Trade & Investment

The riots that South Africa can ill afford

In July, South Africa witnessed some of the worst violence and looting in years. The spark for the nationwide conflagration was the jailing of former President Jacob Zuma, which triggered protests in his home province of KwaZulu-Natal. The protests soon escalated into riots and looting across the country, spreading to Gauteng, the country’s most prosperous province. 

Shopping centres, local stores and warehouses were comprehensively ransacked, while vigilante gangs sprung up to defend property. The final death toll from the national breakdown in law and order is at least 337. The economic costs have also been devastating for many. At least 40,000 businesses have been affected, with the total economic damage estimated at over $3.4bn. 

While the initial impetus was political, much of the subsequent violence appears to be opportunistic looting from South Africans whose desperate economic prospects have been worsened by Covid-19 and strict lockdowns. But the government also suspects targeted acts of economic sabotage by those intent on disrupting the democratic state, and organised criminal gangs are thought to have exploited the security vacuum to operate with freedom. 

President Cyril Ramaphosa talks to volunteers in masks cleaning up riot damage.
President Cyril Ramaphosa interacts with volunteers cleaning up damage caused by rioting at the Makro Shopping Centre in Durban. (Photo: RAJESH JANTILAL / AFP)

Challenge for Ramapahosa

The unrest poses a huge challenge for President Cyril Ramaphosa. South African civil society heralded the jailing of Zuma on contempt of court charges in early July as a huge victory for the president, the rule of law and the mission of ending impunity for political corruption. 

Yet the initially insipid security response to the rioting once again fuelled an international image of a country where law enforcement remains precarious. There is now serious concern among investors over what July’s events mean for the security of their holdings, particularly from retail investors who saw an estimated 200 shopping centres destroyed or looted.

Forecasts from Intellidex expect the events to shave a further 0.7% off GDP, a number that the growth-starved economy can ill afford. Kwa-Zulu Natal alone is thought to have lost over $1.4bn.

Now that security has been established through belated army deployments and the violence has fizzled out, attention turns to the government’s policy response.

Ramaphosa has announced the reinstatement of a monthly welfare grant of R350 ($23.60) for the poor until the end of March and a R400m ($30m) contribution to a humanitarian relief fund and support for uninsured businesses. Tax incentives and deferrals are also on the table. Welcome though they are, they risk being little more than plasters on an open wound. 

Ramaphosa must show that he is not willing to give in to political agitators using the violence to push for Zuma’s release. Any further incidents of rioting and violence must be met with an immediate security response in order to convince investors that the country will not countenance a repeat. The rule of law must be extended to all South Africans regardless of wealth or political influence. 

In the long term, the solution remains the same as it’s always been – ending rampant racial and economic inequality and corruption, reforming the state, and encouraging foreign investors to set up and hire unemployed South Africans. But July’s terrible events have made that job much harder.

Trade & Investment

Protesters and investors rejoice as Tunisia ousts government

Tunisia’s president fired his long-time rival, Prime Minister Hichem Mechichi on Sunday, and suspended the government as public frustration with the country’s worsening economy and handling of the pandemic boiled over.

The streets of Tunis erupted in celebrations as the president Kais Saied announced that he would take power, and appoint a new prime minister. Under Tunisia’s constitution power is shared by the president, prime minister and parliament.

The move was slammed by opponents as a coup and constitutional breach as military vehicles encircled the parliament building, and blocked the speaker of parliament and leader of Ennahda party, Rached Ghannouchi, from entering.

Thousands took to the streets on Saturday after the health ministry reported that Covid deaths hit a record high, with hospitals full, short of oxygen and unable to cope.

A slow-moving vaccine rollout has galvanised frustration with the government’s failure to deliver real change, says James Swanston, a North Africa economist at Capital Economics.

“Tunisia has been in a state of political paralysis since October 2019 with several prime minister-elects failing to form a government. As a result, there has been little in the way of policymaking that has come at the same time as one of the worst economic contractions in Tunisia’s history.”

GDP shrank by 8.6% in 2020 while the political deadlock has prevented the formation of a government and held back reforms to support the economy, deal with the effects of the crisis, and restore macro stability, Swanston adds.

On Sunday, protesters stormed the Ennahda party’s local headquarters in the city of Touzeur and smashed computers. The moderate Islamist party has dominated Tunisia’s political scene since a 2011 revolution ousted autocratic leader Zine El-Abidine Ben Ali and triggered the Arab Spring.

“Right now people are associating this failure with this party.  We needed change and something to unlock the situation,” said a Tunisian investment banker based in London, who wished to remain anonymous.

“I don’t think Ennahda have been helping people have a better life. People have been patient for ten years and had a lot of good will, and this good will has probably run out.”

Investors take stock

The latest political shake-up also holds the promise of enacting the reforms needed to confront the country’s fiscal challenges.

“You can look at the latest move as an initiative to trigger change and bring a more efficient government, and a leader more involved in the running of government. It could bring stability and clarity starting with pandemic recovery,” said the Tunisian banker working for a large global bank.

If the situation escalates into a full-blown political crisis, the turmoil risks delivering a big hit to the economy. “But right now nothing indicates that,” he added.

Tunisia’s services, tourism and manufacturing economy hinges on stability, efficient governance and productive populations, says the banker.

“These sectors require not only political stability to attract foreign direct investment, but it requires the same stability to allow local economic operators to invest and start new projects.”

“That’s the problem with Tunisia, it’s not poor or underdeveloped enough to throw money at, but on the other hand its always struggling to get to the next level.”

Beacon of hope

Until now Tunisia was upheld as a beacon of democracy in a region where revolutions from Egypt to Syria, Sudan and Yemen, have been painful, bringing bloodshed, economic malaise and in some cases war.

As Tunisia continues its transition from an authoritarian to a parliamentary regime, the upheaval is a natural part of the state-building process, the banker says.

“In the history of nations ten years is not a long time, to bring openness and democracy, and to have that trial and error. You can’t make up a successful and a prosperous democracy in ten years.”

Technology & Information

Kenya and Ghana lead world in mobile money

Many African countries like to think that certain areas of their economies have already leapt well out of the pond. But is this actually the case? 

