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Africa has been a more attractive destination for tourists than for investors |
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The tarnished leaders of sub-Saharan Africa face huge challenges in marketing the region’s potential to international investors. But, apart from Robert Mugabe, who local bankers blame for discrediting the entire region, they are at least trying to persuade the world that Africa has changed.
Some are more convincing than others.
“Botswana is one of the unsung heroes at the moment,” says Jollian Irwin, a stockbroker based in Namibia. “It just gets on quietly and does the right thing.” An analyst based in South Africa agrees: “Botswana is a little gem. It’s small, but the macroeconomic numbers are great and it’s run very efficiently.”
Judging from the number of BMWs and Mercedes-Benzes on the newly tarred roads in Gabarone, Botswana’s capital, no one has told the locals that there is a crisis of confidence in the region. The new buildings springing up around the city are further proof that Botswana is thriving and bucking the trend.
In contrast, a country such as Sudan is “the skull and cross-bones of investment”, as Christopher Wheeler, Standard Chartered Bank’s regional head for Africa, puts it. “You won’t find very much activity or new investment going in there. It’s a no-mans land at the moment.”
“Sudan?” smiles Aboudi Najia a salesman covering the Middle East, North Africa and Turkey for Nomura International. “It’s very exotic.” The problem is, he adds dryly, “half the people wouldn’t know where it is and the other half wouldn’t know what the capital is.”
Sudan obviously has its work cut out charming international investors to divert funds into Khartoum. Just as the government starts making noises about its intentions to enter the international financial community, it bombs UN airstrips in the south of the country. It’s obvious which story will make the headlines.
Africa, in particular sub-Saharan Africa, has had yet another difficult year. Images of war, drought and floods come easily to mind. The phrase economic and political stability wouldn’t normally be associated with the continent’s southern half. It would appear to be the last place that any investor would want to place his or her money.
“It often amazes me the perception Europeans and Americans have of this place,” says Philip Mabon, executive director of operations in Botswana for Stanbic of South Africa. Twenty years of working in the area have done little to soften his Scottish brogue. “If something happens in Zimbabwe, then people say that’s Africa, typical Africa. They don’t say that’s Zimbabwe, typical Zimbabwe. There are a lot of good things happening in Africa that get swept under the carpet because of people like Robert Mugabe.”
It’s a sentiment shared by many bankers and analysts associated with the continent and its markets. Ayo Salami, Nomura International’s emerging-markets equity analyst, picks up the theme: “If a country is having problems then its neighbours are seen as having problems.
People use the regular news services and a lot of what you would be picking up is not exactly positive. Generally when Africa is in the news the African risk premium is raised.” This in turn, he says, has meant most investors turning their back on what could be a very lucrative place to invest.
Salami emphasizes that the macroeconomic figures reveal that sub-Saharan Africa has a far more positive story to tell. Over the past 10 years economies generally have improved.
Botswana, Ghana, Tanzania and Zambia will have some of the fastest-growing economies in the world in the next few years, with rates expected to push through 5%.
Salami points out that the governments of Mozambique, Ghana, Botswana, and Nigeria, among others, are now convinced that liberal economic policies are the way forward and that they recognize the need to replace the antiquated concepts of African socialism. “These countries,” he says, “have made key economic-management decisions and are actively promoting private industry, encouraging private-sector growth, liberalizing markets and trade by removing exchange controls and ending price controls while governments have been attempting to improve their fiscal management.”
However, he adds, investors don’t see the changes. “The problem is that investors see the same guys in charge. For example, even Mugabe grudgingly introduced some macroeconomic reform but investors just see Mugabe, which detracts from what is actually happening. The perception of these leaders has not and will not change.”
But what about the risk?
Standard Chartered Bank, Citibank, Stanbic, Morgan Stanley Dean Witter – through its African Investment Fund – and the fund manager Alliance Capital are among the few who have invested heavily in the region. All say they are committed to Africa for the long term.
Citibank continues to expand its network – new operations in Cameroon and Uganda mean it is the only bank to have a network covering all regions. Standard Chartered Bank is refurbishing all its branches to international standards and is upgrading the bank’s technology.
