Africa consists of 55 different economies, most of them woefully undeveloped. The GDP of those 55 countries combined is barely higher than the state of California's GDP. Because Africa's economies are so immature, the current boom is unbalanced. Some regions are prospering, others are not. Some sectors are booming, others are languishing. The benefits of Africa's boom are not accruing equally to all.
|
Be Careful of the Africa Boom
Our guest contributor is Chris Becker, Africa Investment Strategist for ETM Analytics, a Johannesburg, South Africa based market intelligence firm. As Chris will explain, the key to investment success in Africa is to identify who is benefiting from the boom and why. Then and only then can you target exactly where and when to invest.
If you're thinking of allocating some of your investment dollars to Africa or may want to in the future, I think you'll find this week's article indispensable. It's a great primer which explains some of the complex phenomena unfolding in Africa today, with valuable insight that only an experienced Africa analyst with local contacts in the region could provide. |
By Chris Becker, Investment Strategist, ETM Analytics
Sub-Saharan Africa (SSA) is booming. Its energy, transport infrastructure, resources, and consumer goods sectors are all growing rapidly.
The contrarian-minded investor knows that most booms end with a bust. There are opportunities to earn huge profits in any boom, but protecting these profits—and resisting the urge to over-expand your enterprise in the waning stages of such a boom—is equally important. In order to understand the form the bust will likely take, we must understand the underlying drivers of the boom. Then we can predict what might end it.
With that goal in mind, two aspects of SSA's boom are critical to understand. First, most of the investment in resources and infrastructure in SSA is being debt financed by foreigners. Second, governments in the region are not incentivizing private savings and investment and are not increasing economic freedom.
For these two reasons, the boom is not translating to the development of manufacturing and production industries. Instead, it is finding expression as a consumer boom. Because very little of the invested capital is being converted into fixed, productive capital that can continue to drive economic growth (and hence consumption), the boom will likely end when consumption peters out, once the resources boom has run its course.
For SSA to maintain its consumer boom, economies in the region will need to diversify away from primary extractive industries and move decisively toward investing in manufacturing and industry. It is only through production that a consumer boom can be sustained for very long.
So the million-dollar question you need to answer before investing anywhere in Africa is: is infrastructure investment helping the development of manufacturing and productive industry, or is it merely cheapening the flow of minerals out of and final consumer goods into it?
As I've suggested, our research indicates that it's mostly the latter (except perhaps for Kenya). Essentially, SSA is being vendor financed, mostly by China and India. Needless to say, such an arrangement is unsustainable and will probably end badly. Let's explore some other aspects of SSA's consumer-driven boom.
Political Risk Insurance Doubles in Africa
Political risk insurance provided by MIGA, (which stands for "Multilateral Investment Guarantee Agency," an agency of the World Bank) has more than doubled to $1.5 billion in the twelve months to end-June 2013, while MIGA's global book is only up 4.5%. Companies buy political risk insurance to protect their investments against the actions of the notoriously unstable governments of Africa.
MIGA's director of operations told Bloomberg that even more growth lies ahead. He said, "We are contemplating another record year; it's the strongest project pipeline we've ever seen at MIGA …Power is where we see a lot of growth." Bloomberg also notes that ports and roads are contributing to the strong political risk insurance growth and project pipeline.
That the major drivers of MIGA's growth are power, ports, and roads strengthens our view that the bulk of capital investment in SSA is flowing into infrastructure, rather than productive capacity (apart from the burgeoning retail-related real-estate and retail-distribution investment in places like Nigeria and Ghana, to mention two). It's crucial to understand that this type of investment will not by itself boost the long-term economic prospects of the region. It needs to be accompanied by investment and capital accumulation in the manufacturing and production sectors.
The investment in power, roads, and ports may ultimately end up lowering the cost of doing business for the mineral and resources sectors that need reliable power supply and efficient transport to ship output abroad. While this is beneficial to enterprises that operate locally, it also lowers the cost to import final consumer goods into the country. Thus we believe this type of investment will most likely undermine industrialization efforts.
East Africa Logistics Boom
SSA's boom has led to a frenzy to develop ports in East Africa. The ports of Dar es Salaam (Tanzania) and Mombasa (Kenya), located just 400 km apart, are competing to attract traffic. To this end, both are investing to expand capacity and efficiency not only of the ports themselves, but in rail and other transport infrastructure as well. The Kenyan president is spearheading a plan to construct a $13-billion railway line to link Mombasa to the capitals of Uganda and Rwanda (starting in November). Meanwhile, the Tanzania government is spending $10 billion to build a new port northwest of Dar es Salaam.
To give the numbers context, these projects will cost a combined 35% of GDP for both economies—not exactly small change. Because neither internal savings rates nor local tax revenues are sufficient to warrant or afford such extravagant infrastructure spending, the Kenya government is racing to raise up to $2 billion through a Eurobond issue. The Tanzanian government plans to issue a $700-million Eurobond in the next year.
Easy Money Drives the Boom
Easy global money conditions make it cheaper to raise large sums of long-term foreign currency debt from foreigners. Low global interest rates—including SSA interest rates—mislead investors into thinking these long-term projects will be profitable.
In fact, the East African logistics projects are looking so lucrative that even Somaliland (which is not officially separate of the Somalian state) wants in on the action. The Kuwaitis are funding a $10-million makeover of two Somalian airports, while a consortium of investors is being assembled to develop a $2.5-billion logistics hub, including an oil pipeline and a port. This project will cost 172% of GDP, all to serve trade flows into Somalia's still socialist neighbor, Ethiopia. That's a red flag if I've ever seen one.
