Global financial investors continue to be enticed by the economic indicators that point to Africa’s rapid growth potential. The latest to announce ambitious expansion plans is the US giant, Citigroup.
Several strands have been converging to reinforce the perception among the world’s financial high priests that Africa is rapidly becoming a highly attractive investment destination.
As 2010 rolled to a close, an increasing number of the Wall Street fraternity were articulating a strong interest to invest in the continent.
The Boston Consulting Group’s June report, The African Challengers, has made a tremendous impact on investors by highlighting some outstanding performances both by African companies and countries.
Today the rate of urbanisation in Africa is nearly equivalent to that of China, with 52 cities burgeoning with more than one million inhabitants. In 2008, the collective GDP was $1,600bn, which is equivalent to that of Russia or Brazil, with consumer spending some $860bn.
EFPR Global, which provides funds flows and asset allocation data to financial institutions around the world, states that Africa’s regional funds attracted inflows of $484m in the first half of 2010 and total investment for fund allocation was a record $1.39bn.
Given these prospects, it is no wonder that Citigroup, another Wall Street member, describes Africa and its one billion population as a “sweet spot” for financial institutions. The bank is the world’s ninth largest by market value and has more than 200m clients.
The giant suffered huge losses during the financial crisis and received $45bn following the US government bail-out of 2008. Today it is increasingly turning its attention to high-growth emerging markets, more attractive when compared to the sluggish growth that can be found in heavily indebted developed markets.
It is hoped an African strategy will generate higher-margin activity for the company. Chairman of Citigroup Dick Parsons observed that “Given the demographic trends, given the presence of so much of the world’s natural resource base here, there is huge opportunity and it’s high margin.”
The American lender, already present across 15 African countries with plans to expand to three more in 2011, aims to achieve 20–25% growth for its African activity in the next two to three years.
Citigroup says it wishes to develop organic growth in Nigeria – which Parsons describes as a “particularly” interesting country. The bank has been doing business in the country since 1984, formerly operating under the name Nigeria International Bank Limited – it was renamed Citibank Nigeria Limited in 2008 to fully integrate with the bank’s global identity.
Citigroup operates the largest Direct Custody and Clearing Services propriety network in the world and, on August 2008, it entered its 53rd international market in Nigeria.
Nigeria the front runner
To respond to the growing global demand for investment in countries offering higher interest rates, compared to the yields of US Treasury Bills for instance, there is a race to issue the next Eurobond in Africa.
Nigeria seems to have won the latest contest. Following a keenly contested process in November, the country chose Citigroup and Deutsche Bank as book runners for a $500m debut international bond. Africa’s second-biggest economy plans to issue a 10-year bond which foreign investors have been waiting to see since before the global financial meltdown started.
This issue will set a benchmark in international capital markets and allow Nigerian state governments and companies to follow suit in pursuing this access to capital markets.
It is likely that this will become a popular stop for foreign investors preying on high yields who have been waiting many years for the Nigerian bond.
The US Federal Reserve’s QE2 decision to pump $600bn into the US economy will probably have a significant impact on the bond’s success, as speculative money pours from the printing presses of the Federal Reserve into high-growth, high-yielding economies like Nigeria’s.
These bonds play a vital role in improving the perception of African risk as the increasing demand for the resources of emerging economies is pushing the yields of African bonds to all time lows.
Nigerian Finance Minister Olusegun Aganga predicts the bond issue will surpass expectations as he states that there will be enough interest for the country to be able to raise $1bn; although, for now, Nigeria is not planning to raise more than $500m.
Yet there is a risk, as some analysts point out, that the bond will be hampered by the Presidential and parliamentary elections and a period of high government spending and falling foreign exchange reserves.
Standard & Poor’s affirmed in November its B+ long-term and B short-term foreign and local currency sovereign credit ratings on Nigeria, predicting a stable outlook.
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