For mobile money, it is. A report by American research firm Boston Consulting Group (BCG) found that Kenya and Ghana have the second and third highest mobile payment usage in the world, after China. 

The study, Five Strategies for Mobile-Payment Banking in Africa, found that transactions via mobile wallets and phones were the equivalent of 87% of GDP in Kenya and 82% in Ghana. The World Bank has recognised Ghana as the fastest-growing mobile money market in Africa over the last five years. 

The report estimates that mobile payments revenue in Africa could rise from $3.5bn today to between $14bn and $20bn in 2025.

How can Africa benefit from the NFT craze? 

As the world of finance is slowly being turned on its head by new and exciting technologies and asset classes, Africa is no exception. The latest craze, along with satirical cryptocurrencies, is non-fungible tokens (NFTs).

The blockchain technology, which is mainly bought and sold with the crypto Ethereum, is used to certify that a digital asset is unique. Although the technology was created in 2014, the tokens shot to fame this year as artists sold digitised versions of real-world objects like paintings, photographs and videos for staggering amounts of money. 

Africa should not be overlooked as a key player in the distributed ledger game.

In 2020, Nigeria traded more cryptocurrency than any other country in the world except the US and Russia. Faced with currency volatility and a lack of faith in traditional forms of investment, many Nigerians see cryptocurrencies as a more secure form of wealth creation.  

However, while savvy investors are piling into NFTs, artists and content-creators look set to benefit the most from the new technology. African artists have traditionally struggled to monetise their work. The marketplace pays less for African art forms and is dominated by western art houses that take large cuts during auctions.

One benefit of NFTs is that artists can sell digital assets directly to buyers, thereby cutting out the middlemen. The other is that the buyer and seller are forever linked on blockchain, meaning that every time the asset is traded on the secondary market the artist will claim royalties.

African artists have wasted no time in taking advantage of the possibilities. Kenya-based digital media company Picha Images held one of the first NFT auctions in Africa earlier this year, featuring the work of the award-winning photographer and filmmaker Rich Allela.

In April, a trio of South African founders launched a website called Momint that bills itself as the country’s first NFT marketplace. Eliud Kipchoge, Kenya’s record-breaking marathon runner, auctioned off two digital images of his career highlights for around $37,000. Watch this space.

Will city authorities build urban Africa right?

Around 55% of the world lives in urban areas and this will increase as millions of people migrate to cities every year in search of a better life. By 2050, this number is projected to surpass two-thirds of the global population and sub-Saharan Africa and South Asia will be responsible for much of the growth. 

This leaves Africa’s urban planners with a daunting task. Already many of Africa’s lower-income inhabitants are forced to walk down dangerous roads without any pavements as they commute to work, often from informal settlements on the outskirts of large cities. In some cities like Nairobi and Kigali, for example, this is slowly changing but there is still a long way to go. Cycle paths, for instance, largely remain a distant dream. 

A landmark World Bank study found that the most successful urban areas are those that connect growth to economic demand and then support this with comprehensive plans, policies and investments that help avoid uncontrolled sprawl. The new report, Pancakes to Pyramids – City Form for Sustainable Growth,analyses the dynamic, two-way relationship between a city’s economic growth and the floor space available to residents and businesses.

It is unclear whether startups will benefit from improved urban environments or whether many of the problems are key drivers of business. As ever, the most successful startups are those that overcome common problems with elegant solutions. Companies that work in delivery and transport, for example, rely on poor infrastructure and traffic to attract clients. 

One to watch: Payhippo

Nigerian fintech startup Payhippo is hoping to solve credit problems for thousands of small retailers in Africa, by using artificial intelligence to offer loans to MSMEs. The startup raised $1m in pre-seed funding in July to expand its operations. 

It has disbursed over 2,600 loans to businesses and has an impressive 97% repayment rate. Previously funded by family and friends, it raised money from notable Nigerian angels and early-stage venture builder Aidi Ventures. 

Africa’s e-mobility market makes steady gains 

Though one of the more overlooked sectors, Africa’s e-mobility market is making steady gains with over 50 startups working in the space and $4.9m raised since 2020, according to data collected by Briter Bridges

With governments across the world implementing ambitious strategies to curb harmful emissions, 16% of the global bus fleet is electric and there are already 190m 2-3 electric wheelers. Startups are leading the electric vehicle drive in Africa. While there is a great diversity of companies operating in the sector, the bulk are ride-hailing companies and supply chain startups. 

Kenya introduced Africa’s first 100% electric taxi-hailing service, NopeaRide, in 2017.  EkoRent Africa, a subsidiary of Finnish company EkoRent Oy, signed a partnership with InfraCo Africa, an investment company of the Private Infrastructure Development Group, to pump €1m ($1.17m) into Kenya.

Other startups like Sokowatch, a supplier to small businesses, and Sendy, a delivery company, are slowly introducing electric vehicles to their fleets. Indeed, Kenya has the greatest number of e-mobility startups in Africa. 

But other countries are catching up. Guraride, for example, offers a fleet of shared smart bikes, electric scooters and electric bikes in its stated aim to “provide affordable transportation, reduce carbon emission, improve air quality, and ease congestion by developing alternative means of green transport.”

The company’s push-bikes operate rather like hireable bikes in other parts of the world that are picked up at a station and dropped off somewhere else, using an app. The bikes are now available in Rwanda. 

In South Africa, Mellowcabs has set up a fleet of delivery vehicles in partnership with DHL to “reinvent urban delivery”. The main investors in the space are InfraCo Africa, FactorE Ventures and the Mastercard Foundation, among others. 

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The news on this page is taken fromTech54, a biweekly newsletter produced by African Business and Briter Bridges rounding up the most exciting developments in the world of African tech. Subscribe to the newsletter here.

Finance & Services Trade & Investment

How Nigeria dug itself into a hole

I was 13 years old in 1979, when Nigeria began to slip into a dark, frightening hole that seemed to have appeared overnight, and from which it has yet to emerge: corruption.

Until that point, I had walked with a particular adolescent swagger – that of a young citizen of a newly independent nation that really mattered on the world stage; of a country whose voice carried loud and clear in the community of nations. 

