Just over four years ago the editor of Goldman Sachs’ Fortnightly Thoughts publication wrote: “We believe meaningful opportunities for Western consumer companies exist as Africa’s household consumption grows rapidly… and that failure to invest now will see others rush in.”
At the time, this was a sentiment held by many global investors – high commodity prices had fuelled strong growth. Publications such as Forbes often referred to Africa as “the last investment frontier” and companies were advised to take advantage of first-mover opportunities.
However, just four years later, much of the optimism around Africa has died down as low oil and commodity prices have reduced export revenues considerably – resulting in slower growth and local currency volatility.
Last week, Colin Coleman, Goldman Sachs’ managing director for sub-Saharan Africa, shared his thoughts on investing in Africa at the Thomson Reuters Africa Summit in Cape Town. Here is what he had to say.
Is the risk worth the reward?
Despite the challenges that emerging markets have faced recently, Coleman thinks that global sentiment is improving, with Brazil forecast to come out of the recession next year and China and India emerging as “bright spots”.
So how does Africa compare in this global context? For investors with a long-term approach, the continent’s large, rapidly growing, under-serviced consumer base is still an attractive option. However, slow growth combined with high risk remains a deterrent.
“I would say Africa sits in an environment where emerging market investors want to go… but they are very concerned about risk-weighted returns,” he said.
“The actual overall growth rate has dipped probably to more like 3%. So the real growth rate in Africa is disappointing, and the political risks and other risks in Africa have elevated.”
Dollar shortages impeding business
Markets such as Angola and Nigeria, which rely on commodity exports to increase their foreign exchange reserves, are now experiencing a shortage of foreign currencies (mostly US dollars) due to lower commodity prices. Not only has this led to some multinational companies struggling to access the foreign currencies needed to get their profits out of the country, but Coleman noted that it has also resulted in suppressed imports and local currency volatility, as seen in the naira/dollar exchange.
“So that environment is not one conducive to multinationals operating in Nigeria, for example.”
He added that these environments can also fuel local ownership and production debates, which could impact taxation – the taxation dispute facing Randgold Resources in Mali resulted in the Malian government closing the group’s offices in Bamoko, the country’s capital.
“So these issues of tax, ownership, local content and so forth, are also tied somewhat to macro-flows. Now, it is one thing in a growing economy and a growing economic environment to drive those issues; it is another thing in a suppressed economic environment. And obviously one is fighting over a pie that is shrinking, rather than trying to drive a larger growth pie.”
East Africa doing well
One area of optimism on the continent is east Africa. The region has managed to escape some of the knock-on effects of lower commodity prices seen in west Africa, with countries such as Kenya and Rwanda focusing on improving their business environments.
“In east Africa we are seeing quite a lot of growth… and I hear very good things about the east African experience from many companies,” said Coleman.
“At the same time there is concern about government issues and security – particularly in east Africa – and the potential outbreak of terrorism in that area around Somalia, Tanzania, Kenya.”
South Africa’s contestation
South Africa’s political turbulence and slow growth are concerning foreign investors. December’s three-finance-minister shuffle cost the market billions of rand. This year has been characterised by violent student protests, events such as last week’s fraud summons of the finance minister, Pravin Gordhan, and President Jacob Zuma’s interdict preventing the release of Public Protector Thuli Madonsela’s state-capture report. The climate could result in the country being downgraded to junk status by credit ratings agencies.
However, the country’s strong institutions are something to feel optimistic about, noted Coleman. He highlighted that relatively “muted response” on the rand exchange rate after last week’s events as an example of this.
“So actually this tells you quite a bit about the progress that we are making in terms of this democracy sustaining. I would say this year has been a very evidential demonstration of the strength of all of our institutions, the constitutional chapter nine, the public prosecutor, the ability of the IEC to run a good election… the absolute strength of the independence of the reserve bank… and the strength of the business community and liquidity of markets which have continued in the face of these things.”