With the right structural and regulatory reforms, many frontier markets in Africa could offer attractive opportunities for investors seeking to capitalise on potential future high growth. A panel discussion at the recent Financial Industry Summit, hosted by the Africa CEO Forum and held over two days in March, placed three markets in the spotlight: Ethiopia, the Democratic Republic of Congo (DRC) and Angola.
One of the panellists, David Cowan, chief economist for Africa at Citibank, also added South Sudan, The Gambia, Zimbabwe, Seychelles and Algeria for consideration as they met his first two criteria investors look for when contemplating growth potential: political change and the prospect of economic and structural reform. The third is income levels.
With regard to structural change, Ethiopia, the DRC and Angola all recently signed IMF programmes, said Cowan, which put foreign exchange policy as a central focus. Being able to take the return on their investments out of any country, is often a major concern for investors. “Currency inconvertibility is one of the biggest disincentives,” explained Cowan.
According to him, there is a wide range of macroeconomic factors that can help identify an African frontier market, but the potential growth and reform trajectory are probably the most important.
He cautioned investors that frontier market growth is often not a straight line. “Remember that frontier markets can emerge, they can submerge and then they can re-emerge. When you invest in these countries, you must have your time horizon right,” adding that investors should take a long-term outlook of 10 to 15 years.
While income and population levels matter, Cowan argued it is the combination of the two that is more important for any investor, depending on their target market. For example, for one investor, the large population of Ethiopia could predict better results, even though their income levels are quite low, as opposed to the more affluent and smaller population of Seychelles.
All the panellists believe investors should be looking towards Africa now and see the rewards behind the risk.
Mustafa Rawji, the managing director of indigenous DRC bank Rawbank, said the country will remain attractive to investors as long as some critical structural reforms are enacted by the government. “I am a firm believer in private sector-led development,” Rawji noted, motivating for the right legal framework and fiscal reforms from the government to help achieve this. He added that serious attention is required to make the government of the DRC ‘lighter’ as almost 90% of the country’s current tax receipts are going towards servicing the government’s payroll.
Mary Wamae, the group executive director of Equity Group Holdings, the holding company for the pan-African financial services company from Kenya, listed different regulatory regimes, the availability of labour and language barriers as some of the challenges the group has had to face in its expansion drive.
“The penetration of technology, obviously, is also another aspect to look at,” she said. This is especially important as the company uses a different approach to traditional brick and mortar banking when moving into a new jurisdiction. In the DRC it has successfully introduced mobile and agency banking, where third-party vendors offer Equity’s financial services and products.
For those considering an investment into these markets, Cowan has one piece of advice: move quickly. “Being a first mover is always the big step forward. First movers always get the advantage because they understand the country deeper than the rest,” he explained. “So, get in there early but have a long-term horizon about where you are going. Don’t expect miracles in the short term, but in the long term, the growing pie will suck in the competition and spit out opportunities.”