To me, Nigeria was a country that produced wonderful writers, excellent athletes and brilliant leaders. It was the most populous African nation, one where English was spoken well and whose national IQ was one of the highest in the world. Life in Nigeria, while of course not perfect, was in so many respects really good. And it was getting better.

My secondary school, looking back, provided a reflection of what was happening in Nigeria. In 1977 I was fortunate to attend an elite state-run secondary school, where by any African standard I had access to first-class teachers, academic resources and sporting facilities. 

Then that hole emerged seemingly from nowhere, and into its bowels vanished so much of what was good about Nigeria.

Suddenly, my school was no longer a centre of excellence, but an underfunded, overcrowded relic of past glory where standards had plummeted overnight. It was a microcosm of the insidious power of the corruption gripping Nigeria, where good was sucked into that forbidding hole and turned into bad. 

Fall into mediocrity

A nation that had up to that point embraced merit in most things, at least those things my childish mind grasped, had done an abrupt about-turn and chosen instead to pursue mediocrity.

At that time, in 1979, Nigeria had just emerged from military rule, the only system of governance I had known since birth in 1966. Power was again handed to civilian authority – but it was not to last long before the military once again seized power in 1983 (and effectively held it again until the turn of the millennium). 

In 1982, a year before the military seized power from our civilian government for the second time, I began my four years of university studies. Not much changed; certainly, things weren’t getting any better.

Indeed, if I thought that it was the civilians who couldn’t manage our country properly, what followed when we returned to military rule proved that any civilian government is better than a military one. 

Dictatorship was not only bad socially and economically, but from a global point of view Nigeria was a pariah nation unable to get its act together, and on its way to joining the club of failed African states.

Our military administrations from 1983 on are reckoned by some to have been the most corrupt of all, but perhaps Nigeria was so corrupted already that no one really noticed. Perhaps the hole was now so deep already that it no longer really mattered if it got deeper.

Then the miraculous happened, and in 1999 Nigeria returned again to civilian rule. For the next eight years, because we had once again embraced meritocracy, our country experienced a renaissance. 

Nigeria made more progress in that short period than it had in the preceding 25 years. We began to climb out of that terrible hole, the one we had dug for ourselves. 

A wasted renaissance

But then, just as we got our heads above the ground, we lost our footing and we started slipping back down again. Today, I believe, we are almost in the same position we found ourselves in 1999; we have wasted many of the opportunities and outcomes our eight-year renaissance had afforded us.

By now our country should be flying!

Consequently, I have found myself asking: does our apparent inability to climb out of the hole we are in mean that we Nigerians have accepted that we cannot do any better? That our lot in life, despite the fact that we can compete intellectually with any nation on Earth, is much worse than we had dreamed it would be? 

That our children are consigned to being third-class citizens of the world (unless they emigrate and find opportunity elsewhere)?

Here’s another question to ponder. When I was a small boy, our nation was 60m strong. When that hole yawned open when I was 13, we stood at around 80m. Today, we have more than 200m people mired down there, and in 30 years’ time there will be over 400m in number. Would that not be the very definition of Hell?

These are the things I dwell upon, the fears that I have for my beloved Nigeria. But then, I look to the examples of other countries that have climbed out of their own holes of poor performance and, instead of basket cases, have become success stories: countries such as Malaysia, Indonesia and China. Surely, if they can, we can, too?

That is the story that I want for my nation. I certainly don’t presume to have all the answers – indeed, I might not have many – but I have resolved to employ the resources I have (financial and otherwise) to do my utmost to change Nigeria’s sad narrative. It’s an investment in a brighter future for my country and all who live in it – and it’s certainly well worth making.

Aigboje Aig-Imoukhuede is a banker, investor and philanthropist, and the founder of the Aig-Imoukhuede Foundation.  

Agribusiness & Manufacturing Trade & Investment

Towards better times for Africa’s watchmakers

Before 2015 Ghanaian former hotel worker Anthony Dzamefe had never owned a watch. But he needed to make more money, so he bought watches from a local boutique, took pictures of himself wearing them, advertised on social media, and sold them in car parks and on university campuses. After initial success, he soon began to tinker with the designs in order to attract new customers. 

“I kept adding value by using better glasses, and by taking every part of a watch apart to put it back together again, so I could learn how to do repairs. It was then that I discovered the most important part of the watchmaking process, which is the artistry,” Dzamefe says.

The 31-year-old is now CEO and founder of Caveman, a company in the vanguard of Africa’s first generation of artisan watchmakers emerging across the continent. The continent’s watchmakers enjoyed a moment in the international spotlight in 2019 when the Duke and Duchess of Sussex were given LN Watches featuring straps in the colours of Zulu royalty during their visit to South Africa. 

A Caveman watch.
A watch made by Ghanaian firm Caveman.
(Photo courtesy of Caveman)

Meanwhile in Nigeria, luxury watchmaker Asorock is taking on international brands and forging a reputation for artistry and reliability. At its Ghanaian factory, Caveman now has workers expert at different stages of the painstaking watchmaking process and has had to separate its process to prevent spies from competitors stealing trade secrets. 

Globally, watch sales were proving resilient even in the era of the smartphone up until the pandemic, with the global market valued at $62bn in 2020 by Business Wire, a market research company. Rising urbanisation in China and India, an expanding international middle class, and growing urban fashion consciousness in China and India, the world’s two most populous nations, had proved a bulwark to help offset dips experienced in more mature markets.

Still, despite the obvious buzz, the African market is in its infancy. Most African watchmakers are self-taught, with few opportunities for any formal watchmaking education on the continent. Creators first have to learn the different aspects of watchmaking from online video tutorials or apprenticeships with those in connected trades – Dzamefe spent two months with a shoemaker learning how to fashion leather straps.

The size of the embryonic African timepiece manufacturing sector is unclear, as second-hand sales dominate, and less research has been carried out. But the production process is the same used by counterparts around the world, with most firms starting off by importing watch movements – also known as a “calibre” in horology – the mechanical engine that drives the watch, chiefly from Japanese manufacturers Seiko or Miyota. Caveman says about 70% of their watch movement parts are imported from Japan, with 30% customised and assembled in Ghana. 

Watchmakers then create their own unique cases that enclose and protect the movement, design the face and dial and add straps and boxes. 