“In terms of returns on capital we do better in Africa than anywhere else,” says Standard Chartered’s Wheeler. “And in terms of returns on investment we make more money in Africa than anywhere else in the group.” Standard Chartered and its 1999 £100 million profit is testament to the potential investment opportunities in Africa. Paul Starling, vice-president of trade finance at KBC, the Belgium-based investment bank, agrees: “It’s KBC’s largest income earner. Last year we made 43% of the group’s total income.”
In the words of Wheeler and Starling the returns from the misunderstood continent are “phenomenal” and “staggering”.
Rocco Rouseau, managing director of Stanbic Africa, says the reason for the lack of international investment in the region is “because it’s tough. Africa sets unique challenges, the environment in which we function is perceived to be corrupt, the financial sectors are seen as badly regulated.
You have to understand Africa, which we do, and we are not put off by the African challenge. There are opportunities but you have to be courageous.”
Courage is definitely called for when operating in some countries. Standard Chartered in Sierra Leone is a good example. It is the only international bank there and adds positively to the group’s bottom line.
“We make money because of the risk,” explains Wheeler – that’s risk with a capital R, “We used to have 13 branches, now we’ve only one left. Twelve have been bombed and shot to pieces and are of no use to anyone, but that’s the cost we’ve taken on board. We’re still on the ground. With a quick lick of paint, people put money with us and we make a profit.”
African markets
In Mozambique one initiative is the introduction of mobile banking. A mobile-cabin branch is set up in a district and if the area proves to be unsuccessful, the bank is towed to another location where funds and deposits may be more forthcoming. However as one banking wit points out: “It’s a great idea and gives the bank flexibility but what about the customer? He wakes up one day to find his bank has upped sticks and he suddenly has to walk fifty miles down the road to make a withdrawal.”
There are now 19 bourses across the continent compared with only seven in 1989. But in 2000 they have not been able to escape Afro-pessimism. The Johannesburg stock market has fallen 27%; Zimbabwe’s is 20% lower and continuing its downward spiral; Ghana’s has shrunk by 16.5% and Kenya’s is down 13.5%. The Afrophiles blame negative publicity and accuse the media of damaging the investment profiles of countries such as Botswana, Kenya, Nigeria, Senegal and South Africa. However, if stocks are carefully selected they are available at substantial discounts. The subsidiaries of multinationals, such as Barclays, Standard Chartered and South African Breweries, are good examples.
Jaideep Khanna, portfolio manager of the African Investment Fund, the largest pan-African fund, valued at $155 million, says: “There are lots of opportunities since there is great value in the markets. As we monitor the economies and the markets we feel quite confident the value will be realized. We can’t, however, put a time period on it but it’s going to happen. In Ghana you can buy banks at two-to-four-times earnings, with dividend yields of 15% to 20%, return on assets of 4% to 5% and with returns on equity of over 60%. Now that’s compelling.”
When Nomura started to look at the Nigerian markets about a year ago it realized that local banks were trading at less than one times book value and yet growing at 30% per year. It spelt out heavy risk discounting.
Salami says: “I think Nigeria’s risks are political rather than macroeconomic. It also has the capability of attracting more funds to the whole region. If it goes right then people will take another look at Ghana and there will be a ripple effect. We just need a catalyst to get fund managers into these markets.”
Nigeria is the best-performing stock market in the world this year. In dollar terms it’s ahead 30%. But the number of funds investing in the market is still limited. “Africa is the last emerging market and when it goes right it goes right in a big way,” says one analyst, “Ghana may be down 16% this year but two years ago it increased 100% in dollar terms.” He remains optimistic: “When reform is introduced the market doesn’t always give you a smooth ride. You have to stick at it and tough it out to get to the other side. They don’t go back to where they started from.”
The bleak times are the right times to enter these markets, reckons one fund manager: “If we can see the right moves being made in terms of privatization, investor protection and political restructuring then the opportunities are limitless.”
Nomura’s Najia talks about the potential in markets such as Zimbabwe, a seeming pariah to the international investor. Najia believes the market has very good potential if an investor is willing to accept some of the present volatility. And perhaps he is right.
