By Stephane Bwakira, 11 February 2013
From 2012, Ghana is expected to deliver 8.5% real GDP growth, Nigeria will register 6.3%, 6.4% for Zambia and Zimbabwe will do 5% just to name a few. That’s against an estimated 3% average for the world as a whole. Also encouraging is the improvement in current account balances across most of these countries.
Investment conditions in sub-Saharan Africa (SSA) in particular, where growth has averaged 5.6% a year, have significantly improved. Based on the IMF’s latest forecasts, six of the 10 fastest growing economies in the next five years will be in SSA (see graph below). These include Ghana, Ethiopia and Tanzania.
Their economic growth rates will be underpinned by global demand and inflated natural resource prices; growing infrastructure spend and increasing population and urbanisation and the resultant rise in consumerism and mobility. Other important economic growth drivers will be the region’s access to and integration with international capital markets and a growing middle class.
As a result of these attractive economic fundamentals, capital flows to Africa are now estimated to exceed those of most BRICS countries, barring China.
As global demand for commodities continues on its upward trajectory, so too will the growth potential of the continent’s extractive industries (including mining, oil and gas). Mining and metals, oil and gas, and the exploitation of natural resources are the top three sectors investors expect will offer the greatest growth potential in the next 10 years. Africa is home to 13% of global oil reserves; 50% of proven gold reserves; 60% of cobalt and 90% of the platinum reserves.
This potential is already reflected in listed companies as returns on African Exchanges have widely outperformed those of developed world indices over the past decade (see graph above).
But for SSA to deliver on its potential, the pace of infrastructure investment will need to be sustained. This should be possible given the current low level of debt to GDP ratios in several countries and the global search for yield, which has already enabled many African countries to issue bonds. Zambia recently issued its maiden $750m Euobond bond, which was 15 times oversubscribed after attracting offers of $11.9bn.
Infrastructure investment in SSA is likely to take place in power and energy; toll roads; Information Communication and Technology (ICT); sea ports and airports; railway lines and water and sanitation.
While SA and Nigeria currently spend the most on infrastructure development in the region, countries such as Nigeria, Angola, Tanzania, and Uganda are expected to pick up the pace of their infrastructural investment; developing their roads, ports and air transport.
According to the most recent Global Competitiveness Report by the World Economic Forum, the countries with the weakest infrastructure development programmes are Uganda, Malawi, Nigeria and Angola.
The adjacent graph shows the impact on development based on a country’s infrastructure spend.
Traditionally, industrial capacity has tended to be financed and constructed by western multinationals operating in capital-intensive industries. Now, during the last decade we have seen the emergence of some African-born industrial giants.
For instance, Nigeria’s Ali Dangote has built up an industrial empire spanning Dangote Sugar (raw sugar processing), Dangote Flour Mills (flour milling and processed foods), as well as Dangote Cement. The cement business reached 19m tons of installed cement production capacity in the third quarter of 2012 and is expected to rise to 53m tons at the end of 2015. Forbes Africa estimates his fortune to be in excess of $10bn – putting him at the top of the Forbes list of Africa’s 40 Richest.
In the telecommunications industry, SA’s home grown MTN has proven its success on the African continent. Nigeria now contributes more to its profitability than SA does, with 65% of MTN’s earnings before interest, tax, and depreciation (EBITDA ) stemming from SSA (excluding SA).
Safaricom, which is the dominant mobile operator on the continent and also a subsidiary of the Vodafone group, pioneered mobile banking (M-PESA) in East Africa’s Kenya. Most of its customers are now subscribers. The company developed cashless banking through M-PESA before anyone in the world did so and, despite the wide adoption of this form of banking in the developing world, no market or operator has experienced similar success with this technology.
Politics, and the resultant investment risks it poses, has always been a thorny issue for investors when considering Africa as a potential investment destination. Hard to ignore are the coup d’états, entrenched dictators, widespread corruption and the lawlessness.
However, SSA has experienced dramatic changes in its political fortunes. Dictators from the post-colonial era are, for the most part, gone and the adoption of free and fair elections has become the norm rather than the exception.
The December 2012 election in the West African nation of Ghana is testament to this improving political climate. Despite the incumbent winning by only a slight margin (51%), the elections were declared free and fair by international independent observers. The same has been the case for the 2012 elections in Zambia, as well as Egypt.
The tipping point was the Arab Spring in North Africa, which saw the removal of President Mubarak of Egypt, and Ben Ali of Tunisia as a result of the actions of a peaceful, but determined, populace, which made their rule untenable. The driver of this seismic political shift: the forced recognition that unless the leaders offer the promise of better socio-economic conditions and political freedom, the electorate will drive it in that direction.
The map above shows that the operating environment in Africa, though not perfect, has widely improved, and in our view has contributed to the better growth outlook generally envisaged by international investors.
We are confident that the encouraging trend will continue and, hence, believe the smart money will benefit from exposure to the continent.
Don’t be mistaken, the attractive SSA macro outlook is not without risk. So investors need to keep in mind the lessons from the past when considering when and how to invest in the region. Given the unique complexities and risks involved in Africa, we believe our 25 years of investment experience on the continent make us well placed to identify and exploit the best risk-adjusted investment opportunities within the region.
Liquidity is by no means homogenous across markets or securities – and, in fact, is poor in some areas – thus it’s necessary to continuously screen the markets and to study them extensively before getting involved. We prefer counters with a diversified investor base and free float of above 40% – and pay great attention to corporate governance and the potential for poor decision making by management or weak board oversight. We are active investors and our teams on the ground within the region travel extensively so that they can continuously engage with company management, regulators and policy makers before deciding where to invest.