“They don’t make the watches with the African weather condition in mind. So, for example, a certain type of material or metal that could be used in European countries would expand with the heat over time here, so we customise and adapt,” says Dzamefe, who uses surgical stainless steel in his watches. 

“The whole idea of the Caveman brand is to have products that can be generational. Watches that grandfathers leave to their grandsons, and by using surgical stainless steel it means they won’t corrode, or react to sweat or the oxygen in the air.”

Swiss fall out of favour

The last decade has been transformative for the luxury watch market. Smartphones have presented stiff competition to traditional watchmakers, and dominant Swiss luxury firms were suffering declining sales in Africa even before Covid-19 lockdowns forced malls to close. 

“From 2017 to 2020 exports of Swiss watches to Africa have been on a downward trajectory, with exports declining by 47% in volume,” says Rubab Abdoolla, a beauty and fashion analyst at Euromonitor.

Speaking from the Swiss Business Hub at the Embassy of Switzerland in South Africa, Daniel Schneider says the luxury sector is a quick adapter, and the export of Swiss watches like Rolex, Omega and TAG will pick up again. But the recent civil unrest and looting in South African cities and the weak economy are hurting Swiss imports and investment.

“We believe that in African countries like South Africa, with strong financial institutions and longstanding established markets for luxury goods, the export of Swiss watches will pick up again, even if it takes its time,” he says.

“Very often these timepieces are seen as investments, bought intending to be passed on as heirlooms, and perceived as a status symbol. Connoisseurs also purchase certain luxury brands because they value the craftsmanship, so it’s expected that once the economic situation improves, demand for luxury watches will see healthy growth,” says Abdoola.

In the meantime, some African companies are eschewing the luxury end of the market in favour of timepieces targeting the wealthy middle classes. In the second quarter, Caveman sold 600 turquoise Blue Volta watches, which sell for C450 ($75) – while Asorock watches retail for up to around $200. 

Betting on luxury

Despite the tough times for luxury, other African watchmakers continue to target the upper end of the local market. Cape Town watchmaker Bettél, whose wooden timepieces can sell for over R5000 ($340), says the lockdowns have been unsparing. Co-founder Stuart Swan led a team producing 200 handcrafted wooden-cased watches per month before Covid, to sell at its store in the trendy Watershed at the V&A Waterfront luxury shopping development. 

Mixing high-quality stainless steel, carbon fibre and natural local wood, with movements often manufactured by Seiko and customised by Bettél, Swan says that a single piece of dust entering the movement during assembly can ruin the operation, meaning that precision skills are essential for workers in the labour-intensive process. 

After a tough year-and-a-half, Bettél are ramping up production once again, and will target social media to release videos showcasing their watchmaking prowess. Despite growth in smartwatches like the Apple Watch – which is capable of running a host of health monitoring apps and is estimated to have sold over 100m units since 2015 – Swan believes the distinctive craftsmanship of Bettél’s watches will retain their appeal when tourists and shoppers return in numbers to Cape Town.

“Each watch is truly unique, using local wood, local leathers and metals. It’s very meticulous work and a difficult product to make, but many of our customers say this is the best watch they’ve ever had.”

Finance & Services

Gender lens investing takes centre stage

Women currently oversee just 6% of the total funds managed in Africa, with their roles often restricted to the micro and small-scale sectors, but growing interest in gender lens investment could see real change in the investment landscape.

A string of research projects has demonstrated that more diverse teams adopting gender-aligned strategies generate higher returns, so the benefits are commercial as well as in promoting gender equality and social fairness.

In order to highlight the challenges and the opportunities, Educate Global and African Business organised a webinar attended by leading female voices in the African financial services industry.

For the uninitiated, gender lens investment takes gender-based factors into consideration to advance gender equality and better inform investment decision making.

Sandrine Henton, managing director of Educate Global, a private equity asset management company based in Nairobi that invests in companies in the food, health and education sectors, said: “Investing in women is not just good for impact but is also good for business.” Educate Global is over 65% women-owned.

Recent research by the International Finance Corporation of the World Bank calculated that gender balanced teams in private equity generated 20% higher rates of return than average. If you fund more women fund managers, you will fund more women entrepreneurs. By contrast, it is widely recognised that people invest according to their bias, so women-led and owned businesses are less likely to attract funding if those allocating that funding are overwhelmingly men.

The trend is certainly in the right direction. Alternative investment strategies focused on female fund managers and gender lens investing today account for $7.7bn of assets under management, 61% more than in 2018. Moreover, the G7 has committed to inject $15bn into gender lens investment by 2022.

Jen Braswell, director of value creation strategies, at British development finance institution (DFI) CDC Group, told the webinar that “valuing how and where women play is simply good investing… There’s a lot of momentum around the idea of gender lens investing… but we need to not be distracted with other factors.”

At least 40% of African SMEs are owned by women but only 20% of these have access to institutional finance, creating a funding gap of about $42bn.

Lindeka Dzedze, Executive Head: Institutional Clients, Global Markets at Standard Bank Group, which has set a target of ensuring 40% of group executive roles are held by women by 2023, commented: “We are seeing significant progress and change but we need to accelerate that pace of change. Even where funds are in place, it can be difficult for female-led businesses to find out about them.”

Dzedze said that Standard Bank had a three-month campaign to market its initiatives and works with female entrepreneurial organisations, as well as identifying partners through its own networks. Dzedze herself worked on setting up the African Women Impact Fund.

Pandemic recovery

The Covid-19 crisis has put a very clear spotlight on the challenges facing women in Africa because it has added to the already heavy care burden that women are placed under, increasing the desire by the investment community to invest in sectors that support the care economy.

Seun Toye-Kayode, Vice President, Head of Launch with GS EMEA at Goldman Sachs, said that one of the benefits of gender lens investing was “ensuring that capital gets into the hands of those who need it the most”.

“Put quite simply, if we don’t put money in the hands of women, the issues that we have in the world will not be resolved”, she added.

Goldman Sachs is seeking to create change across all the organisations that it works with as well as within its own doors. Last year it introduced a policy of not taking any company public that does not have at least one woman or other diverse member on its board and as of July 2021, it is increasing this minimum threshold to two board members, including at least one woman.

