Africa As Global Game Changer?

Africa is a rising economic giant, promising bountiful returns for investors. But the continent’s capital markets are not keeping pace with economic growth and several fundamental issues still
require resolution. These and other issues were discussed and debated during Renaissance Capital’s third pan-African investor conference in Lagos in May.

The African market is a ‘huge construction site’ where there is always something for every discerning investor. The level of growth currently being enjoyed in the continent at a time when the Eurozone is in crisis shows that it is the next economic game changer amongst world economies.

Developed nations have posted less than 2% yield in the last 10 years, but in Nigeria and many other countries in sub-Saharan Africa, the possibility of making 14 to 15% returns or more is huge. Investors are rapidly becoming wise to the massive earning capacity that Africa offers. These opportunities were highlighted during this year’s Renaissance Capital’s Third Pan-Africa 1:1 Investor Conference held in Lagos, Nigeria in May.

Renaissance Capital’s West Africa CEO Yvonne Ike pointed out that Africa is where every right-thinking investor should be heading for.

She stated that there are huge investment opportunities whether in power in Nigeria, oil and gas in Ghana, agriculture in The Gambia or the banking sector in Kenya.

Renaissance Capital’s Global Chief Economist Charles Robertson explained at the conference that from the improving ease of doing business in Africa to low debt profiles and favourable demographics, the continent is set for phenomenal growth that should interest prospective investors. He said investment opportunities are becoming visible, with more people preferring to invest in Africa than in Europe.

“I feel much safer here, telling clients to invest their money in Africa than in Europe,” he said.

Lagos State Governor Babatunde Raji Fashola said that African markets have experienced tremendous growth at a time of economic crises in most developed economies.

He said that the Lagos State government is enforcing law and order while strengthening the judiciary to help protect investments in the state. It has institutionalised offices for public private partnership to assist investors in their decisions. Over 160m Nigerians are in need of services and hungry for investment from across the world, he added.

The governor listed investment priority areas in the country as the power, transportation, housing and agriculture sectors. He said Lagos State is planning to build a major airport at the Lekki axis, with road perimeters for the project already under construction.

“The state is looking for foreign investors that will partner with government on a build-operate-and transfer (BOT) basis. There are opportunities in water transportation, elevated rail platforms and more cinemas. There are needs for health facilities and bus manufacturing among others,” he said.

On government policy, Fashola said the Sovereign Wealth Fund (SWF) which keeps a large chunk of government earnings from oil for the rainy day lacks the necessary legal backing, thereby making it difficult for governors to key into it. He explained that until the controversial issues surrounding the fund are addressed, it will continually be seen as a high risk venture for investors.

Policy contradictions

James Mwangi, CEO and MD of Equity Bank, Kenya, one of the panellists, regretted that although there are huge debt problems in Japan, America, Spain, and the Eurozone, governments in emerging markets are not borrowing enough to support infrastructure and key developmental projects.

He said that in 2014, Nigeria could become the biggest economy in Africa, overtaking South Africa but admitted that the crises brewing across Europe has some impact on sub-Saharan African economies. Bismarck Rewane, MD of Financial Derivatives Company (FDC) said that at 7.1% GDP growth, Nigeria’s economic growth story remains robust but policy contradictions, especially the delayed passage of the Petroleum Industry Bill (PIB), will have to be resolved as the 2015 elections approach to give the economy needed leverage.

Nothando Ndebele, Head of sub-Saharan Africa Research at Renaissance Capital, questioned the discrepancy between the over 50% year-to-year credit growth numbers reported by the Central Bank of Nigeria (CBN) and the modest growth of 15 to 20% year to year reported by individual banks in first quarter of 2012. The CBN attributed this discrepancy to the Asset Management Corporation of Nigeria’s (AMCON) bonds.

“We do not think AMCON bonds tell the full story on credit growth. Only by issuing an amount of bonds exceeding the bad debt, the excess of which was used to fill troubled banks’ capital holes, can the AMCON bonds be counted as credit extension, in our view,” he said. However, private credit extended in the year to March 2012, increased by N4.8 trillion ($29bn).

Ndebele estimates that N3.9 trillion ($24bn) of AMCON bonds have been issued since December 2010, of which about N1.5 trillion ($9bn) was issued to fill the capital hole.

Agriculture is responsible for almost 30% of real GDP growth. However, only 2% of credit extended goes to the agriculture sector. Two important drivers of growth, trade and communications, contribute 26% and 22% to growth but also receive relatively low shares of private credit at 11% and 10% respectively. “This disconnect between credit and real economic activity implies to us that our projection of a measured recovery in credit growth will have limited upside for Nigeria’s GDP growth,” he said.

Impact of Chinese slowdown

Rewane said the impact of slowing economic growth in China on African economies will be minimal. Although China may not be experiencing double-digit growth, it is doing better compared to other advanced economies. “China is pumping funds into African economies. I don’t see the possibility of economic slowdown in that country affecting investment drives in Africa,” Rewane said. Chinese non-financial investment has reached $9.3bn in Africa, which excludes the $5bn investment in Standard Bank by Industrial and Commercial Bank of China (ICBC in 2008.

Kenya’s financial inclusion drive

Yvonne Mhango, sub-Saharan Africa Economist, Renaissance Capital, said Kenya’s new constitutional reforms will boost confidence of both local and foreign investors. But it needs to reduce domestic debt, as well as public debt for it to realign its economic potentials. Part this success was due to Kenyan regulators allowing banks to develop mobile banking apparatus, and then following up with regulation. The mobile banking account has increased from 1.9m customers for Kenya’s population of 40m.

Mhango, who was also one of the panellists, said she expects a change in credit growth to have a more pronounced impact on Kenya’s economic growth than on Nigeria’s. This is because 80% of sectors that drive growth in the two countries are exposed to 50% of the credit extended in Kenya, compared with only 23% of the loans extended in Nigeria. The country’s agriculture is the only sector where there is a wide divide between its contribution to growth, nearly 30% and its exposure to credit ay only 5%.

Ghana

Clifford Sacks, CEO Africa Renaissance Capital, explained that Ghana is one of the West Africa’s few middle-income countries and one of fastest growing sub-Saharan Africa economies. Ghana’s economy, with a nominal GDP of $29.8bn in 2010, is about 14% the size of Nigeria’s economy and 8% the size of South Africa. However, it has one of the richest natural resources base in the world. The services sector is hungry for investors and accounts for the largest proportion of economic activity in Ghana. Also, the transport, wholesale, retail and hospitality sub-sectors have been the drivers of growth in the services sector.