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Creating Africa’s Temasek in Djibouti

Djibouti has often punched above its weight. This small country, in terms of landmass and population, is today one of the most sophisticated logistics hubs in Africa. Strategically located in the Red Sea, it is effectively a shipping gateway into Ethiopia, a country with a population of 120m inhabitants. 

But the country’s ambitions are much larger. The route from Asia up the Red Sea and through the Suez Canal accounts for 30% of the world’s shipping activity. As such, Djibouti does not only want to service the east coast of Africa but also serve as an important hub for transhipments and other shipping activities along this route. 

A view of Djibouti harbour. (Photo: Daphné BENOIT / AFP)

At the heart of its longer-term strategy is rapid economic diversification to become a leader in telecoms, finance, tourism, as well as develop new sectors such as renewables, sustainable natural resources and fintech.

Often preferring to take a long-term approach when it comes to positioning the country, the leadership in Djibouti has always been canny and strategic, not least in how it has managed to play its cards to simultaneously host the military bases of both America and China, two of the world’s superpowers. With other bases also present in Djibouti, the country makes a considerable amount of income from hosting these different powers, as well as the economic activity this generates.

The person hired to run the recently established Djibouti Sovereign Fund (Fonds Souverain de Djibouti – FSD) is Dr Slim Feriani, a Tunisian national based in London. He has over 25 years’ experience in international capital markets and recently served as a minister in his home country of Tunisia where he led two portfolios, those of industry and SMEs, as well as energy, mining and renewable energy.

The fund is expected to help improve governance and catalyse greenfield investments in strategic sectors of the economy, such as sustainable natural resources and energy, telco and digital infrastructure, financial services, general infrastructure, technology, tourism, healthcare and education. “This is a key part of the plan for economic diversification. Djibouti is not resource-dependent,” says Feriani.

‘A hidden gem’

Explaining the structure of the fund, Feriani says the government has placed its shares in three state-owned enterprises under its management. One of these is Djibouti Telecom and Feriani expects by the end of this year that up to 40% of its shareholding will be acquired by an international strategic partner.

Demonstrating the scope of the telecom group, in which FSD currently has 100% ownership, he points to a map which indicates the eight undersea cables passing through Djibouti and the potential in terms of the country acting as a connectivity hub for Africa, as well as a conduit between East and West – not to mention for data centres, call centres and more. 

“Djibouti Telecom, like Djibouti, is a hidden gem. Hidden gems, once you polish them, they shine and rise. With its location and subsea cables, Djibouti Telecom should be a key player in interconnectivity within Africa and then, from Africa and to the rest of the world.”

Besides the dividends from its underlying portfolio companies, recurring cashflow for the FSD includes 20% of the annual rent that the different military bases are paying the government of Djibouti. 

Finally, as per the FSD law enacted in 2020, its mandate also includes managing 60% of the reserves of the CNSS, the state social security fund. Historically, the CNSS portfolio has been invested in term deposits in the local banking sector. The objective is to diversify some of the CNSS funds into different asset classes. 

He cites other successful funds such as those of Chile or Australia’s superannuation fund as well as highly successful US university funds such as those of Harvard or Yale as examples to follow. Right
now though the risk appetite will be measured. “We have to be conservative and prudent. We’ll take measured risk to generate decent dollar returns, starting with a  selective international fixed income, real estate and the usual asset classes you identify with pension funds.”

Inspired by Singapore success story

The inspiration for the FSD has been Singapore’s Temasek. “In many ways, our fund resembles Temasek, the Singaporean sovereign wealth fund, one of the most established funds in the world today,” he says. 

The two countries are similar – both are small yet at the heart of large and dynamic regions, even though Djibouti is 30 times the size of Singapore in terms of its landmass and is a coastal country rather than an island.

“Singapore started Temasek with Singtel, Singapore’s telecom company, roughly 45 years ago. They didn’t have much in terms of oil revenues or any other resource. FSD has been set up with what I feel are the jewels of the country: Djibouti Telecom is the national champion of telecoms, 100% in our portfolio now. 

“We also have 40% of the national holding company, Great Horn Investment Holding (GHIH). GHIH owns 27 companies. It accounts for a significant part of the economy because it has all the ports and free zones infrastructure and a number of important businesses, such as Air Djibouti. The third portfolio holding, as per the FSD law, is Electricité de Djibouti, the national champion in terms of energy. These three businesses, in terms of historical book value, are worth over $1bn already. 

“By the end of this year as Djibouti Telecom goes through the process of opening its capital, we expect that up to 40% of its shareholding will be acquired by an international strategic partner, creating synergies for further operational excellence and market expansion.”

A market scene in Djibouti. (Photo: PEDRO UGARTE / AFP)

Investment strategy

FSD, according to Feriani, will start by investing in Djibouti itself, followed by projects that enhance regional integration, before looking at diversifying its assets internationally – although that is in the medium to long-term ambitions of the fund. “We can’t talk of building an Africa we want, by Africans for Africans,” he argues, “if we ourselves don’t first lead with the investments. But the fund will be run with a diversified portfolio – by asset classes, by sectors and by geographies.”

Feriani says that ticket sizes of the investments will vary depending on the industry and the complexity. The port infrastructure for example involves multi-billion projects over different phases. Creating a hub for data centres, on the other hand, will involve smaller equity investments in the millions of dollars.