Henton agreed that there was momentum towards gender-aligned strategies that seek to address bias in pandemic recovery strategies. Recent research highlighted a correlation between women fund managers and increased fund allocation in the recovery sectors, such as health, food, education and digital services, although many fund managers are unsure how to proceed.

“Many institutional investors are still missing out on the possibility of generating superior returns by investing in diverse teams and gaining fresh insights for compelling investment strategies for Africa”, noted Henton.

Working together for change

There is a danger that the current upsurge of interest in gender lens investing will be a temporary blip but Braswell is convinced that there is now a critical mass of men and women ready to pursue change. The debate now should be about the mechanics of achieving it.

“Operationalising a gender strategy is not as easy as saying ‘we’re making a commitment and here’s our ambition’; it requires change management,” she said, adding “gender lens investing is an idea whose time has come” and that it is up to everyone to make sure real change is achieved.

However, there is currently remarkably little investment data on gender splits because companies and institutions are not looking for it. Although there is the capacity to generate the required information and it is straightforward to take women into account because they are easy to identify, “that lack of data makes it hard to invest with purpose”, said Braswell.

Shared definitions and reporting frameworks are needed, so data can be comparable across the industry, so CDC set out agreed minimum standards in its 2X Challenge in partnership with other DFIs. The Challenge calls on DFIs to mobilise both their own funds and private capital to advance women as entrepreneurs and business leaders.

The capital to support gender lens investment already exists. Henton said that the investment landscape in Africa was dominated by very large funds that already exhibit a discrepancy between the amount of capital they are raising and the amount they are deploying.

More capital needs to be brought to the real economy and to medium-sized companies, rather than the current narrow focus on infrastructure, energy, financial services and tourism she said.

Perhaps the greatest challenge will be moving from gender lens investment being a side issue to becoming a fundamental part of business strategy. Toye-Kayode said that much depends on where such initiatives are positioned within an organisation: they have to become important strategies for core departments.

Organisations that are currently devising their diversity strategies need to bring a good team together and make any goals public because then there is more accountability, she advised.

Fundamentally, it will take the entire sector to make the change and that has not happened yet. Goldman Sachs had hoped that other investment banks would follow its lead on board representation but that has not happened yet.

Toye-Kayode argued: “It’s not one strategy or one firm that is going to make a difference. We all have to come together: we have to look at it from the top end, from the bottom end and from everything in between.”

Having more women on boards will help but it will not solve the problem alone.

Technology & Information

Review: Chain Reaction: How Blockchain Will Transform the Developing World

In the May 2020 issue of African Business, our Deal Tracker section reported the first use of blockchain for an intra-Africa trade finance transaction. The transaction involved several thousand tonnes of fertilisers shipped by OCP from Morocco to Ethiopia, valued at nearly $400m.

This transaction makes the OCP Group the first African company to execute an intra-African trade transaction using blockchain, essentially a digital ledger of transactions. 

The deal illustrates the possibility of reducing the trade finance gap in Africa and boosting trade between African countries through adoption of the new technology.

In Chain Reaction: How Blockchain Will Transform the Developing World, the authors – comprising both consultants and entrepreneurs – set about explaining the many practical uses of a technology which is predicted to help bring the next billion emerging consumers into the formal economy by creating reliable institutions of contract, ownership and trust. 

Some argue that blockchain is a poor substitute for an efficient banking and regulatory system, but for those living in countries where the rule of law is weak, concepts of ownership are vague and trust in institutions is in scarce supply, it could be truly transformative.

Chain Reaction provides a number of case studies that illustrate many ways that blockchain can facilitate development objectives – everything from property registration to pharmaceutical certification, money transfer to farming applications.

Early in the book, the authors state: “Blockchains can, and will, interact with all of the internet-enabled tech or smart tech: internet of things, machine learning, artificial intelligence, ubiquitous connectivity. These technologies are really about creating systems that do things better than we humans can – whether faster, more safely or for less money. Blockchains could become the transactional lifeblood that enables these technologies to become more effective.” 

Verifying medicines

A timely application of blockchain is in the global war against the pandemic. A Q&A with Genevieve Leveille, the chief executive of OTT8 Group, a company using blockchain to authenticate coronavirus testing kits, explains the thinking behind test kit verification.

Leveille points out that verifiable tracing of the supply chain adds transparency, uniformity and trust, allowing the manufacturer or purchaser of a Covid-19 test kit to track the product.

The transparency and trust this builds “leads to better relationships, secure purchasing and, in the case of medical tests and therapeutic treatments, more certainty around efficacy,” she argues. 

Leveille goes on to explain just why this is so important in an emerging markets context. In the case of Covid test kits, the volume manufacturers are based in China, a country where verifying quality in medical goods has traditionally been difficult.

Via a blockchain-enabled supply chain management ecosystem, manufacturers can demonstrate in a verifiable way that their product has been manufactured and delivered according to certain specified standards.

Such technology can also help with other medicines common in emerging markets. The authors quote research that indicates that fake drugs are estimated to account for 15% of the global pharmaceutical supply, rising to as much as 50% in some developing countries. This causes deaths from untreated illnesses and side-effects from harmful ingredients in fake pills.

The market for counterfeit drugs is particularly significant and deadly in Africa, which the World Health Organisation estimated accounts for 42% of all fake or substandard drugs globally. Counterfeit malaria tablets alone result in 120,000 children dying every year across the continent, according to the Brazzaville Foundation.

But with blockchain technology, if at any point in the supply chain nefarious activity occurs, it is possible for a pharmacist to track precisely where and when it happened. Patients can scan the digital label with their smartphone and receive an instant reply on the authenticity and provenance of the drugs.

Financial applications

While the authors are broadly enthusiastic towards blockchain technology, they add a note of caution regarding the limited usage of cryptocurrencies and the financial risks inherent in an unregulated currency. 

The authors write: “With regard to how many outlets in a given area accept payment, crypto-currencies are very limited. As compared to the ubiquity of whatever the local physical currency may be, crypto-currency penetration has a long way to go, even in countries where the local currency is more challenged. Electronic cash, by contrast, has reached material penetration even in the most remote of regions.”

