GRI sat down with Malick Badjie, director and head of Investment Solutions at Silk Invest, to discuss investment outlook in core African markets for 2015 and beyond.
In 2008 when the global recession rocked Western markets, investors shifted attention to riskier markets in the global South for untapped opportunities. Africa became the poster child for frontier markets with some of the fastest growing economies, as well as political and economic stability trends and rising African consumer demands. Despite the optimism and the waving 'Africa rising' flag, the continent still finds itself revisited by disease, despotism, terrorism and corruption.
As with any market, possessing a global sensibility accompanied by local knowledge gives any investor the edge. GRI recently sat down with Malick Badjie, director and head of Investment Solutions at Silk Invest and former head of BlackRock's Institutional Business in sub-Saharan Africa, to touch on pressing issues affecting one of the most exciting frontier markets.
How does the recent slump in oil prices affect some of Africa's oil producing giants?
Well let us take Nigeria, for example. Currently 80 to 85% of its revenue comes from oil. Nigerian oil prices hit $75 per barrel and with oil prices dipping below $80 per barrel, there is a possibility it might run at a budget deficit. This means the Nigerian government would have to readjust its budget, which translates into less government spending in 2015.
In this scenario, it is going to be difficult for Nigeria as they have an election next year and as of now there has not been significant spending, but as we get closer to the elections it might affect that.
On the consumer side, the decline in oil prices has been a net positive. Oil contributes a significant portion to the core inflation (CI) in many countries. Falling oil prices means the cost of consumption has reduced and has actually been a net benefit for both the manufacturing industry and the regular consumer.
Does the high youth unemployment rate and questionable consumer purchasing power in Africa affect investors' decisions?
Obviously, when you have sustained high unemployment it causes social strife, mass demonstrations and instability as we have seen recently in Burkina Faso. However, the high unemployment in Africa is more on a productivity level and rooted in broader structural issues.
South Africa, for example, has a high unemployment rate at 40%, but international investors entering the market are not deterred by that as it does not affect them.
Retail investors have been pleasantly surprised. Shoprite, one of the largest retail chains in South Africa, opened up in Nigeria earlier this year. The CEO indicated they were able to hit their 18-month target in six weeks - that tells you something.
In terms of purchasing power, what you see in Africa is there has been a growing disposable income. It is a misnomer [that Africans don't have disposable income] because of the way statistics are put when we talk of GDP and purchasing power parity ability for consumers.
The statistics understate certain things. If you look at informal employment, approximately 85% of Africans are entrepreneurs. Many youth have small businesses which are very difficult to account for, and it can lead to misleading unemployment figures. Their disposable income is actually higher.
We have quite a few investments in Egypt, Ethiopia and Nigeria. We find the numbers are relatively strong and I think international investors tapping into the 'consumer story' are not afraid of high unemployment. I don't think it factors into their models.
What does factor is the population size, number of consumers and people above the poverty rate. Currently, there are 953 million consumers in Africa, and that is expected to rise by another 500 million in the next two to five years, which is quite impressive.
Have you seen a greater willingness in African governments to do more to maintain investor confidence?
Yes, there is a greater willingness to open up to investors as well. Just to put it in perspective, FDI influence in Africa was roughly around $5 billion 10 years ago and is expected to be closer to $50 billion in 2014. FDI investment has increased significantly.
This is not just a China story, but it's also international investors from India, Brazil and from other emerging market countries investing in Africa. Why is that? One of the larger elements is that the institutional structures have improved significantly. If you look at surveys on doing business, African countries are higher than Russia, Brazil, India and China and higher than any of the other emerging market countries.
There's been a concerted effort toward establishing good perception. Ten percent of African countries are in conflicts zones, much less than people would have predicted. And what you've seen across the board in many markets is there has been a great emphasis on an independent judiciary and enforceable rule of law. From an investor perspective, your concern is your return of capital, and there have been very good enforceability laws.
Improvements have been in the area of drafting contracts and being able to enter these markets and come out of them. Even with things like Ebola, perception in the market has been that it was a big scare. But if you look at the reality, Nigeria has been very aggressive in its education and awareness campaign and there haven't been any reported cases in East Africa.
From an institutional perspective, I see two things happening: more Africans are investing in their own continent, and remittances from Africans investing in local institutions have become much stronger.
There is much talk of Africa rising with some of the fastest growing rates. Do you see this rise trickling down to the broader population?
Has the GDP growth been very strong? Has it trickled down? Yes - because you're looking at it from a very low base. The poverty levels are significantly lower in Africa.
If you look 20-25 years ago, the majority of Africans in many of these countries like Nigeria and others were living on less than a dollar a day, so what you see is a rise toward the working and middle class. With the GDP growth, increased FDI and tourism, and greater diversification beyond natural resources, there's much more of a stronger economy.
In Kenya, there is a stronger service industry. Most of their GDP growth comes from the service industry and tourism. In fact, they call it the Silicon Valley of Africa.
I think with the investments and the way the government is structured, you've also seen governments take a step back from the private sector and the private sector has become in many markets a significant employer. It's really been allowing an opportunity for people to come out of poverty and become a part of the working and rising middle class.
The GDP growth is always an interesting statistic. If your population is growing by 5 to 6% and your GDP is growing at 5 to 6%, then you're just barely keeping up with the population so it doesn't really have an impact. In certain countries, you have structural issues so you haven't seen them emerge.
In 2010, Sierra Leone's GDP was close to 25%, but if you look at the stats on poverty and opportunity it's relatively dismal. Overall, in my opinion, growth in Africa is relatively positive.
What is your outlook on African investment for 2015?
The outlook for 2015 is relatively positive. It's going to be a good year for Africa on many levels. We're seeing an emergence in many economies and stability of many governments compared to 2013 where you had headwinds in Egypt, Kenya, Nigeria and South Africa. I think we are coming into 2015 with a positive momentum.
If you look at companies in Africa, they continue to grow 15 to 20% a year. This year alone there were 23 IPOs that listed in Africa, which indicates the momentum that's going on.
Many are looking in earnest at the upcoming elections in Nigeria. We think it's more noise in the background, but overall it's relatively positive. Nigeria will have a strong year I think, and both the naira and the economy will rebound. The elections will pass and the privatization that the government has done in the energy sector will benefit the economy.
Kenya has been relatively positive as well, and I think the issues concerning the ICC and terrorism are related, but overall these countries will remain very strong and bullish.