Africa prospects lure investors, but is the continent ready?
Africa offers among
the world’s best investment prospects as emerging markets grow ever
more important, although its economies risk being destabilised by the
slew of capital they stand to attract in coming years.
Energy-producing
continental giant Nigeria was identified as a top pick by some of the
most influential figures in emerging markets finance who spoke to the
Reuters Emerging Markets Summit in Sao Paulo last week.
Africa withstood
the financial crisis better than many predicted, and the region’s
economic growth is forecast at 4.75 percent in 2010. Next year, half of
the world’s 10 fastest growing economies are expected to be in Africa,
and it is now attracting more than just the most intrepid investors.
“The latent
interest in Africa is enormous,” said Stephen Jennings, chief executive
of Russian investment bank Renaissance Capital, speaking to the Reuters
meeting by video link from Moscow.
“Before the crisis
there were probably 40 people or groups establishing Africa funds. In
3-4 years you’ll have 100 Africa funds and the biggest one won’t be $2
billion, it’ll be $20 billion.”
Fund tracker EPFR
reports 43 consecutive weeks of net inflows to Africa equities funds,
reaching $484 million in the first half of 2010 – nearly double those
to India over the same period.
Africa’s advocates
say the inflows stand to accelerate rapidly as a dearth of attractive
returns in the developed world pulls investors in while a more stable
political and economic environment indicates diminishing risks.
BRIC links
A shift of global
economic power to emerging giants such as Brazil, Russia, India and
China – known collectively as the BRICs – benefits Africa as surging
economies seek its resources and push up commodity prices and
investment.
Brazil, Russia and
India still trail China, which last year became Africa’s biggest trade
partner, but they have been rapidly expanding trade and putting more
money into Africa.
“What’s absolutely
striking is how much change there’s been between the BRIC countries and
Africa,” said Jacko Maree, chief executive of South Africa’s Standard
Bank, which is Africa’s biggest.
“We like to think
that the whole story has only just begun.” Brazilian firms with a large
African presence may soon issue bonds in South African rand to seize on
growing interest, said Standard Bank’s chief executive in the Americas,
Eduardo Centola.
Nigeria top pick
Nigeria’s market of
about 140 million people – nearly three times bigger than South
Africa’s – as well as its energy resources and bigger, more liquid
markets, makes it the top choice for many eyeing Africa.
On the Goldman
Sachs’ growth-environment index, which measures a mixture of economic
and social development indicators, Nigeria’s score has nearly doubled
over the past decade.
“If it were to show
the same increase in its growth-environment score over the next decade,
many investors will look back and say why the hell didn’t I invest in
Nigeria,” said Goldman Sachs’ global head of economic research Jim
O’Neill, who coined the term BRICs.
Ethiopia and Rwanda
are among the smaller African economies seen as promising. They show
how previously ignored countries scarred by war are emerging as
possible investment magnets alongside those such as Ghana, a relatively
stable democracy which is soon to become an oil producer.
There are risks, though, with concerns over political stability even in bigger economies such as Nigeria and Kenya.
Africa experts
underline the fact that new mineral riches have rarely been shared
widely, and suggest reliance on such income for national coffers could
discourage establishing tax bases that would put states on a sounder
footing.
“Where I think the
real caution has to come in is the quality of the growth,” said Patrick
Smith of the Africa Confidential newsletter. “It would be pretty silly
to say success is certain.”
A big influx of
investment funds could in itself pose a problem for African countries
less prepared to cope than those in other rapidly growing regions that
have felt the pain of such flows in the past.
“Africa has no
experience of huge capital inflows,” said Renaissance’s Jennings.
“Under the scenario I’m painting, the capital inflows will be way above
and beyond the ability of those countries to absorb them.” Most African
countries have small, illiquid markets and little financial
infrastructure, raising the chances of economic distortions and asset
bubbles that could lead to currency crises and long-term damage.
“People look at how
certain African economies have been getting their act together and
there is a risk you will get significant capital inflows,” said Mohamed
El-Erian, chief executive of PIMCO, the world’s largest bond investor.
“That will provide quite a challenge to policy makers.”
