Into Africa … (2)

While frontier markets in Africa are not yet the new Brazil, let alone the new South Korea, there are ample reasons to be optimistic about the economic resurgence in many African countries.  As The Financial Times recently pointed out:

“…The focus on high profile conflicts in Africa, such as the ongoing election in Zimbabwe and recent events in Kenya misses many positive developments in the continent.

The number of armed conflicts has dropped dramatically from over 20 in 1999 to 5 today; for example, long running civil wars in Angola, Mozambique, Sierra Leone, and Liberia have all come to an end.

Unnoticed by the media and much of the investment community has been a step change in Africa’s economic performance in the last 5 years. Real GDP growth in Sub-Saharan Africa (SSA) averaged 4.1 per cent in 1997-2002 and by 2007 it had risen to 6.6 per cent.

More importantly, real incomes are rising and Africans are getting richer at an unprecedented rate. In 1997-2002, real GDP per capita rose at a rate of 1.8 per cent per annum, this was up to 4.6 per cent in 2007. At 1.8 per cent per annum it takes 39 years for real incomes to double, but at 4.6 per cent per annum real incomes double within 15 years.

The cynics will dismiss these figures as coming off a low base. A response is that all growth starts off a low base but SSA today compares favourably to where the ASEAN nations stood in 1980 when the phrase “emerging markets” entered the vocabulary. Africa has lower inflation; higher foreign exchange reserves; and a similar growth profile; it also receives more foreign direct investment and portfolio investment than ASEAN nations did in 1980.

What is driving growth in Africa? A common misconception is it is just a function of commodity prices. But with the exception of the oil producers, commodities are something of a double edged sword: although countries have gained from higher metal and soft commodity prices, these have been more than offset by higher import bills for food and energy. Indeed, some of the strongest growth performances have been seen in oil importing, resource poor countries such as Tanzania and Mozambique.

At the heart of the improved economic performance is a significantly better policy environment. Governments have ceased financing themselves by printing money and have privatised many state enterprises. Most central banks target inflation either formally or informally. As a result inflation has fallen to global norms and exchange rates are more stable.

Economic stability has seen a resurgence of private sector investment both domestic and foreign. In the late 1990s investment as a proportion of GDP had fallen significantly below 20 per cent almost everywhere on the continent. Since then investment has risen sharply and is approaching 30 per cent of GDP in most countries and in some such as Ghana, Madagascar and Senegal has passed into the mid-30s.

A new feature of this investment has been the involvement of other emerging market countries as sources of foreign direct investment. China, India, Russia, Brazil and South Africa have been substantial investors in sectors as diverse as mining, oil, banking, retail and telecommunications.

New technologies are throwing up new business models. The sale of pre-pay cards is a ubiquitous feature of any crossroads or traffic jam in any African city. In many countries rather than send cash back to families in rural areas, city dwellers are texting airtime back which is then redeemed for cash.

It is not only physical technology – such as a burgeoning telecoms infrastucture – that is being adopted, financial technologies are penetrating just as fast and leading to rapid developments, especially in credit markets. A major feature of the last 3-4 years has been duration extension. Government bond yield curves in many countries now stretch to 10 years and in countries like Zambia and Kenya stretch to 15 years. Duration extension is feeding into retail financial markets. In Zambia it is now possible to get a 20 year mortgage, when only 5 years ago the maximum duration was 5 years.

Anyone who has traveled in the region is well aware that Africa is not short on entrepreneurs or entrepreneurial spirit. Reducing the dead hand of the state and a supportive environment are releasing Keynes’ “animal spirits” and African entrepreneurs are thriving. Ignoring Africa today is like not investing in emerging markets in the 1990s, south east Asia in the 1970s and 1980s and Japan in the 1950s.”

This entry was posted on Friday, June 13th, 2008 at 4:17 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. 

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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.