The strong infrastructure is there to project Zimbabwe to a very high GDP but at the moment it has a big deficit driving inflation that is weakening the currency. Najia believes the government eventually will run into a wall and will have to do something: “If it makes some difficult decisions the economy will shoot up very quickly.” Unfortunately, Najia says, in the prevailing circumstances, and not surprisingly, it is very difficult to persuade investors to buy Zimbabwe stock.
Those which are investing tend to be specialists in distressed assets. Michael Wheelhouse, a senior analyst at Nomura, says: “A number of these bottom-feeders are disaster-recovery funds which work in a contrary fashion to normal funds. They might sound ludicrous but they do actually work.
Those who went into Russia during its crisis have been very successful.”
One cannot escape the fact that Africa is basically a speculative investment risk and investors must be patient. But in the medium to long term, high risk can mean high returns.
Mark Breedon, a director at Alliance Capital Limited, stresses that the region is not for the unsophisticated investor aiming for quick profits or those unable to absorb short-term loss. “You can get in but you can’t always get out. Investors have to be committed. There will also always be nasty surprises, for example Zimbabwe.”
One independent banker recommends that individual private investors shouldn’t buy African equities but should buy into something such as the Morgan Stanley fund, which would deal with the problem of illiquid trading and provide the expertise. As Khanna says: “You can’t trade these markets and so that’s why we have our vehicle; a closed-end fund.”
Although many companies throughout sub-Saharan Africa are very cheap on an international comparison, often they sit on their cash. In the words of Breedon: “They have cash coming out of their ears but aren’t giving it to the shareholders, it just sits there going into executive cars.” So for the small shareholder these companies are not a profitable investment.
One fund manager describes a cigarette company in Zambia. Its stock trades at a price multiple of two times earnings and it has more than its market capitalization in cash on the balance sheet. “If we were operating in a developed economy, obviously it’s a screaming buy.” But he goes on to say that the management shows no desire to return cash to the shareholders. This is a problem in many countries where shareholder rights are not a priority. Cash on the balance sheet is seen as giving the company a sense of security.
Breedon of Alliance Capital explains that it then becomes necessary to tell management to “hand over the cash” and get it restructured. “Unfortunately it doesn’t always work because management are not under threat from takeover but if the management does do something about it then you can make a lot of money.”
Another banker talks about a large brewery in Botswana, describing it as a company stuffed with cash. The investor took the cash, used it to expand and the company is “now making us very good money”. But shareholder focus like this is still relatively rare.
Breedon says that Alliance Capital is also becoming increasingly proactive since becoming more aware of these risks.
“We are moving towards taking board seats and making a nuisance of ourselves and being more demanding. We may be seen as more threatening but we believe there is a duty to our shareholders and hopefully we will see results, but it will be a long struggle.”
Sruti Patel an analyst with Afrivest, points out: “Africa is simply a case of weighing up the risk against possible lost opportunities.”
Botswana: more than just diamonds
Botswana has one of the the fastest-growing economies in the world, posting average growth rates in excess of 9% since independence in 1965. At $6.5 billion its foreign reserves are greater than South Africa’s. The land-locked state has no domestic debt and very little foreign debt and has had a budget surplus in 15 of the last 16 years: impressive statistics for a country that was until the 1970s one of the poorest on the planet. But then not every country has diamonds.
| Botswana parliament: a pragmatic government and very low corruption | ||||||
“Oh yes, we have lots of diamonds” says a grinning local banker peering over pork knuckle and sauerkraut in a restaurant located on a newly developed business estate. “In some areas they are just lying around on the ground but sometimes”, he adds, taking a slurp of South African white, “you have to scratch the surface to find them.”
By scratching the surface Botswana, in partnership with De Beers, now supplies 40% of the world’s diamonds. Last year, millennium celebrations boosted earnings. But only halfway through 2000 the previous year’s record level of diamond sales has already been surpassed. It’s no surprise that the banker looks very happy with his lot. The people are consuming more and are going to the banks to get the required credit. Mobile phones, Calvin Kleins and luxury European cars are hot items.
