SA still top but going wrong way in RMB’s “Where in Africa” investment report

The good news is South Africa is still the best place on the continent to invest. The bad news is its relative appeal is falling, and unless there is a change soon this is another African table where the country will lose its top spot. Every year RMB’s analysts spend months crunching numbers and weighing up other quantitative factors to produce a detailed document for clients considering an African investment. The report ranks the countries by investment appeal and, as the editor Nema Ramkhelawan-Bhana explains, clients use it as a guide for their own decisions. Every new edition exposes some new ideas and trends. The 2016 version is no different. – Alec Hogg

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This special podcast is brought to you by RMB, whose Nema Ramkhelawan-Bhana joins us now. Nema, you’re the co-author of the ‘Where to Invest in Africa Report’ and it’s the sixth one that RMB has done, the one that you’ve just released.

It’s been quite an evolution for us Alec. Myself and my two colleagues, who put together this mammoth document this year, have seen quite a number of changes in terms of its findings. Also, there’s been some things that have stayed the same and this has really become a sounding board for investors with corporate and institutional interests in Africa to see whether or not their investment strategies have longevity. This is a long-term view of Africa. It takes into consideration the macroeconomic landscape, and offsets that against the ease of doing business on the continent.

Just as a broad feeling, are you getting less demand for the report now than you did during the heyday?

Absolutely not. I think with the increased level of uncertainty we’ve in fact seen more demand for information and information is now more forthcoming. Five or six years ago it could have been argued that there was an issue around reliability of information. There’s a number of sources we can now turn to and discern the actual strength of these economies. I think with the current environment, although there is less demand from an investment perspective, people are still interested and they want to have facts and figures at hand, so that they can make well-informed business decisions.

So they might not be jumping into the water just yet but they need to know. I guess existing investments or potential investments in the future.

Absolutely. I think what has really changed is the mindset, with regards to Africa. As you mentioned ‘in your heyday’ there were traditional markets that investors could turn to. Those that were screaming with demographic potential or macroeconomic growth rates, in excess of 7%. With the growth environment being so subdued it means that you need to look beyond that simple rhetoric. It’s the markets that have basically flown under the radar that are starting to emerge as real gems, within West Africa, East Africa, and Southern Africa despite being somewhat of a saturated market. There are still pockets of excellence within these specific markets that are drawing interest from investors – not only across the continent but also offshore.

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You talk about there being a treasure-trove of opportunities but you need to have a couple of cornerstones in place. What are those?

You obviously have to look at it from an industry perspective. The regulatory environment has certainly become more onerous over the years, and that’s in response to the deteriorating macroeconomic landscape. Some economies have advanced in terms of the actual ease and practicalities of doing business. We have for example seen pockets of growth within East Africa.

Within our top 10 we have Kenya, Tanzania and the likes of Ethiopia. In West Africa, interestingly enough Cote d’Ivoire now features prominently within our top 10. If we cast our minds back no less than 10 years ago, it was probably not an economy that anyone would have looked at, or at least compared to that of Ghana or a Nigeria.

Again, what is driving it is a diversified business model or framework. It is not simply centred on a commodity or a particular industry. It is a more balanced approach. One that leverages both the demand and production side of the economy, as well as making regulations easier for both domestic and foreign entities, to transact.

So unlocking the potential of the private sector?

Absolutely, and that needs to be complimentary. It can no longer simply be a government-led effort. It needs to be a complimentary effort between the private sector and government, with incentives to the private sector to invest in key infrastructure and strategic projects.

The attractiveness index still puts South Africa on top, but interesting reading through the fine print of your report it says that that’s a position where it’s not quite as secure as it was in the past.

We’ve seen this behaviour over the last two or three reports, where the scoring between 1 and 2, regardless of who’s been in the number 2 spot, has narrowed. Again, that is largely attributed to the faltering growth outlook, as you mentioned, but I think it’s important to understand that its aspects of the operating environment, which are also starting to deteriorate.

Keep in mind the way we look at the operating environment – it is based on four key international surveys, and those surveys are basically annual reports taken at a certain point in time. One might question whether or not current happenings are included in those types of reports. Unfortunately not, but that will be expressed in years to come. Over time this has had a real impact on peoples’ perceptions of doing business in South Africa. That isn’t to say that the regulatory environment is suffering. I think South Africa is still seen as a bastion of institutional independence and strength compared to its sub-Saharan African peers. Certainly, people are starting to take notice of aspects of governance around our strength, regulatory oversight etc and that is starting to weaken its scoring.

Nema, without getting into the details of the punching and the counter-punching that’s going on between various parties in South Africa at the moment. If the country gets through this. If its institutions hold, do you think that could be a plus factor, going forward?

Most definitely, there’s no doubt. If you look at the behaviour of ratings agencies across the board, it is more the qualitative factors that are starting to take centre place. In terms of the institutional strength – it is definitely a plus factor, which will not only support South Africa’s sovereign rating but the continent. Having the proper means to ensure that there’s adequate transparency and high levels of governance is only going to put the continent on a better footing.

So South Africa is still number one, a tenuous lead though, with Egypt coming up fast.

North African countries have featured quite prominently in the past. It’s only Libya that has fallen by the wayside post the Arab Spring, so we’ve seen that quite consistently in terms of a deceleration. Interestingly enough, positions 2 and 3, (in terms of our rankings) are held by Egypt and Morocco, which have been quite resilient post 2011. Morocco with its favourable geographic positioning has quite a robust infrastructure, strong regulatory practices, and more importantly to the North of the continent is a stable, political setting.

