Why Not Africa?

> Posted by Bruce MacDonald, Vice President, Communications and Operations, CFI

We go to a lot of conferences in this business – some good, some less so. AFSIC, the Africa Financial Services Investment Conference, definitely falls into the former category.

The 3-year-old brainchild of former Botswana Stock Exchange boss Rupert McCammon, the London event draws a mix of debt and equity investors, insurers, quants, fintech angels, consumer lenders, policy mavens, IFIs, MFIs, and other NGOs of various stripe. If your appetite runs to Africa, it’s a generous smorgasbord.

McCammon framed the challenge neatly in his opening remarks: Africa suffers from investment shortfalls of $110 billion annually.  He was followed at the podium by Mohamed Kalif, head of financial intermediation at the African Development Bank, who pitched an appealing prospect.  Showing images of a drab and undeveloped Shanghai and Dubai in 1990 and comparing them with photos taken last year, each chock-a-block with glittering skyscrapers, he posed the question, “Why not Africa?”

Why not, indeed?  Well, cynics could give you a list of reasons: commodity price collapses; weak demand from China; woeful infrastructure (Kalif framed it as a $1 trillion ‘investment prospect’); meagre intra-African trade; corruption; and deep distress within some of the continent’s biggest economic engines, including South Africa, Angola and Nigeria, with bail-outs by the IMF of the latter two likely within the year.

Then there is this: a continental average GDP of 3.5 percent in 2015. True, a decade ago it was double that – 7 to 8 percent – but last year the average worldwide was only 3.1 percent, and only 1.5 percent in the Eurozone.  Kalif says he expects to see African GDP reach 3.6 percent this year, and 4.4 percent in 2017.

The ADB invests in both the public and private sectors, with the latter now representing a third of the Bank’s total investments.  Two recent initiatives are of note.  Its Africa SME Program has earmarked $125m in lines of credit and technical assistance to what will initially be 25 financial institutions in low-income countries, in order to strengthen managerial, portfolio and risk-management capacities to accelerate SME lending.  Boost Africa supports start-up and early-stage companies through a three-pronged strategy comprised of a €200m fund, €20m in TA for intermediaries, and €10m for its Africa Innovation Lab incubator.

Growth is definitely slowing, particularly among major oil exporters such as Angola, Gabon, Nigeria and Zambia, “but it’s still strong,” asserted Joseph Rohm, equity portfolio manager at Investec and Kalif’s co-panelist.  Rohm then delivered a neat SWOT analysis of African public equity markets that alone was worth the price of admission.  On the downside: widespread fiscal indiscipline, which has weakened national currencies and reduced the dollar returns of investments, particularly in the last 12 months.  Three to five years of weak liquidity, especially in North Africa.  An acute shortage of dollars across the continent.  A lack of IPOs.  “There’s a pipeline,” Rohm said, “but it’s a small pipeline.”

On the upside: valuations are compelling; structural reforms and economic diversification are under way; foreign ownership restrictions are being lifted, particularly in Kenya, Tanzania and Zambia; demand for consumer products continues steady; and governance, transparency and accountability are continuously improving.

That last point encouraged us, as we’d come to AFSIC to set up our Africa Board Fellowship “tuck shop,” as program director John Lwande likes to call our booth.  The program offers peer-to-peer learning for directors and CEOs of sub-Saharan Africa financial institutions, and the message appeared to resonate with investors who stopped by.

In a recent special report on Africa business, The Economist noted other reasons for optimism.  While Somalia, South Sudan and the Central Africa Republic still grab headlines, Africa is far more peaceful than it was a decade ago.  It is also far more democratic.  Inflation has largely been tamed, and many central banks are ‘islands of excellence.’  Better government has led to better results, and the proportion of Africans living in absolute poverty has dropped from 58 to 41 percent since 2000.

“A lot of concerns have been priced into the market,” Rohm concluded.  “Most markets are down 20 to 40 percent in dollar returns, and trading is near historically low multiples.  So, this is a good time to put money to work in the market.”   His top investment picks?  “Financial services, including MFIs, and telecommunications.”

“In terms of risk profile, Africa is like any other continent,” said Mohamed Kalif in closing.  “But the returns you get from your investments in Africa are much higher than in other parts of the world.”

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