Africa 8: Continental Drivers In the Future?

Courtesy of the Financial Times, an article on the Africa 8:

We’ve had Brics and Biits, the Mints and the Fragile Five. It’s now Africa’s term to acquire an investment appellation: the Africa 8.

This refers to the handful of Africa’s 56 countries that Ecobank, the Benin-based pan-African bank, believes will represent the main drivers of the continent in the long term. It’s an eclectic mix: alongside familiar African growth stories like Nigeria, Kenya, Ghana and Cote d’Ivoire are less celebrated countries Rwanda, Mozambique, Angola and – probably the least understood of them all – the Republic of the Congo.

Ecobank assessed sub-Saharan African markets on a weighted framework of 15 indicators including political, legal, regulatory and infrastructure metrics. “These are the countries we think are going to provide the momentum for pulling the continent up, taking their neighbouring countries with them,” says Angus Downie, head of economic research at Ecobank. “We’re referring to them as the locomotors that will transform the Africa growth story. Everyone’s familiar with Africa rising: that’s been done to death. But this group of eight economies has some unique strengths compared to others on the continent.”

Despite the divergence in their economic positions, one can perceive some patterns: at least four are fairly recently emerged from civil war. “Political stability is one of the indicators we look at and yes, several of these countries have recently emerged from conflict,” says Downie. “But there are a lot of negative perceptions around Africa that it is conflict-ridden: that as one [country] moves into peace, another moves into war. What we have seen over the decades is that a lot of countries in Africa have moved from war to peace and stability and that the overall trend is to less conflict, as we would expect when a continent develops.”

Some of the markets in Ecobank’s grouping are familiar to westerners, but somewhat on the nose in recent months, notably Nigeria and Ghana. “Given the whole uncertainty that was created by the suspension of [central bank governor] Sanusi, it’s true that a lot of investors have been thinking: what’s going on here?” Downie agrees.

“This isn’t the way things are meant to work. This is a country that is meant to be moving forward and strengthening institutions and policies, yet you have that knee-jerk reaction from the top.” But he says that the appointment of a new governor suggests a return to stability, and that even if some of Nigeria’s ambitions seem hard to realise – “you can’t have the impossible trinity it wants of a fixed or managed exchange rate, open capital account and independent monetary policy, you have to choose” – the longer term picture is good. “There are short term problems and policy headaches but the medium term growth story is continuing: the middle class is growing and disposable income is rising.”

“Look at Ghana,” he adds, “where the wheels are coming off. The short term is not good. But in the medium term you have an oil field coming on stream and greater diversity in the economy. The outlook is good.”

At the other extreme, some of the markets Ecobank highlights are scarcely known to world investors at all. For the Republic of the Congo, for example, the premise is that it is an oil producer at a time when energy demand is going to remain strong, whether from elsewhere in Africa, emerging markets generally or the developed world.

“You are seeing new oil fields come on stream in the medium term, and the revenues that accrue from that extra oil will be ploughed into the economy, particularly in infrastructure,” he says. “Across Africa, the returns you get on infrastructure are very strong: you build more roads, more goods can come to market, you build more schools and hospitals, the workforce becomes better educated and healthier, and they become more productive.” Additionally, and perhaps surprisingly, the country comes from a background of monetary and policy stability, aided by a peg to the euro that has helped keep inflation in check. “Low inflation allows the private sector to plan ahead with greater certainty. Inflation in Francophone central Africa has been 2, 3, 4 per cent over the long term; that can’t be said in many places outside that zone,” particularly Ghana, where it stands at 15 per cent.

This bloc, then, is designed to be one that will help investors who are prepared to invest for the long term, but there is a natural problem of accessibility. Congo, for example, doesn’t have a stock market, though it does have companies listed on a regional market. Downie advises working with a knowledgeable local partner, which is, of course, why Ecobank has come up with the Africa 8 grouping in the first place.

It’s worth noting that many of the countries on the list have issued sovereign debt in the last two years, in many cases at rates that seem alarmingly tight and have raised concerns about a bubble. Downie agrees there’s an issue here. “Look at Cote d’Ivoire launching a eurobond at 5.625 per cent [for $750m of 10-year funds, just three years after defaulting on debt]. That’s staggering. That’s not normal. But it’s what the market said it wanted.”

Downie says, “We have to have a lot of concern about what is happening in African sovereigns accessing the market, in terms of the sustainability of low rates,” but also notes that international fund managers – particularly pension funds – need to find yield from somewhere. “The only place to do so is frontier and emerging,” Downie says. Clearly this will change when US rates start rising, or look likely to do so, and it’s possible we will then see a decline in appetite for African sovereign credit. But for the moment, demand is robust.

“The main thing is that these countries are the locomotors,” says Downie, “and by gaining exposure to them they will provide better returns than going into key markets that everyone is familiar with.”

This entry was posted on Thursday, July 31st, 2014 at 7:47 am and is filed under Uncategorized.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

Comments are closed.

Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.