The sub-Saharan African country that is doing best at the moment outside of SA is Ghana, so it’s not surprising to see that that is moving up on your list.

Yes, I think in the context of where they are at the moment, we’re almost halfway into an IMF programme and they are starting to rebuild confidence with international investors. That’s been borne out by the renewed interest in both their local currency debt as well as their international debt. We’ve seen relative stability in their financial markets. There’s a real interest in Ghana’s real economy, as well as its financial economy. Again, that speaks to the longevity of our invested attractiveness scoring and why Ghana has consistently been in the top 5 for the last three years.

A new member of the top 5 is Kenya and it has been moving up for some years now. It’s a consistent improvement. What are they doing in Kenya that is leading to this result?

Kenya has always been perceived to be the ‘big brother’ within the East African community. The one aspect that we are exceptionally impressed with is its positioning within the EAC as a conduit for the movement of goods and services. Whereas its neighbouring countries are quite resource focussed at the moment, Kenya has almost removed itself from natural resources and instead positioned itself as an infrastructure hub.

It operates in more liquid financial markets, so there’s depth and sophistication, which allow investors to transact more easily perhaps than elsewhere on the continent, given the current liquidity constraints.

Not such good news for Nigeria, which slides out of the top 5 in this period. What’s the outlook for that country?

To be honest, it is not particularly favourable at least not for the next three years. It was the commodities downturn that obviously revealed most of the structural inefficiencies in Nigeria. The downturn in the oil price more particularly has crippled fiscal and export revenues. But with the new dispensation having taken the helm in 2015, I think there really needs to be expedited reforms to grow the country’s secondary activities to empower Nigerians who have been marginalised from oil proceeds over the last two to three decades.

There needs to be a structural adjustment, but it’s not going to happen overnight. Nigeria can’t however be discounted in terms of its value as it is still regarded as a viable, long term investment destination. Investors are guarded though. Those who are looking for an investment in West Africa, obviously can’t overlook it simply because of its geographic prowess within the region. Again, it might just be a cautious investment, rather than the head first type of scenario that we saw in the early part of 2010/2011.

One of the more interesting things of your top 10 is you don’t have a place there for either Mauritius or Botswana. Both countries are doing really well in many other surveys, including the World Economic Forum’s Global Competitiveness Index. Why don’t they make the top 10?

Botswana and Mauritius are 13 and 14 respectively within our overall index. Keep in mind that it is a a weighted index, which takes into consideration the size of the economy. Again, we have to standardise the index comparing even the smallest of geographies with the largest of terrains, with forecasted GDP growth rates, as well as the operating environment. When we have to breakdown those particular pillars Botswana and Mauritius are the forerunners, when it comes to the strength of an operating environment. They have consistently led the way. When you have to offset that or weigh that against forecasted levels of growth, which we know for Southern Africa, as a whole is relatively subdued, it lessens their relative attractiveness. In terms of scalability and accessibility to large markets and demographic potential. It weighs them down ever so slightly, so it isn’t to say that these markets aren’t attractive. It’s just the particular aspects that we’re looking at and have weighed, that means that they are pushed down slightly. If you think about more traditional and mature markets, like Morocco and like Egypt. Those have extreme scale attached to them, which means that they are formidable players within the African Continent. Again, if we had to exclude North Africa and simply look at it from an SSA point of view, Botswana and Mauritius would naturally fit into your top 10.

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I guess that also plays in the global breakdown. Africa still having relatively small economies, in a global context.

Yes, and I think the smaller economies are starting to adjust their development plans, so they can leverage their competitive advantages, outside of just natural resources. To be able to compete within global value chains and this is essentially where the continent needs to position itself, going forward given that we are going to see a number of years depressed global demand, which might not necessary support 7% plus growth rates in the economies.

If we just had to run this type of methodology across the globe, which we do within the particular report, we find that Africa is still lagging. In fact, South Africa was the only country to have featured within the top 40 in 2006, from a global standpoint. Even South Africa has dropped to number 45, and that’s being surpassed by a number of emerging economies in East Asia, Latin America, which have continued to forge ahead.

I know you’re looking for the upside there and there are opportunities and they are very attractive opportunities but generally speaking, it’s not a very optimistic story that we’re seeing here. How’s that going to turn around? What’s going to be the catalyst to change that into a smiley face?

I think again it is the realisation that this is not going to be an overnight success. At the moment it is largely a derivative of the global environment, levels of demand and investment. If we just had to look at foreign direct investment, and how that has progressed over the last couple of years. It’s been rather stagnant in terms of allocations to Africa, but as you say, what is going to be that differentiating factor?

One of the key things is all inclusive growth, so again, growth that is more diversified and more meaningful. That encompasses a larger part of your population, so it’s around skills development and adequate access to healthcare facilities. I guess around creating productive levels of employment, so that you grow your labour force and we’re actually able to capitalise on the demographic dividend that is so highly talked about in Africa but perhaps we haven’t made the necessary strides in order to achieve it. It’s because of that that we’ve lagged economies in South East Asia for example. I think that is definitely the catalyst for change. It’s the slow progression in conjunction with industrialisation..

Nema Ramkhelawan-Bhana is Africa analyst with RMB and this special podcast was brought to you by Rand Merchant Bank.

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