Africa Weekly Review: The regional impact of the global turmoil and the stuttering deal in Zimbabwe.

The still strong investment case for Africa

In the midst of a flight to asset quality, it is the time to reassess African risk. We are not in a position to say whether individual investors will exit (or have exited) the continent’s markets to cover their losses elsewhere. However, we think it is worthwhile to revisit the investment case for Africa.

Not the best timing for a new issue

These are not the best conditions to raise capital. At one end of the scale is the African Development Bank, the AAA-rated multilateral which is about to embark on an investor roadshow. Its investment case should be well received. At the other end of the scale is the Ivorian government, which is in default and unrated. A number of banks and boutiques have put together funding packages, usually secured against cocoa export taxes, to enable the government to clear its arrears and thereby unlock donor support. These packages have been blocked by IMF pressure on the Ivorian government. One was given an informal go-ahead by the Fund because of its very short tenor but is unlikely to fly in current market conditions..

A good test of appetite for new risk is the launch by Ecobank Transnational on 25 August of an equity issue totalling US$2.5 billion equivalent across three exchanges (Lagos, Accra and Abidjan). Ecobank is a strong African brand and has good financials. It insists that the issue, which closes on 3 October, will proceed despite the market turmoil. The funds raised from the issue will be deployed to enter new markets in Africa (such as Angola), boost the capital of some existing country operations and prepare for possible acquisitions. Ecobank is looking to raise three times the Kenyan government’s take from the Safaricom IPO in early June. If its issue is successful, it will be because of distribution among institutional investors in West Africa.

No longer just a commodities play

Turning to existing investor exposure, we need to rebut the argument that the party is all over now that commodity prices have moved sharply southwards. Africa has been principally a resource play for many years but the portfolio investor has, with very few exceptions, only been at the party since the turn of the century. The reason for their interest is that government and market reforms across the continent have created confidence that wealth generated by resources will be channelled into the private sector.

The most common reform has been the setting up of stabilisation funds (such as the Excess Crude Account in Nigeria) which enable governments to strengthen fiscal management, provide for the proverbial rainy day and set funds aside for priority spending on infrastructure. A recent convert to this idea is the Malian government, which is in the process of creating such a fund for its revenue from gold. The Ghanaian government is taking advice from Norway on the structure of the fund it will launch before the start of oil production next year.

Chart 1: Selected African stock market indices (ytd movement in per cent)

Investment, both direct and portfolio, and growth have picked up strongly. Telecommunications and banking have benefited the most, along with resources, but investment has flowed into sectors as diverse as plantations, hotels, real estate and ports. A wide range of services industries has been expanded to meet the demand of the emerging middle class. It is no exaggeration to talk of a transformed landscape.

We also need to mention one huge change since the last major shakeout in financial markets in 1998, e emergence of China as the largest trade and investment partner of Africa. This is evident in most countries and industries, ranging from railways in Angola and roads in Kenya to mines in Zambia and banks in South Africa. Governments and businesses in Africa can look beyond Western institutions for funding. When liquidity levels contract, this becomes significant.

Our final argument in favour of the investment rationale is the obvious one that Africa is a continent of more than 50 countries. Our chart shows the year to date performance of some of the larger stock exchanges. It is no surprise that the indices have declined most in Cairo, Nairobi and Lagos: the three markets are reasonably liquid (and thus the first that would normally bounce back) and have been “discovered” by the new breed of foreign portfolio investor in recent years. Performance in the Mahgreb markets has been markedly better. These are more tightly regulated, and have enjoyed substantial inflows from Gulf investors.

Needed in Zimbabwe: A reality check for the Mugabe circle

The principal exception to our positive investment case for Africa remains Zimbabwe. In our last weekly review, we commented on the political deal, which then had no details, and urged caution.

One week on, the outlines of the deal have been released. However, the first attempt at distribution of ministerial portfolios between ZANU-PF and the two wings of the MDC was unsuccessful. It could be that the mediator, South Africa’s President Thabo Mbeki, will be required to break the impasse.

Members of the coterie around President Mugabe are reluctant to surrender influence. They cannot accept that the international rescue package will not be released if they continue to control certain levers of power such as the central bank, the finance ministry and the police. Perhaps they believe in economic recovery without the package. Core bilateral donors such as the US and the UK are in no hurry to provide development aid. They want to see the deal at work and see who pulls the strings in the new structures. Their influence in the Bretton Woods institutions will shape the rescue package. The coterie is not yet ready to accept these unwelcome truths. Ultimately it will, at which point the unveiling of the package will move significantly closer.

Recent research reports:

Sudan: Potential rewards for the patient investor
Ultimate recovery hinges on several complicated political variables

African property: Magnet for remittances
Real estate attracts diaspora and regional institutional investor interest as a play on economic recovery

South African mining: Opportunities in a changing regulatory environment
Government negotiations are not one-sided

With best regards,

Gregory Kronsten
Director, Africa Research
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