive potential—including promoting trade and financial sector development, encouraging domestic saving and investment, raising standards of governance, and strengthening institutions—are also likely to help attract private inflows on a sustained basis. Looking ahead, for most countries in the region, the emphasis of economic policies now needs to be on medium-term development objectives consistent with macroeconomic stability considerations.

With recovery under way, fiscal policies in these countries needs to shift from near-term and output stabilization considerations toward a more traditional focus on strengthening health and education systems and addressing infrastructure gaps. Where fiscal deficits have been increased beyond sustainable medium term paths, these should be revisited so that policy buffers can be restored. Of course, in some countries where output remains well below potential, there remains a strong case for fiscal policy to help sustain demand in the near term, subject to financing availability.”

To be continued in the next issue of “Entrepreneurs Anchor Magazine.”