But they argue that the reality is that cryptocurrencies are only the very first of many financial applications of blockchain technology. 

Take the perennial issue of sourcing forex in Africa. The authors profile AZA, a profitable firm which developed through blockchain technology and which now employs over 200 currency traders at offices in Africa and Europe and administers $100m of intra-African trades every month. 

The firm began when banker Elizabeth Rossiello, frustrated that a Kenyan, Ugandan or Tanzanian exporter can’t transact with a Nigerian, Senegalese or South African importer without the cost and delay of routing payments via the US dollar, began trading African currencies from her living room via bitcoin as a cheaper and faster alternative.

Nowadays, very few of the trades involve bitcoin. AZA now has enough transaction volume to deal the currencies direct, meaning that it can move beyond the blockchain. But the authors say the firm offers a model for how startup firms can adopt the technology to suit their business needs.   

“The most fascinating thing about AZA’s journey is Blockchain’s usefulness as a catalyst for creating infrastructure – in this case financial. While the ultimate outcome has been to evolve beyond Blockchain, this would not have been possible without first building the market using bitcoin.

“The second most fascinating thing is that AZA is a profitable business – and there aren’t too many of these amongst the Blockchain startups set.” 

The authors conclude: “That this should occur in Africa is significant.”

As the last paragraph of this compelling book states: “The post-Covid world may be filled with shadow as we slowly recover from the pandemic, but the blockchain future remains brighter, and as complicated, as it ever was. We’re now hurtling towards a blockchain-based future even faster.”

Finance & Services Technology & Information

How Fintech lenders can help SMEs unlock post-pandemic recovery

It feels like a lifetime since the Egyptian government reported the first positive case of Covid-19 on the African continent back in February 2020.

As I write from Lagos in Nigeria where I have been based for almost the entire duration of this pandemic, I can see that there is much work to be done in rebuilding African economies as we look beyond the “new normal” of restrictions and vaccines.

While the human cost of this deadly virus is frightening, dramatic changes to our everyday lives – that have been catalysed as a result of successive lockdowns – leave us at a crossroads.

We can either choose to return to the ways we did business and interacted with one another before the pandemic, potentially risking the next global shockwave having an even more catastrophic effect on our livelihoods, or we can chart a new path.

Addressing the SME credit gap

SMEs are the backbone of all global economies but are an even more delicate and salient matter for African and other fast growing markets. The International Labour Organisation (ILO) estimates that SMEs contribute 70% of employment worldwide, while research by the Johannesburg Business School suggests that as much as two-thirds of African economies are made up by SMEs.

The latter disregards the informal economy, which is widespread across the continent, yet includes many hundreds of thousands of SMEs and jobs that are not connected to the wider economic matrix. It is fair to say that African economies are highly reliant on the fortunes of SMEs, perhaps more so than fast-growing economies elsewhere in the world.

I know from first-hand experience what a struggle it can be growing a business from the ground up in Africa. As an SME entrepreneur and business owner the multitude of obstacles can be overwhelming, including lack of reliable access to power, poor logistics and transport infrastructure, low but growing levels of internet and mobile internet penetration, and access to finance.

The global SME credit gap, which the International Finance Corporation (IFC) estimates to be $5.2 trillion (a figure not updated since before the coronavirus pandemic and now likely worse), is the challenge that Lidya and other fintech lenders have set out to solve.

A new approach to financing SMEs

Entrepreneurs and business owners with great ideas but lacking the finance they need to scale is constraining economic growth and job and wealth creation in Africa and elsewhere. By not providing the tools our small businesses need to thrive is perhaps one of the single biggest self-inflicted economic dilemmas of our generation, and it does not serve us well in building back better after the pandemic. 

The SME Finance Forum believes that 131m SMEs in fast-growing economies experience constraints in accessing finance and working capital. In many cases it is small and sudden costs which can become troublesome for business owners.

Larger and more traditional lenders cannot usually meet their needs because of high thresholds for collateral and credit history when applying, greater perceived risk, and the often small size of the loans required. In Nigeria, for example, most traditional lenders are unlikely to loan sums less than $50,000 and the process can take many weeks.

This traditional approach is outdated and not fit to meet the needs of modern SMEs in Africa and other fast-growing economies. Alternative lenders, powered by fintech, are beginning to address the challenge. Lidya, for example, uses a proprietary fintech platform that uses artificial intelligence (AI) to assess more than 1,000 data points and can disburse loans from around $500 in just 24 hours.

Unleashing untapped potential

By addressing the credit gap, fintech lenders will help to unleash untapped potential across fast-growing economies, providing long-term benefits to employment, public services, education and many other industries and sectors.

It goes beyond benefitting the SMEs themselves and will enhance the quality of life for communities that feel cut off. Not only are SMEs the largest contributors to national gross domestic product (GDP) figures and job employment rates, but they are incubators for progress – pushing the needle in sectors such as the creative arts to tech.

As a Nigerian, I am constantly impressed and proud of the innovative solutions which African entrepreneurs are taking to the next level, in some sectors stealing a march on the rest of the world.

Nigeria’s startup scene is vibrant and full of original ideas and thinking. This was another driver for why we founded Lidya; to nurture entrepreneurial mindsets and ensure that SMEs can grow without fear of whether a loan may or may not be approved, or if they have the right collateral to apply in the first place.

When you place yourself in the shoes of a small business owner, you are better equipped to empathise with their situation and create solutions, and this is exactly what fintech lenders are doing. 

At such a volatile time in our lives there is absolutely no need to lose more jobs than what the pandemic has already cost us. The various virus strains and access to vaccines have disproportionately affected different regions of the world.

Africa has not been immune to the more negative impacts of this pandemic with lockdowns and tight restrictions exacerbating an already significant unemployment problem and severely dampening economic growth projections, risking the future for Africa’s rapidly expanding population.

The African Development Bank (AfDB) has found that continental growth shrank by 2.1% during 2020. Academics highlight that African economies will not see a return to levels of pre-pandemic growth until 2022 when a greater proportion of the continent’s population will be vaccinated, travel resumes and safeguards against potential spikes in transmission levels have been put in place. This is why the work of alternative SME lenders and ensuring every SME has the best opportunity to grow is more important now than ever.