According to one Standard Chartered employee, Botswanans are borrowing to the hilt and this is great news for the banks. Financial products include unsecured loans for those with a salary and auto loans. SCB commands 33% of the car loan market.
Finance ministry official Serwalo Tumelo, on the other hand, realizes the seriousness of the problem. “People need to save more so there is money to invest. Money, especially for graduates, is a novelty, so we will have to persuade them to save more by putting in place the necessary macroeconomic policies. We will make it too expensive for them to borrow.” Musonda Mwamba, Standard Chartered’s head of external affairs, also present, grimaces.
Botswana is succeeding economically where so many of its neighbours have failed and it’s not just to do with the diamonds. “A lot of African states have tremendous wealth in minerals but they have abused the wealth they have created,” believes Philip Mabon, executive director of Stanbic’s operations in Botswana. “Botswana has benefited from a very pragmatic government, a very low level of corruption, a free press and racial harmony.”
These four ingredients are missing from most states in sub-Saharan Africa .
Keith Jefferis, the deputy governor of the Bank of Botswana, gives another reason: “There has been a willingness to bring in people from the outside. Experts from abroad have been used when positions cannot be Filled domestically.” He has First-hand experience of this policy. In 1989 the English-born Jefferis left the UK to take up a position teaching economics in Botswana. Ten years later the pig-tailed and leather-jacketed lecturer was appointed deputy governor of the central bank.
Although it seems for the moment that diamonds are forever – some estimates suggest that reserves will last 100 years – there is a recognition of the need to diversify the economy. The diamond industry is demand-led and during the Asian crisis of 1998, Botswana experienced a big slump in its export earnings.
Diversification is the new buzzword and the financial sector is one of the main areas set for development. “We need to be more competitive,” reasons Jefferis. “The financial markets are pretty underdeveloped. We only have three corporate bonds and there isn’t really an active market in these. If there isn’t activity we won’t attract foreign investors.”
Foreign investment banks face initial problems when entering the market. Investec, the South African investment bank, having placed itself into the market early on, has found that companies are cash-rich and they don’t need to borrow to expand. “You can’t force people to borrow or issue,” complains one banker. Investec’s advisory role is limited at the moment but with several parastatals looking to privatize, business may be about to pick up.
In another attempt to differentiate itself from neighbours and the region’s dubious reputation, Botswana is going for a sovereign credit rating. It is preparing a short list of advisers and hopes to have a rating by the time of the IMF meeting this month. “We aren’t getting a rating in order for us to borrow like a lot of others. This is more of a PR exercise,” says Jefferis. “We need to show that we are different from others.”
The government has set about marketing the country as an offshore financial haven. The International Financial Services Centre is an attempt to attract foreign Flows into the country by offering a range of financial services to non-residents with a package of incentives such as a low corporate tax rate of 15% instead of the usual 25%. Butler Phirie, general manager of Botswana Development Corporation Limited, says:”We recognize our limitations but the IFSC will create economic growth and employment and investors will come to us because their money will be safe. Our economy is very liberal and secure, unlike many others. Investors would also be participating in one of the fastest-growing economies in the world that is underpinned by sound management and political stability.”
There is, however, a dark cloud on the horizon in the form of AIDS. It is believed that 25% of the country’s 1.5 million inhabitants have contracted HIV. It could prove a major obstacle to the country’s continued development. The belief is that within the decade Botswana’s population will be falling.
“The AIDS problem will be resolved,” says Phirie. “AIDS is a short-term problem. Within the next four to Five years the problem will be contained.”
“Look” Tumelo forcibly states, “people have played too much on this situation to our disadvantage. It is not like a company will come in here, set up and see its workforce die the next day. It’s not something investors should be considering too seriously.”
Mabon again takes the opposite view – a view held by many outside the government. “If Africa, or indeed just Botswana, is going to be successful, the government needs to take action. It has taken an ostrich approach to the whole situation. The level of infection is rampant and companies won’t invest if your professionals are dying off like that,” he rages, clicking his Fingers to emphasize the point. ” The population could be decimated.”
