An African renaissance

An African renaissance
While western banks and financial institutions recoil in the aftermath of the global financial crisis, institutions from emerging markets are
scouring places like Africa for yield. Renaissance Capital, which was recently acquired by one of Russia's largest private investment funds, has
been active in Russia, the CIS, Central and Eastern Europe and Africa looking for high-risk, high-reward opportunities.
Charles Robertson, Renaissance's global chief economist and head of macro strategy, is the lead co-author of the book The Fastest Billion, published in October
2012 by Renaissance Capital. The book charts Africa's rise as an economic growth engine, and where the opportunities lie.
In an emailed interview with alfiarabia.com, Mr. Robertson explains how to play the risky, but rewarding African continent:
Q: How much has Renaissance Capital invested in Africa, and where do you see the greatest opportunities (which sectors and which countries)?
Charles Robertson: Renaissance Capital began investment banking operations in Africa in 2006. With offices across Africa, and over USD5-billion in
capital-raising and financial advisory transactions, Renaissance has established itself as the international investment firm with the strongest local presence on the
African continent.
For investors who are happy to invest for 5-7 years and not think about the investment again until 2020 - then private equity is the obvious option. However, for
investors who would like the opportunity to exit an investment, then the country choices are more limited.
For equity investors, looking at Africa as a whole, the biggest market is the domestic South African market, which is well established, bigger in the MSCI than
Russia, and where some stocks offer exposure to the Africa theme.
Domestic pension funds are massive, equivalent to 60% of GDP, and keep the market supported.
Next largest is Egypt, but there is obvious political risk - our analysis suggests there are strong similarities with Turkey in the mid-1970s (based on per capita
GDP, in PPP constant 2005 dollars).
The large budget deficit and public debt ratios are additional concerns. After that comes Nigeria - the largest population in Africa - with 170 million, strong
growth for over a decade, a very well regarded economics team (the central bank governor has won numerous awards for best central bank governor), an excellent
finance minister (who was a contender to take over the World Bank), and others from agriculture to trade and industry.
Public debt ratios are around 10% of GDP, the budget deficit is small and there is a current account deficit. With the largest equity market by far in SSA
(sub-Saharan Africa), this is an obvious country to invest in. Kenya too is interesting, but far smaller. Beyond these two, Zimbabwe (with political risk) and Ghana
(illiquid) are interesting.
Another option is debt securities. Dollar debt yields have now plunged. Nigeria 2021 Eurobonds yield just 3.7% in dollars. More interesting is the NGN local
currency debt in Nigeria, at around 12% yields, and with sometimes similar in Kenya.
Q: How would you advise Middle East funds to invest in Africa - where can they add value? Do you think ME interest would be limited to investing
in agriculture lands and oil assets?
CR: The big themes from growth include banking and consumer stocks, as well as mining and oil assets which are more exposed to the global story.
Agriculture assets are more rare - though companies like Zambeef do exist. Telecoms also have expanded considerably and as more services like banking migrate
to the mobile phone, this may be another way to play the consumer story. Access to real estate should also be interesting.
Q Your book appears to be very bullish on the continent, but where do you see the challenges? What could go wrong that would curtail
investments in Africa?
CR: Politics is always a risk. There has been a significant political shift in Africa. From just a very few democracies in 1990, now there are over 30 countries
counted as democracies by Freedom House or the Polity IV database.
But democracies at this income level are fragile (see Mali), and there is a less than 10% chance each that the poorest democracies become autocracies again.
This is more likely when incomes are falling - so a combination of a commodity price plunge, and a coup, and poor policy choices by incoming leaders - could
derail the story. However, we struggle to find risk-free investments anywhere in the world when central banks inject so much liquidity - we just believe you get a
better risk-adjusted return in Africa.
Q: Which countries in your opinion offer the greatest promise and why?
CR: Nearly the whole continent is showing improvement, which has been helped by responsible fiscal policies - debt levels have fallen to around 35% of GDP in SSA
while G-7 debt has risen to 120% of GDP.
Leading officials are better qualified than ever. The positive example set by Asian, Latin American and Emerging European countries provide an ever larger
template of "best policy" choices to follow. Georgia's success in being one of the top 10 countries in the world in the Ease of Doing Business survey by the World
Bank has directly influenced Rwanda, which became the first SSA country to ever top the list of most improved country (in the 2010 survey). Ghana and Rwanda are
both very interesting but it is Nigeria which investors will find easiest to access.
Q: A major issue in Africa is skilled, educated labour. Do you think African states are addressing the issues adequately - what more needs to be done to address
education and training?
CR: The improvement in education is a crucial reason - perhaps THE crucial reason - why Africa now has the billion people who have experienced the fastest
growth the continent has ever seen.
The number of SSA secondary school age children getting an education has trebled from under 9% in 1975 to around 30% in 2005. That sounds low - but it is the
same figure that Mexico and Turkey achieved in 1975, just ahead of their industrialization in the 1980s, leading both into the OECD and giving both full emerging
market status by the 1990s. Back in the 1970s, Africa attracted no foreign direct investment (less than 1% of GDP annually).
Today Africa gets 2-4% of GDP annually. This is helping bring skills to the workforce. Continued investment in education is reaping benefits and while more needs
to be done, education is now at levels sufficient to double GDP every decade.
Q Corruption and lack of legal and business frameworks is another key issue facing foreign investors in Africa? Do you believe states are
addressing these issues sincerely?
CR: Corruption is normal in poor countries. In rich countries, whether they are strong monarchies as in the Gulf, or western democracies, the corruption
perceptions index gives a much better score than in any poor country. As countries get richer, corruption falls.
The best way to reduce corruption is to invest in poor countries and help drive growth at a faster pace. Some countries have better corruption indicators than their
per capita GDP levels imply they should - Africa is fortunate in having many more countries that outperform on this index, than underperform.
The underperformers include Libya, Angola and some other (mainly) oil producing nations. Nigeria has improved its rating significantly in the past 10 years - in
fact, it is the third best improver from 2001 to 2011 - and has a "normal" level of corruption.
The outperformers include countries like Rwanda and Botswana, where corruption is less than it "should" be. A number of governments are making reforms that
improve the Ease of Doing Business - here we have to praise the World Bank for introducing a survey which enables us to show this progress. Rwanda - as noted
above - is best.
Q: You singled out healthcare as an investment opportunity for investors in your introduction - what are the other areas that are ripe for the
picking?
CR: Investment in infrastructure is obviously needed, and is normal at this stage of development (after a ten-year boom). The electricity sector needs to be
improved, and privatization in Nigeria is happening which will enable that to happen. With better electricity provision, countries can start to invest in manufacturing.
© alifarabia.com 2013