The pandemic has ravaged economies across the world, but it has also allowed space for a complete reset. We have a duty to think what we can do to respond better to events like this in the future and I for one believe the lending sector is one of the first port of calls for encouraging change.

SMEs are at the nexus of how we can help build back better from this pandemic and ensure the benefit of economic growth is felt more evenly across African societies. We need to lend them more than just a hand and make sure they have access to all the tools they need to succeed.

Tunde Kehinde is the founder and CEO of Lidya, an international alternative SME finance lender with operations in Nigeria, Poland and Czech Republic. Tunde also co-founded Africa Courier Express, the leading e-commerce delivery company in Nigeria, and Jumia Nigeria, the leading e-commerce platform in Nigeria.

Trade & Investment

SAA: Selling off the family junk?

Pravin Gordhan, South Africa’s Minister for Public Enterprises, is either a genius in corporate debt restructuring or the doyen of all risk-takers.

While his boss, President Cyril Ramaphosa was hobnobbing as a guest with the likes of Joe Biden and host Boris Johnson at the G7 Summit in sunny Cornwall, Gordhan was busy trying to sell off the family junk – the debt-ridden state-owned enterprises (SOEs) such as Eskom, South African Airways (SAA) and Sanral (the national roads agency).

They are the bane of Minister of Finance Tito Mboweni’s plans to stabilise the country’s growing debt – 80.3% of GDP for 2020/21, and projected to rise to 88.9% in 2025/26. Gross loan debt is projected to increase from R3.95trn ($280bn) this year to R5.2trn in 2023/24. 

Loss-making parastatals have been the bane of African economies – a drain on the national coffers and an obstacle to public debt stabilisation. They are consumed by a bloated bureaucracy and over-employment. They are often based on a misplaced sense of national pride, driven usually by a leftist ideology centred on a ‘people’s ownership’ of ‘national assets’. 

So when on 11 June, Gordhan signed a “groundbreaking public-private partnership (PPP) for SAA” with Takatso Consortium, Mboweni must have let out a huge sigh of relief. Last year he reluctantly forked out R10.5bn ($730m) to keep SAA afloat.

The majority Black-owned Takatso will own 51% while the state will retain 49%. SAA’s historical debt of $1bn remains the responsibility of Pretoria. Its list of creditors is 32 pages long.

But all is not as rosy as it might appear at first sight. Selling off these assets to private ownership, albeit with some caveats – privatisation to you and me – is politically sensitive even in developed countries. SAA is no exception!

Investors, bankers and the IMF/World Bank Group love privatisation. The International Finance Corporation (IFC) for instance midwifed the sell-off of Kenya Airways in 1995, in which Holland’s KLM took a 26% strategic stake. 

The partnership, even after the KLM/Air France merger, was largely profitable. The impact of Covid however put paid to it. In September the partnership mutually dissolved.  

When it comes to airlines, one choice is to have a state-owned model, such as Ethiopian Airlines, Africa’s largest and most profitable service, which last October suspended privatisation moves as part of wider economic reforms because it was “doing well”. Or, having a PPP where the state shares ownership with a strategic investor; or, going for a full-scale privatisation, where the law acts as the guardian of the national interest. 

Gordhan has opted for a PPP, which carries huge risks. Nevertheless, he is bent on diluting the government’s shareholding and eliminating the burden to the taxpayer, but he says the government will retain a ‘golden share’ of 33% of voting rights. 

The reasons against having a PPP are manifold. Using the sop of Black Economic Empowerment (BEE) to make the sell-off palatable to radical ANC factions, does not remove the state’s future liabilities. Several BEE projects have been mired in corruption. 

Devil in the detail

The devil of the partnership deal is in the detail, which has yet to be revealed. The state-owned Public Investment Corporation – itself investigated for alleged corruption last year – holds 30% shares in the Harith Group, one of the Takatso Consortium’s partners, along with Global Aviation.  

SAA is currently under “business rescue protection”, which saw 80% of staff laid off. The plan is to relaunch domestic and regional services in September and international services thereafter. 

A public offering down the line – to allow ordinary South Africans to invest in listed national assets – is dependent on the airline becoming profitable. How likely is this in an industry that has been clobbered by the pandemic and is projected to take some five years to get back to pre-Covid levels? 

There are also questions about the consortium’s ability to run an international airline as opposed to a local budget airline and charter service, which it has been operating. Injecting a mere $258m to relaunch SAA hardly matches the aspiration of a ‘world-class’ airline.

The PPP is far from being a done deal. Due diligence on almost every facet of SAA’s future operations and crucially, the future of its subsidiaries, Mango Airlines, SAA Technical and Air Chefs, has yet to be carried out. 

This begs the question: Why did Gordhan not opt for a continental troika tie-up with Ethiopian Airlines, and Kenya Airways, international carriers with proven credentials, both interested in SAA?

Has political accommodation once again got in the way of rational business?

Finance & Services

Rating agencies risk condemning Africa to penury

The economic downturn created by the Covid-19 pandemic, which begot Africa’s first recession in 25 years, also triggered an avalanche of sovereign credit rating downgrades across the region.

In one of the most dramatic moves on record, 18 of the 32 African countries rated by at least one of the ‘big three’ agencies (Fitch, Moody’s, and S&P) endured downgrades at the peak of the pandemic downturn in 2020, heightening uncertainty and potentially exacerbating the crisis. 

Several studies have shown that sovereigns that suffer such demotions are likely to experience a deterioration of their macroeconomic fundamentals and an increase in foreign currency borrowing costs.

This landslide of procyclical downgrades affected more than 56% of rated African countries, significantly above the global average of 31.8% as well as averages in other parts of the world (45.4% in the Americas, 28% in Asia, and 9.2% in Europe). 

The share of affected African nations is even higher (62.5%) if we extend the period covered to include the two countries downgraded in the first half of 2021. 

Further curtailing investor confidence, the glut of downgrades has been accompanied by a torrent of negative reviews of African countries’ ratings outlooks. Cumulatively, rating agencies revised downward the outlook of 17 nations, in four cases from positive to stable and in the remaining 13 from stable to negative.

