Zambia shows how the West must lend like China, says Mark Mobius
Zambia’s default shows that Western lending to Africa needs to become more like that of China, veteran emerging markets investor Mark Mobius tells The Africa Report.
Western loans need to stop being used to support government bureaucracies. Instead, lenders need to focus on roads, bridges, power infrastructure and expanding Internet access, Mobius says from Dubai: “People survive in the informal market and we need to support them with infrastructure. These are the things that help the small guys do business.”
Western lenders say they can’t tell if Zambia is treating them the same as Chinese lenders. A committee representing holders of 40% of Zambia’s Eurobonds says that the transparency that would allow them to consider debt relief request is lacking and that there has no direct engagement with the government.
China, Mobius says, lends for specific projects such as roads and then brings in the personnel needed to build it. The approach has been “very effective” in terms of building infrastructure.
Western countries could do this, sending staff and employing them alongside local workers, says Mobius: “That’s the reality – that’s the kind of implementation that’s needed.”
Beijing’s loans to Zambia probably have “quite lenient” terms which allow China to simply take control of an asset if necessary, says Mobius.
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He sees no great danger of a contagion effect in Africa from the default: “Lenders are pretty sophisticated” and will be able to discriminate between different degrees of risk. In private-sector lending markets, he adds, “defaults happen every day.”
Sovereign defaults, of course, are different. Mobius sees the possibility of a positive upshot if the IMF becomes less tolerant of a lack of Zambian reform. They now have a chance to “impose some conditionality”, which could help to reduce corruption, he says.
Welcome to deflation
Mobius’s new book, The Inflation Myth and the Wonderful World of Deflation, was published by Wiley in November. The book’s main argument is that technological progress has made the concept of inflation obsolete. Prices may officially go up, but that just reflects outdated baskets of goods that people no longer buy.
In the real world, Mobius argues, technology means that we are able to transmit and store information at speeds and quantities without parallel in history. The argument, and the book, concerns economics rather than Africa specifically. But, Mobius adds, Africa stands to be a major beneficiary of the shift to a deflationary world.
Technological progress in Africa has the potential to increase the value of services much more than for already affluent people in the US or Europe. Wider Internet and mobile phone penetration mean that farmers in Africa now have access to much more information and potential markets, says Mobius.
The opportunity exists for Africa to “leapfrog” the West in technological terms.
Mobius made his name as a perpetually optimistic investor in emerging markets. He spent 30 years at Templeton Emerging Markets. In 2018, he started Mobius Capital Partners with former Templeton colleagues Carlos von Hardenberg and Greg Konieczny. Aged 84, he swims every day in Dubai while waiting for the chance to travel back to Singapore.
Even South Africa’s economic woes are not enough to blunt his professional optimism. In November, Fitch and Moody’s cut South Africa further below junk. Moody’s now has South Africa two notches below investment grade, while Fitch’s rating is three levels below. Both have negative outlooks on the country.
President Cyril Ramaphosa is facing “terrific resistance to reform” from people who “don’t want to give up their cushy jobs”, says Mobius. Yet the country benefits from “relatively good” infrastructure. “With relatively small changes, they could turn this around. It’s never too late.”
- Scaling back Eskom and letting people generate their own power would solve one major problem, he argues.
- Privatizing South African Airways would solve another.
- State-owned enterprises, he says, are “an incredible drain on the government budget. They must be reformed in the national interest. That realisation, he says, is dawning on the ANC hierarchy.
- It’s “quite possible”, he adds, that the rand will appreciate if the right reforms are made.
Overall, Mobius says he’s “very positive on Africa,” where Mobius Capital Partners (MCP) has continued to invest during COVID-19.
He’s encouraged by Africa’s free-trade agreement and a young population which has the potential to become highly productive. Free trade, he says, will make a pan African market that is attractive to global capital, and give an impetus for economic reforms.
The Mobius Emerging Market Fund’s largest African holdings are Clicks Group in South Africa, with 4.2% of the portfolio, and Safaricom in Kenya, with 3.9%.
A constraint on investment, he says, is lack of market liquidity. MCP only invests in publicly traded companies, but Mobius expects that more IPOs will in time create more opportunities. The fund continues to look for more investments in South Africa and Kenya. Technology, retail, healthcare and education will be the priority sectors.
Western lenders will need to learn to play the Chinese game to benefit fully from Africa’s economic recovery.