Battle of Belief: African Bulls

By Francis Beddington in London

Posted on Monday, 23 November 2009 13:48

There are conflicting views on

the effect of the credit crunch on Africa.Francis Beddington of

Insparo Capital makes the case for the optimists

There have been many apocalyptic statements about the impact of the global credit crisis on Africa, especially from the aid lobby, interested parties and ageing rockstars, usually followed by pleas for significant increases in aid. Good news does not sell newspapers or raise aid budgets. As President Barack Obama’s chief of staff, Rahm Emmanuel, is reported to have said, “A crisis is a terrible thing to waste.” The aid lobby can certainly not be accused of wasting this crisis. If it results in greater aid flows to Africa, then maybe we should not begrudge it too much.

Exaggerating the damage does ?Africa a disservice, though, in perpetuating the image of the continent as a passive victim of global events. This idea is not supported by hard evidence.

In truth, the majority of African economies have held up very well in the crisis. Growth in 2009 has sustained itself and the prospects for 2010 look healthy. The exception is South Africa, a highly globalised economy where international trade in goods and services was equivalent to 75% of GDP in 2008. In many ways the global economic crisis could have been designed to damage South Africa: it has a large and mature commodity sector able to make a rapid output adjustment with the consequent impact on growth; employment and fiscal revenues; a substantial automobile industry accounting for around 10% of total manufacturing and aimed predominantly at export markets; a large high-end tourism sector and a large financial services industry.

South Africa even managed to have its own housing boom with the main house-price index up 100% in the last five years and a positively exuberant 400% in the last decade. Outside the US housing sector it would be harder to pick four sectors that have been harder hit by the global economic crisis and, unsurprisingly, economic growth has collapsed in South Africa, with real GDP growth forecast at -2.2% in 2009.?

South Africa is an atypical African economy, being much more developed and integrated into the global economy. The South African economy and financial markets are significantly correlated with the global economy and other large emerging markets like Turkey, Brazil and Russia. This is not the case for the rest of Africa, which is relatively isolated from the global economy.

Outside of South Africa however, the news is much better. One of the key reasons that much of Africa is not suffering as much as people expected is that to get a credit hangover, you need to have been drinking to excess. Africa had barely got its coat off at that particular party before the police raided and closed everything down. Capital flows to Africa started in earnest only in 2006 and this was only to a few selected countries and sectors: Ghana and Gabon tapped the Eurobond market, two Nigerian banks issued Eurobonds and a few listed global-depository receipts. Nigeria and Egypt became popular carry trades (currency investments), there were flows into other local fixed-income and equity markets but, with the possible exception of Zambia, none had a macroeconomic significance.

The crisis came early enough to prevent Africa over leveraging and committing what former IMF chief economist Kenneth Rogoff called the “original sin” of unhedged offshore borrowing. I can only think of one deal in Africa that could be classified as “AAA subprime CDO squared” and that would be the Seychelles Eurobond. At approximately 40% of GDP, it always looked an imprudent transaction (which was followed up by a private placement) and so it transpired. Unfortunately, the Seychelles is suffering from a credit hangover, has defaulted on its obligations and is negotiating with its commercial creditors.

In general, Africa avoided bingeing on credit during the boom times, as much of the decade was focused on rebuilding balance sheets. It has thus avoided the wholesale collapse in demand seen elsewhere. Improved government balance sheets and better economic policy environments allowed a number of countries – such as Nigeria, Kenya, South Africa, Botswana, Angola, Algeria and Egypt – to undertake countercyclical fiscal and monetary policy to ease the impact of the crisis.

Focus on the fundamentals

Africa therefore enters the economic recovery with better fundamentals, including lower debt, lower inflation and an improved fiscal situation in many regions. It is well placed to benefit from a sustained global recovery and has also kept many of the benefits such as deeper financial markets, especially domestic government debt-yield curves and pension reforms.

These local capital markets continue to develop rapidly. In October, Kengen, Kenya’s state electricity authority, issued a KSh25bn ($330m) bond, and Safaricom issued a KSh5bn bond, both 7-year and both of which were significantly oversubscribed. Corporate bond issues are expected in Nigeria and Egypt in the coming months. Even African equity markets have shown some signs of life, with initial public offerings in Namibia, Burkina Faso, Nigeria, Tanzania and Tunisia in 2009 and a healthy pipeline of deals for 2010. Africa remains one of the few regions of the world where financial innovation is not a dirty word.

Bulls versus bears

The latest IMF forecasts released in the October World Economic Outlook predict that growth for 2009 will be only 1.7% for Africa as a whole and 1.3% for Sub-Saharan Africa, rising to 4.0% and 4.1%, respectively, in 2010. These numbers look excessively pessimistic, especially given some of the quarterly GDP numbers that have already been released. The IMF does not include Egypt in Africa, but at Insparo we do and have included it in our analysis.

The forecasts look particularly weak in Nigeria and Egypt (25% of Africa’s GDP) where quarterly data is showing much faster growth. Nigeria posted rates of 5.2% year-on-year in the first quarter and reported real GDP growth of 7.6% year-on-year in the third quarter of 2009, up from 7.2% in the second. In a similar ?fashion, Egypt recorded 4.5% year-on-year growth in the second quarter of 2009. The IMF’s forecasts also look on the low side in Kenya, ?Angola and Zambia.

The decent economic performance continues to offer interesting investment opportunities as Africa’s middle classes expand. Three sectors offer attractive investment opportunities: telecommunications; banking, especially retail banking; and real estate. In telecommunications, mobile usage continues to rise. To quote the Chairman of MTN: “Whether you are in Sweden or you are in Swaziland or Rwanda, the mobile phone has become almost an essential service.”

In addition, the sector is throwing up new business models in mobile banking, providing huge opportunities for revenue growth. M-pesa in Kenya had 7m users as of September and person-to-person transfers were $302m. Liberalisation of the banking sectors and the growth of micro and payroll lenders have meant that mortgages and consumer finance are now available to a much broader section of the population than ever before. Access to credit and mortgages is stimulating demand for low- and middle-income housing from Lagos to Lusaka and Cairo to the Cape.

Without the drag of ?deleveraging that is impacting (and will continue to impact) other regions, African growth is likely to return to trend faster. Even the IMF’s ultra-cautious forecasts have growth accelerating rapidly in 2010. We recently conducted a market survey of the major banks with interest in and research departments covering Africa. Looking across the 20 largest African economies, market consensus is more bullish for both 2009 and 2010.

The world is massively underestimating economic growth in Africa and when the numbers are finally counted the outcome for 2009 will probably be only marginally less than the 5.2% recorded in 2008.

In 2010, as world growth starts to accelerate, we expect African GDP growth to be in the range of 6-7%, with a few key countries like Nigeria, Egypt, Zimbabwe and Angola pushing double-digit growth rates. It is a bit of a cliché, but not investing in Africa is like missing out on Japan and Germany in the 1950s, South-East Asia in the 1980s and emerging markets in the 1990s.

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