Fallen angels

The significance of these large-scale procyclical moves goes far beyond the total number of downgrades. They have created cliff effects, with two of the very few African countries – Morocco and South Africa – that have enjoyed a relatively low sovereign risk premium losing their investment grade and becoming, in the vernacular of rating agencies, ‘fallen angels’.

For years, four nations in the region – Botswana, Mauritius, Morocco and South Africa – have enjoyed investment grade status. By downgrading the latter two to high-yield and junk status, the financial fallout of the Covid-19 downturn has been cataclysmic for Africa’s sovereign risk profile. The region will emerge from the pandemic with over 93% of its sovereigns rated as sub-investment grade borrowers.

These downgrades are underpinned by several factors, but two are especially relevant to Africa. The first is the institutional instinct of rating agencies to preserve their reputational capital. 

The second concerns perception premiums – the overinflated risk with which African sovereign and corporate entities have been perennially overburdened, irrespective of their improving economic fundamentals.

While the synchronised nature of the pandemic downturn offers an opportunity to scrutinise the extent to which perception premiums are shaping the distribution of sovereign risk across countries and regions, the disproportionately larger number of African countries affected by procyclical downgrades further supports the Africa premium hypothesis.

Impact on growth

Irrespective of the underlying causes, the bevy of downgrades will have significant implications for the region. By raising countries’ risk premiums and ringing investors’ risk-aversion bells, they could undermine access to the development financing that would support growth and the structural transformation of African economies. 

Higher premiums will raise the costs of borrowing on international capital markets, and getting the cold shoulder from investors will diminish demand for African public assets. Prevailing regulations either prohibit investors from holding sub-investment grade securities, or generally deter such investments by requiring that extra capital be held against those securities.

The spillover effects of the procyclical downgrades were strongly felt across Africa when the sharp tightening of financial conditions early in the Covid-19 crisis set the stage for sudden stops and reversals in capital flows in a ‘flight to quality’. 

Capital outflows from the region reached new highs, with South Africa particularly affected. It recorded net non-resident portfolio outflows (bonds and equities) exceeding $10.6bn (3.6% of GDP), and its 10-year bond yield rose by more than 100 basis points (from 8.24% to 9.27%) between January and September 2020.

Across Africa, the impact of the downgrades on countries’ ability to access financing were just as significant. A comparison based on a large sample of Eurobonds shows that the spreads of African sovereign issuers increased dramatically in the wake of the demotions. They rose sharply relative to the full JP Morgan EMBI averages, setting a record in June after escalating by over 1,000 basis points above US treasuries and more than 400 basis points above the all-grade EMBI composite index spread. 

Throughout the region, the short-term implications of the downgrades for borrowing costs on international capital markets are magnified by the predominantly junk status of African sovereign issuers. 

Most regional sovereigns were already sub-investment grade borrowers, paying higher coupons to attract investors. The downgrades will raise these costs, as yields are not only inversely proportional to credit rating scores, but are also more sensitive to rating changes within the sub-investment grade bracket.

Moody’s own research has shown that yields that are relatively insensitive to downgrading when the rating is above investment grade become very responsive even to small downgrades when the rating plunges below investment grade. 

Perhaps this helps to explain the large spreads logged across Africa last year, and validates policymakers’ concerns about the cliff effects associated with the demotions of Morocco and South Africa.

Long-lasting effects of downgrades

Besides their short-term implications for economic recovery, the negative spillovers of procyclical downgrades can persist long after crises have passed. These downgrades are not automatically reversed after recession and recovery from the trough of business cycles.

As the pandemic unfolded, Fitch, in a dramatic ‘multi-notch move’, downgraded Gabon’s sovereign rating to ‘CCC’ from ‘B’, largely on the grounds that falling oil prices would widen the country’s twin deficits and undermine the government’s capacity to honour commitments to external creditors.

Oil prices have since recovered, rising above pre-crisis levels and as the world braces for a post-pandemic commodity super-cycle. But an upgrade of Gabon’s sovereign credit rating seems far from imminent, with empirical evidence showing that it takes an average of seven years for a downgraded developing country to regain its previous rating.

Reflecting these challenges, early in the Covid-19 crisis the European Securities and Market Authority cautioned rating agencies against deepening the pandemic downturn through ‘quick-fire’ downgrades. The European Systemic Risk Board echoed these concerns, stressing the need for greater transparency and incorporating changes in economic fundamentals in credit rating models in a timely manner. 

With a view to reducing volatility, these groups also argued for a through-the-cycle approach to credit risk assessment, recognising that credit ratings are not expected to change frequently during business cycles.

Whether or not through-the-cycle approaches are fully integrated in existing credit rating models, the concerns raised by these regulators highlight the potential risks of procyclical downgrades to growth and financial stability. 

Across Africa, where private sources (bondholders and commercial banks) have become major providers of long-term development financing, the dangers of large-scale downgrades are even more acute.

Beyond exacerbating the crisis and compounding macroeconomic management challenges in the short term, procyclical downgrades have long-term consequences for economic development. 

They can undermine the process of structural transformation necessary to reduce the unhealthy correlation between commodity price cycles and growth, especially in a region where most countries   remain heavily commodity-dependent. 

Access to affordable long-term development financing will boost returns on investment and accelerate the diversification of sources of growth and trade. This, in turn, will broaden African countries’ fiscal space and set them on the path towards long-term fiscal and debt sustainability, both of which are credit-rating positive.

These factors, in addition to the unlikelihood of a rapid reversal (even in the face of better economic fundamentals) of rating demotions, should militate against hasty large-scale procyclical downgrades, even though rating agencies may rationalise such moves on the basis of self-preservation. 

Striking a balance

Finding the right balance, though perhaps less expedient, should be their objective. Ultimately, this will lead to a win-win engagement that accounts for increases in credit risk without undermining economic recovery or long-term development goals.

It is possible for rating agencies to preserve their reputational capital without jeopardising the growth prospects of sovereigns aspiring to global standards of macroeconomic and corporate governance. Across Africa, striking that balance will enable countries to escape the destructive twins – the high costs of development financing and commodity-dependency traps – and ease the process of global income convergence.

Hippolyte Fofack is the Chief Economist & Director of Research and International Co-operation at the African Export-Import Bank.