As enthusiasm for the more popular emerging markets has faded, investors have been in search of the latest frontier. One result has been an increasing interest in sub-Saharan Africa – beyond the already established South Africa. A fund launched by Bob Diamond, Barclays’ former Group Chief Executive, raised an unexpectedly large $325m to invest in the continent’s nascent banking industry.
Diamond has not been alone in spotting Africa’s rising promise. Net foreign direct investment (FDI) jumped 16% last year to $43bn, according to the World Bank. It predicts that by 2015, FDI will reach $54bn. Even securities investors have been doing well in Africa, with sharp rises in the largest stock market indices of Nigeria and Kenya.
“Africa has finally started to appear on the radar of investors,” says Shilan Shah, analyst for the continent at Capital Economics. “Yet there are still plenty of dangers as well as opportunities.”
Over the past decade, eight of the top 20 fastest-growing economies in the world have been African. This seems to be due to more than a long rally in commodity prices. Even as the price of these has have faded, Africa’s expansion has continued. Excluding South Africa, sub-Saharan Africa’s economies grew by 6% in 2013, according to the World Bank. It expects this pace to be maintained for at least the next three years. Demographics are also in Africa’s favour. More than half of its population is younger than 20 years of age, so Africa will have a working-age population as large as China’s by around 2040.
From strength to strength
This rapid growth is still from a small economic base. At $1.3tn, the annual output of sub-Saharan African nations combined is still only about half that of the UK. Yet there are good reasons to expect the growth to continue. The consumer market in the region has quadrupled in size since 2000 and is now worth $650bn a year. This burgeoning household market appears to be part of the reason that investors such as Diamond are attracted to the continent. Of the region’s billion inhabitants, only about a quarter have a bank account and fewer than 5% have a credit card.
“The rising number of Africans with disposable income means good prospects in sectors such as consumer goods, financial services and construction,” says Philip Boulton, a senior managing director at consultancy FTI. “Large discoveries of oil and gas – from offshore west Africa to Tanzania and Mozambique – are also creating opportunities.” An abundance of natural resources helps explain a surge of investment from China, which is interested in securing access to the continent’s oil and gas in particular. FDI from China has climbed from around $392m in 2005 to $2.5bn in 2012, according to data from the Chinese Ministry of Commerce.
In other areas, China has supported infrastructure construction in transportation, communications and electric power projects, including hydroelectric facilities. In 2012, Chinese enterprises completed construction contracts worth $40.8bn in Africa, an increase of 45% on 2009 levels.
Pitfalls for investors
In financial markets, the variety of securities in which investors can place their money has also been expanding. More African governments have started to issue dollar-denominated bonds – removing the currency risk associated with investing in the region. In the first nine months of 2013, African nations raised a record $6.2bn in international debt markets, a three-fold increase on 2011, figures from Dealogic show. African stock markets also offer an increasing diversity of choice. Nigeria’s stock exchange, for example, now offers a market in around 200 stocks.
Yet even some of the most traded African shares suffer from low levels of liquidity, making them hard to sell quickly. Such problems led to the closure of New Star’s Africa Fund in 2009 – just a year after it was established.
Solid institutions are not yet firmly established in most countries...
Aside from illiquidity, investors also face political risk. “In recent years, there have been encouraging signs of stability in nations like Ghana, Zambia and Kenya,” says Shah. “But solid institutions are not yet firmly established in most countries.”
Africa: Factfile
1. According to China’s Ministry of Finance, more than 2,000 Chinese companies are active in more than 50 African countries.
2. Africa accounts for 35% of China’s completed overseas contract work, and is now China’s second largest overseas contract market.
3. In the past decade, use of telephones in Africa has grown from 0.7% of the population to 70%, owing to the advent of mobile phones.
4. A quarter of Kenya’s economic activity is done via M-Pesa, a mobile-phone-based payments system.
5. New construction and service projects have contributed more than 60% to the growth of Uganda’s economy.
The World Bank’s Doing Business report, which measures the quality of the environment for companies and investors, still ranks sub-Saharan African nations low – with the exception of stars Rwanda and Botswana, which have strong and relatively well-functioning institutions, low levels of corruption and efficient labour markets. In terms of offering protection to shareholders, for example, the organisation ranks Kenya, one of the continent’s main markets, a mediocre 98th out of 189 countries. Investors in companies lack such basic rights as the ability to hold directors responsible for deals that fail, the World Bank says. In terms of corporate transparency, it gives Kenya just three out of a maximum ten, compared with an average of seven for rich member nations of the Organisation for Economic Co-operation and Development.
The continent’s poor infrastructure is also a handicap for some businesses. In the World Economic Forum Global Competitiveness Report 2013–2014, Angola was rated as having the globe’s poorest overall infrastructure out of 148 countries in the index. Other sub-Saharan peers, such as Chad and Nigeria, also linger near the bottom.
An additional worry is that a sharper fall in commodity prices could take the steam out of growth. “Many economies are more than mere resource plays,” says Shah. “But that doesn’t mean the continent could easily weather a steep decline in the price of minerals and oil.”
Despite such caveats, interest in the continent is building. The World Bank expects net private inflows to sub-Saharan Africa (excluding South Africa) to climb above $72bn by 2016 – almost double the level of 2008. If that proves the case, the continent could finally be on course for sustainable development.
Casablanca – A new financial gateway to Africa?
Many cities have aimed to establish themselves as transnational financial hubs. But few manage to attract the top global institutions and so join this elite group. Casablanca, Morocco’s largest city, is hoping to follow in the footsteps of places like Dubai, which now punches far above its economic weight as a financial centre.
The Moroccan king Mohammed VI launched the project in 2010, with the goal of turning the city into a regional hub and an entry point for Morocco’s fellow north African states, as well as countries in western and central Africa. The Casablanca Financial City zone was still under construction at the end of 2013, but it has already attracted some important residents and partners.
In June 2012, the Abu Dhabi-based asset manager Invest AD obtained a licence to operate in the Casablanca hub. FinanceCom, an investment company controlled by Moroccan billionaire Othman Benjelloun, has also signed up. The CISI has agreed to work with the city to promote the highest standards of financial professionalism by offering training and a range of diplomas.
The city has several significant advantages, according to Jason Tuvey, an economist who specialises in the Middle East and north Africa at research company Capital Economics. The first is Morocco’s political system. “The nation has been moving towards a constitutional monarchy with a strong parliament,” he says. “That reduces the chances of sudden changes of policy if the leadership changes – a worry in many other nearby states.” Aside from a friendly tax regime, the financial centre will benefit from Morocco’s relatively relaxed capital controls compared with neighbouring countries. “It is possible to open accounts in foreign currencies and withdraw money,” says Tuvey.
Should Casablanca prove a success, the rewards could be great. “Financial hubs create plenty of highly paying jobs and tax revenue,” says Tuvey. “What’s more, success could encourage even more business-friendly reforms, creating a virtuous cycle.”
For investors, this could be the beginning of a beautiful friendship.