These projects are only sustainable as long as global easy money policies remain in place. Therefore it's anyone's guess as to the exact timing of when SSA's boom will unravel. Our best prediction is that the boom will run for a few more years.
Here are three things you can expect once the easy money stops:
Click here to find out about the five African ‘boom towns’ that should be on every investor’s radar.
Sub-Saharan Africa (SSA) is booming. Its energy, transport infrastructure, resources, and consumer goods sectors are all growing rapidly.
The contrarian-minded investor knows that most booms end with a bust. There are opportunities to earn huge profits in any boom, but protecting these profits—and resisting the urge to over-expand your enterprise in the waning stages of such a boom—is equally important. In order to understand the form the bust will likely take, we must understand the underlying drivers of the boom. Then we can predict what might end it.
With that goal in mind, two aspects of SSA's boom are critical to understand. First, most of the investment in resources and infrastructure in SSA is being debt financed by foreigners. Second, governments in the region are not incentivizing private savings and investment and are not increasing economic freedom.
For these two reasons, the boom is not translating to the development of manufacturing and production industries. Instead, it is finding expression as a consumer boom. Because very little of the invested capital is being converted into fixed, productive capital that can continue to drive economic growth (and hence consumption), the boom will likely end when consumption peters out, once the resources boom has run its course.
For SSA to maintain its consumer boom, economies in the region will need to diversify away from primary extractive industries and move decisively toward investing in manufacturing and industry. It is only through production that a consumer boom can be sustained for very long.
So the million-dollar question you need to answer before investing anywhere in Africa is: is infrastructure investment helping the development of manufacturing and productive industry, or is it merely cheapening the flow of minerals out of and final consumer goods into it?
As I've suggested, our research indicates that it's mostly the latter (except perhaps for Kenya). Essentially, SSA is being vendor financed, mostly by China and India. Needless to say, such an arrangement is unsustainable and will probably end badly. Let's explore some other aspects of SSA's consumer-driven boom.
Political Risk Insurance Doubles in Africa
Political risk insurance provided by MIGA, (which stands for "Multilateral Investment Guarantee Agency," an agency of the World Bank) has more than doubled to $1.5 billion in the twelve months to end-June 2013, while MIGA's global book is only up 4.5%. Companies buy political risk insurance to protect their investments against the actions of the notoriously unstable governments of Africa.
MIGA's director of operations told Bloomberg that even more growth lies ahead. He said, "We are contemplating another record year; it's the strongest project pipeline we've ever seen at MIGA …Power is where we see a lot of growth." Bloomberg also notes that ports and roads are contributing to the strong political risk insurance growth and project pipeline.
That the major drivers of MIGA's growth are power, ports, and roads strengthens our view that the bulk of capital investment in SSA is flowing into infrastructure, rather than productive capacity (apart from the burgeoning retail-related real-estate and retail-distribution investment in places like Nigeria and Ghana, to mention two). It's crucial to understand that this type of investment will not by itself boost the long-term economic prospects of the region. It needs to be accompanied by investment and capital accumulation in the manufacturing and production sectors.
The investment in power, roads, and ports may ultimately end up lowering the cost of doing business for the mineral and resources sectors that need reliable power supply and efficient transport to ship output abroad. While this is beneficial to enterprises that operate locally, it also lowers the cost to import final consumer goods into the country. Thus we believe this type of investment will most likely undermine industrialization efforts.
East Africa Logistics Boom
SSA's boom has led to a frenzy to develop ports in East Africa. The ports of Dar es Salaam (Tanzania) and Mombasa (Kenya), located just 400 km apart, are competing to attract traffic. To this end, both are investing to expand capacity and efficiency not only of the ports themselves, but in rail and other transport infrastructure as well. The Kenyan president is spearheading a plan to construct a $13-billion railway line to link Mombasa to the capitals of Uganda and Rwanda (starting in November). Meanwhile, the Tanzania government is spending $10 billion to build a new port northwest of Dar es Salaam.
To give the numbers context, these projects will cost a combined 35% of GDP for both economies—not exactly small change. Because neither internal savings rates nor local tax revenues are sufficient to warrant or afford such extravagant infrastructure spending, the Kenya government is racing to raise up to $2 billion through a Eurobond issue. The Tanzanian government plans to issue a $700-million Eurobond in the next year.
Easy Money Drives the Boom
Easy global money conditions make it cheaper to raise large sums of long-term foreign currency debt from foreigners. Low global interest rates—including SSA interest rates—mislead investors into thinking these long-term projects will be profitable.
In fact, the East African logistics projects are looking so lucrative that even Somaliland (which is not officially separate of the Somalian state) wants in on the action. The Kuwaitis are funding a $10-million makeover of two Somalian airports, while a consortium of investors is being assembled to develop a $2.5-billion logistics hub, including an oil pipeline and a port. This project will cost 172% of GDP, all to serve trade flows into Somalia's still socialist neighbor, Ethiopia. That's a red flag if I've ever seen one.
These projects are only sustainable as long as global easy money policies remain in place. Therefore it's anyone's guess as to the exact timing of when SSA's boom will unravel. Our best prediction is that the boom will run for a few more years.
Here are three things you can expect once the easy money stops:
- Foreign financing will dry up.
- Projects that looked profitable at rock-bottom financing rates will be revealed as terrible malinvestments.
- Sub-Saharan Africans will be left with some shiny new infrastructure and half-built projects—but not the productive capacity they need to lift themselves out of poverty.
Click here to find out about the five African ‘boom towns’ that should be on every investor’s radar.