Is Africa The Next Emerging Market?
A drastic shift towards financial sustainability is currently happening right now in Africa, which is leading many financial analysts to indeed, call it the next emerging market.
Now, I can’t see Africa (as a whole) growing as quickly as Asia or even Latin America, but the results we are seeing in this continent are promising.
What investors know about the continent is that it lacks advanced technological infrastructure, is prone to crime and corruption, and is considered to be a more “risky” investment than perhaps Asian markets.
However, as risk falls and telecommunication capabilities rise, Africa is quickly becoming a viable place for investment, especially when you take into account the production capabilities that come as a result of having the world’s fastest growing population.
China, India, Russia, and Brazil all have close ties with Africa, hence the formation of the BRICS trade agreement. Their investments today however, trump anything they were forking over in the not-so-distant past. In 2013, China was investing $26 billion into Africa, but in 2017, Chinese president Xi Jinping offered a whopping $60 billion loan and aid package to Africa, according to several sources. Xi has been quoted as saying that “China aims to develop infrastructure, improve agriculture and reduce poverty on the continent.” This should come as no surprise considering the $900 billion new Silk Road project that China aims to embark on, which will create numerous new trade routes, as well as build up old trade routes throughout the Middle East and Asia.
Africa has still yet to develop in any significant way where it can help China, but with long term investments in the continent, China knows that they can benefit greatly from a flourishing African economy, and they plan to do just that.
What is drawing so much optimism among investors is the recent emergence of pan-African investment funds. The London-based fund Blakeney Management, which has been committed to Africa for well over a decade, now invests in Angola, Mozambique and Ethiopia, deciding to bet on countries that have managed to pull themselves out of years of violent conflict and corruption. Furthermore, South Africa’s Pamodzi Investment Holdings has announced a US$1.3 billion pan-African fund too, this one backed by US financial institutions.
In total, nearly $3 billion in private equity has been raised so far in 2017 for Africa outside of BRICS countries. Investors in the emerging equity markets are also developing a taste for Africa, with global emerging market funds deploying nearly 10% of their portfolios on the continent. What was once a “risky” and “low-return” investment is now looking much more promising to investors - something that was simply not the case five years ago.
So what exactly is going on?
Has Africa changed or is there just so much money slushing about that all bets are on?
Africa has definitely changed in the last decade. What was once a number of countries searching for an identity is now a growing market for investment banks, and bustling infrastructure projects, but external factors certainly do play a role as well. International conditions and low yields in OECD countries, high liquidity and the search for high returns all lure investors into the arms of ever riskier investments.
Furthermore, investment opportunities have grown tremendously in African countries. Only 66 firms were listed on sub-Saharan stock exchanges in 2000, while there are now 522 firms, another great reason for foreign investment.
As put by the OECD observer,
"But something new is happening, as now even the hedge funds are getting in on the action. Tudor Investments took a risk on Africa Opportunities Partners, a vehicle for investing in Tanzanian beer, Senegalese Telecoms, and insurance companies in Egypt. The Swiss financier Nicolas Clavel launched the first hedge fund in Europe entirely dedicated to Africa on 1 July 2007: the Scipion African Opportunities Fund, with the aim of raising $700 million."
A reason for all this new investment has to do with the fact that financial information and communications infrastructure are also improving a great deal, so much so that Renaissance Capital’s analysts can now cover over a dozen sub-Saharan local equity markets, "a feat that would have been unthinkable five years ago" says Javier Santiso of the OECD economic institution.
Africa has changed however, and is indeed, one of the next emerging markets. Growth in Sub-Saharan Africa is forecast to pick up to 2.6 percent in 2017 and to 3.2 percent in 2018, predicated on moderately rising commodity prices and reforms to tackle macroeconomic imbalances. Per capita output is projected to shrink by 0.1 percent in 2017 and to increase to a modest 0.7 percent growth pace over 2018-19.
This does not mean that all problems will suddenly disappear in the continent, as at those rates, growth will be insufficient to achieve poverty reduction goals in the region, particularly if constraints to more vigorous growth persist.
However, the fact that governments are modifying their policies and encouraging private investment in viable and profitable projects with a lasting impact on development means that the trend of economic growth in the continent will not be one that is short-lived.
Expect Africa to change more in the next century than it has in the past ten.
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