Africa is a glimmer of hope in global doom

Peter Guest of The Financial Times

As expected, the International Monetary Fund’s global outlook report reinforced the increasingly prevalent perception that stagnation, rather than growth, is to be the predominant theme for world markets in 2009.
However, amid the gloom there remain some glimmers of hope, among them the forecast that sub-Saharan Africa will experience growth of over 6 per cent.

For many this seems counter-intuitive, given the slide in the commodity prices that have fuelled the growth in foreign direct investment into Africa’s extractive industries. However, As Roelof Horne, portfolio manager at Investec Asset Management, points out, Africa’s outgrowth of world markets predates the start of the commodity bull cycle in 2004 by three years – the continent’s extractive industries have benefited from the commodity cycle, but its economies are not totally dependent on it.

“Africa is in a secular growth phase. It is different from anything we’ve seen in post-colonial Africa,” he explains. This can partly be attributed to an improvement in macroeconomic management on the continent, which in turn stems from an unprecedented level of peace and democracy, Mr Horne believes. “This may sound like motherhood and apple pie stuff, but it is actually true,” he says. While civil conflict remains a reality in parts of the continent this is hugely diminished from just a decade ago.

“What we tend to forget is that in the second half of the 1980s, as recently as 20 years ago, only 12 per cent of the countries in Africa had democracies,” says Mr Horne. Today it is about 92 per cent. It may not be working in all the 92 per cent, he acknowledges. “It’s probably closer to about 74 per cent, but certainly it’s a far cry from the 12 per cent we had in 1988.”

The spread of democracy has translated into a greater degree of accountability and transparency in countries’ economic leadership. “Over the past few years we’ve seen a focus on service delivery, on infrastructure improvements, on better macroeconomic management, more transparency. All of these things are coming together, and I think that underlies the secular growth that we’ve seen in Africa,” Mr Horne says. His optimism is typical of that exhibited by many experienced investors in Africa and remains largely unaffected by the crisis overshadowing other emerging markets.

There are a number of countries that have significant incomes from the export of natural resources and some, such as Zambia, do appear fragile in the face of sliding commodities prices. Others, such as Kenya and Nigeria, have suffered due to their integration into world markets. Nigeria has no doubt benefited from the recent high oil price regime. It took a lead from the Middle Eastern oil economies and budgeted for a $56 per barrel environment, banking the surplus to the tune of $60bn in foreign exchange reserves. How and when this war chest will be used is not yet clear, but for investors it adds a reassuring resilience to the Nigerian economy.

Nigeria’s stock market has, like other global markets, seen a shortage of liquidity in recent weeks, imposing restrictions on the movement of stocks that were only eased on October 28. A continued lack of liquidity does impose barriers on trading into some of the opportunities in the country, admits New Star Asset Management’s Jamie Allsopp, who oversees the firm’s Heart of Africa fund. However, at current prices, many of Nigeria’s big names look like good value. Mr Allsopp’s biggest holding is in UAC Nigeria, a diversified group whose products include Gala sausage rolls, a ubiquitous snack on the streets of Lagos.

Valuable brands such as Gala, or another of Mr Allsopp’s portfolio companies, Dangote Sugars, play into the developing disposable income of African consumers and could tap into the GDP growth on the continent.

Telecommunications businesses such as Celtel Zambia, MTN and Safaricom, and breweries, such as Phoenix in Mauritius, are also attractive.

“These are really great, high quality companies. They are consumer staples, they have very little debt on their balance sheets and they are benefiting from the generation of wealth in the sub-Saharan region,” Mr Allsopp says.

Businesses with so little leverage and with access to growing consumer markets are likely to be a rare and prized commodity in 2009.

Peter Guest is editor of This is Africa, a Financial Times publication
Copyright The Financial Times Limited 2008

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