The fund will be a minority investor with up to a 25% stake in future greenfield projects as the objective is to encourage PPPs where the national and international private sector becomes the key engine of economic growth and job creation.

A week after our interview, it was reported that Meridiam, an important France-based investor with $18bn in assets under management, was in Djibouti to scope potential investment opportunities, including as co-investors with FSD. One venture where Feriani sees an opportunity is an ongoing industrial park project called Damerjog Industrial Park.

Djibouti’s assets 

Feriani is keen to emphasise that one of Djibouti’s main assets is its peaceful people and its stability. A key point of note to investors, Feriani adds, is the stability of its currency, which has been roughly 178 to the dollar for the last 20 years or so. Hence, unlike many emerging markets there is no foreign exchange risk to worry about for investors.

“This region,” he adds, “is replete with success stories of smaller nation states playing an outsize role in terms of economic influence. Dubai is the obvious example, but Qatar was a small country with a population of 300,000 – today it’s 3m people, of which 90% are expats.” 

Djibouti is no exception, he stresses. “Even I was surprised by the size of the opportunity – although I have been investing in nearly 100 countries throughout my career.” 

The government is looking at investments of €12bn as part of its national development plan 2020-2024, with annual growth expected to be around 8.5% by 2025. This is within the framework of the Djibouti 2035 vision and the medium-term focus on inclusion, connectivity and institutions, explains Feriani.

Part of his remit will be to help attract global investors to co-invest in FSD. His job, as much as anything, will be to originate opportunities for investors and he anticipates that international roadshows will showcase some of the opportunities. “Part of our job is to make sure we are a source of ideas; and bringing in international co-investors is a crucial part of our work.”

He then mentions the natural resources sector, an area he is familiar with from his time as a minister in Tunisia. “It’s still early stages, but Lake Assal, which is 150m beneath sea level, has not been mined at all and studies point to a potential of riches.”

Question of timing

Given that he will be investing for future generations, isn’t it a bit risky to be betting on Djibouti first? Feriani disagrees: “It’s a question of timing and priorities in the short term. It has to be Djibouti first, that’s the right thing and we’re talking about major investments and diversifying the economy. We are trying to invest in several sectors, really diversifying and reducing the risk of the Djibouti economy being over-reliant on one sector – the ports business. But our mandate allows us to invest up to 60% of our assets outside of Djibouti.”

Djibouti has built a competitive advantage in logistics as the hub servicing Ethiopia. Roughly 90% of Ethiopian trade goes through the country, which means that the country is exposed one way or another to Ethiopia’s economy. I ask him whether the current conflict in the country has dampened prospects. 

He says the combination of Covid-19 and the Ethiopian crisis has impacted on Djibouti’s growth numbers although these have since picked up. The fact that many primary goods get through has reduced the impact of these two factors and the prospects are looking good. 

“We have a vested interest as a neighbouring country and as a brotherly country to see things settled. Ethiopia was consistently one of the fastest-growing economies in the world. We benefit from them continuing to develop their country.” 

However, he points out that the ports activities are also being diversified in their nature. “As we speak [in February] it has been announced that OCP [the Moroccan giant in phosphate] have struck a deal to transport major quantities of phosphates through our ports to take them to Ethiopia [as part of a massive fertiliser plant project]. And there’s still so much more we can do and in terms of what can be done.” 

Feriani has been in the job for a little over six months and says he could not be more enthused with the opportunities that he’s discovering with each
conversation. He values highly the clear political will  in Djibouti to get things done and succeed.

It seems to be a match made in heaven given that the position involves working strategically with policy makers whilst putting a compelling investment case to crowd in private sector players, which is an area where he is very comfortable. It was as a fund manager and investor in emerging markets that he made his name. He feels that it’s this unique combination of public service and private sector experience that made his candidacy a successful one. 

“They [the government] hired one of the top executive recruitment firms for this position and from the interviews I think they were looking for someone with not just investment experience who understands finance, but someone who could lead and be aligned to their national development plan.” He praises his board and especially the national President Ismaïl Omar Guelleh, who he describes as a visionary. 

Demonstrating impact

But Feriani knows that he will need to deliver some quick wins to show the impact the fund can have and to validate the rhetoric. “The future is very exciting and we will be investing for the long term but the short term is important too. Our view is we need to make things tangible already because people want to see things changing. There will be some investments realised this year.” 

One of the first projects he’ll be launching will be a crowdfunding platform to help startups and SMEs – something he initiated successfully in Tunisia. He is also working on starting the first leasing company. These greenfield projects are in line with the country’s strategic focus on financial inclusion and diversifying access to finance, Feriani adds. Another investment that should bear fruit this year is in data centres, in parallel with the Djibouti Telecom transaction. 

We had been speaking for over an hour and Feriani was still bursting with excitement at the opportunities that are ready for investment. A few minutes after the interview ended, Feriani sent me a WhatsApp message with photos of turquoise sea, beaches and sunsets.

“In case you didn’t believe me that tourism is another hidden gem; see the few pics from our last holidays here with the family. Whale sharks, coral reefs, amazing beaches.” Coming from Tunisia, he should know!

Djibouti’s sovereign wealth fund is in very good hands. Plenty more exciting developments to look forward to from this small nation with an explosive punch.