By Usman Hayat, CFA
Perceived risks of investing in Africa are higher than the actual risks, and attractive investment opportunities can arise from the "negatives" associated with Africa.
These were the views of Nkosana Moyo, the founder and executive chairman of the Mandela Institute for Development Studies (MINDS), who was speaking to an audience of investment professionals at the Fifth Annual European Investment Conference in Prague, 18–19 October 2012.
Moyo explained that the financial markets of the developed world were considered low risk, but the financial crisis that started in 2008 proved otherwise. The 2011 GDP growth rate for Africa, estimated at 5.2%, showed that Africa’s economic growth was recovering from the drop it experienced after 2008, and it was well above the levels seen before 2001. He said that one has to be careful with aggregating data across more than 50 African countries because they are materially different from one other, but such data facilitate discussion on identifying longer-term changes.
Moyo believes that foreign investors who want to assess the risks in Africa should observe what Africans are doing. Investors will see Africans investing in and not divesting from Africa. Similarly, companies operating in Africa since the colonial era are staying in Africa and earning profits, even though these companies prefer not to bring attention to their profitability. Moyo stated that this is not a risk assessment you learn at business school, but it gives you an insight into investing in Africa.
The challenges that Africa faces, such as corruption and poverty, are not over, Moyo said, and it would be "dishonest" to ignore them. At the same time, he believes that "the future of Africa is going to be different from its past" because of a changed political and economic environment.
Moyo has held a number of senior positions regarding policymaking and investing in Africa, including chief operating officer at African Development Bank and minister of industry and international trade for Zimbabwe. Using his vast experience, Moyo shared insights into long-term changes taking place in Africa. He explained that the new generation of leaders in Africa have grown up in a more democratic world and have been exposed to the Western way of life through education and travel. Moyo said that the continent is now made up of 33 countries with at least two successive elections, and deep political changes in South Africa, Ghana, and Malawi point to a different future for Africa. In addition, in the post-9/11 world, there has been much less tolerance of actions that create security risks for other countries, which helps keep a check on "bad behavior" by political leaders.
Moyo also said that along with the political climate, the economic environment has also changed in Africa. Reforms have improved property rights, such as registration of land and the resolution of commercial disputes through the judiciary. This has resulted in better access to finance because property can be used as collateral for banks, and banks are more willing to lend if there are reliable ways to resolve commercial disputes.
Recalling the Cold War era, Moyo reflected that the continent was influenced by socialist ideas and governments that often relied on state-owned enterprises to implement public policy. But now, with the failure of many state-owned enterprises to deliver the goods, there is much greater realization and acceptance of the role of the private sector.
Moyo contended that these longer-term political and economic changes are leading to a different future for Africa. These changes are helping Africa make better use of its abundant natural resources and growing young population. The African economy is not well integrated in the global economy, and the correlations of returns of African and developed markets are not high, offering diversification to investors.
The business environment in Africa is challenging, Moyo conceded. The cost of doing business is high because of several factors, such as power outages and the poor inland transportation network. The cost of these inefficiencies, however, is passed on to the customers, which is why, despite the high cost of doing business, Moyo believes there are profits to be made.
Moyo added that investors need local knowledge and smart tactics to overcome the challenges and realize the profit potential of Africa. He gave the example of MTN (MTNOY.PK), which invested in bringing mobile technology to Nigeria and put significant capital at risk. By relying on a pay-as-you-go model, the company was able to successfully deal with such problems as defaults by customers and their lack of credit rating.
Access and lack of affordability are the main limiting factors to growing consumer demands in Africa, according to Moyo. He explained that, in the past, consumers in Nigeria knew the benefits of mobile phone technology, but could not access phones simply because they were not available. Today’s consumers in Africa are aware of the many goods and services available in the developed world, and they are willing to spend money on these should they become available.
Moyo’s concluding message for investors was that because of long-term political and economic changes, Africa’s future is going to be different from its past. Despite the challenging business environment, investors can earn substantial profits and benefit from diversification.
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