Investing in Africa: SA’s lost crown and how it can get it back from Egypt

In each of the last six editions of RMB’s authoritative report ranking the best places to invest in Africa, the middle income nation on the southern tip has topped the pile. But this year South Africa has slipped to second, ceding its crown to Egypt. In another major shift, Nigeria has now dropped out of the Top Ten. In this interview, the report’s author Celeste Fauconnier explains the back story behind the changes, outlines the likely impact and suggests ways in which Pretoria can regain the top spot. – Alec Hogg

Africa Analyst from RMB, Celeste Fauconnier, is with us on a story that has been making headlines, the latest Where to invest in Africa report. How many editions have you done of this report?

This is now the 7th year that we’ve done the Where to Invest in Africa publication. So, we’ve got a historical background. Even though this year there have been quite a number of changes. At least we can explain it by way of the methodology that we use, which remains consistent and has remained consistent over the past seven years.

The big one, as far as South Africans are concerned, is that SA is off the top for the first time ever.

Yes. Finally it’s ceded its crown. Unfortunate for us, but if we look at the methodology we shouldn’t be too concerned. The main reasons for the shift to the second place now, behind Egypt, is that our growth rate is not helping us much and the growth component is quite strong within the methodology. And, of course, we use the market size as the second indicator of the methodology.

The third indicator we look at is the operating environment, and there we know that SA is still miles apart from Egypt. We are still one of the easiest environments to do business in. Unfortunately, we faced a recession last year, where Egypt grew by 3 – 4%, and we do know now that Egypt is the largest market in Africa. That is even ahead of Nigeria now.  All these aspects have actually pushed Egypt up in the ranking. Just to highlight that the change or the margin between the two scores is minimal, it’s 0.02% points. So, it’s basically still a neck-on-neck competition.

So, SA could get back if the economy starts growing again?

Absolutely. But unfortunately, if we look at the forecast of a growth rate of about 1.5% for the next 3 – 4 years, maybe it won’t get into that number one spot in next year’s edition. However, our operating environment is still much better than Egypt. If Egypt does anything wrong in the next year, we can easily see SA trumping it again.

What do you mean by ‘operating environment?’

For that component in the methodology we look at quite a number of pillars, and look at all the most reliable surveys we can get across the world. For instance, the World Economic Forum’s competitiveness report, all the way to the World Bank’s ‘Doing Business Reports’. Underneath these there are a number of pillars.  It can stretch all the way from ‘how good is your infrastructure’ and ‘how liquid is your currency markets’ to ‘how strong are your institutions’ and ‘what is the political risk’. So you can’t just pinpoint one. It is a wide array. But again, Egypt is still a far cry from the top 5 best business environments, which include SA.

That’s a very interesting point you make there because in a piece on BizNews from Independent Economist, Azar Jammine, he warns that we could see SA falling in those ratings in the wake of the furore that’s going on at the moment, about KPMG and McKinsey. Particularly, for instance, World Economic Forum, where SA ranks very highly on audit processes. His suggestion is that we’re not going to be there anymore so, all of these things are intertwined, aren’t they?

Yes, absolutely. Thank goodness, these reports do come out with a lag as they are annual reports. If we had to see one of them come out now, I am sure that market moving news like that could move it down. We have seen from WEF and the World Bank that SA has slipped some rankings because of concerns about our institutions, but I still think we are at the top of the African log. We still have the best financial sector on the continent. If we do things right and fix things quickly, it might not reflect in next year’s survey rankings across the world.

How seriously do people take the rankings and particularly, this survey?

If you are an investor and you don’t have the ability to do the research yourself I think these surveys are key for doing business in other economies, specifically Africa. We know that there is a lack of data across the continent. It has definitely improved over the past few years, so I think investors do depend on research houses like ourselves to get them the information. We do a lot of our own research. We visit the countries extensively where a company might not have the resources to do that. That’s why they find these surveys quite important. But even I would say, having written this report, that you have to take the methodology into consideration to understand the rankings. If you don’t look at the methodology, you would see countries in the positions that they are in, and not be sure why they are there.

A good example is Tanzania. Although it is in the top 10, Tanzania is battling with their own business environment at the moment, for instance politicians getting involved in the mining sector. We had questions about why Tanzania is still in the top 10 when it’s battling like this. To highlight again, growth and market size are key components of the methodology and that’s why it’s still doing very well. If we had to take those components out and just look at risk, Tanzania can easily fall to the 18th or the 19th spot in the rankings. So, I think when investors look at the rankings, they must also look at the methodology behind the ratings.

RMB’s Africa analyst Celeste Fauconnier.

And what they want out of it as well. If they’re risk averse, they don’t worry about the risks and perhaps take the rankings and look at Egypt rather than SA.

Absolutely. What we do to cater for these types of clients, is that we’ve got 2 different rankings. A ranking for when you’re purely looking at macroeconomics, and a ranking for when you look at the risk associated with the business environment. And there, if you look at the operating environment alternative ranking, you’ll get countries like Botswana, Namibia, and Mauritius doing very well because they’re investment-grade countries. The risks are much lower in these economies. If you had to look purely at macroeconomics, you’ll get Nigeria, Ethiopia, and even Egypt that will come to the fore because they’ve got strong macroeconomic forecasts for the next 5 years.

So, it is a canvas upon which you can paint your own picture. But the Nigerians did not perform well in this latest number. Dropping out of the top 10, in fact, to position 13. That, I guess, for many people 2 years ago, would have been almost inconceivable.

Absolutely. This is the first time in the 7 years that we’ve written this document that it does not feature in the top 10. Looking at the growth of the economy – it had recessionary conditions. It has definitely eroded its short-term investment appeal and of course, there are many other challenges it faces, like political instability in certain parts of the country and the fact that it’s still highly dependent on what the oil price does. And the pace of diversification is still, unfortunately, very slow. However, I do believe that if they start diversifying more, and if oil prices start recovering again, we will see Nigeria coming back into the top 10.

Celeste, that’s an interesting point you raised there about the actions that have been taken by countries in reaction to the commodity price slump. Are you seeing any moves up and down the table? You’ve touched on Nigeria, but on the table generally, any action by those countries that are applying the right policies and those who perhaps are keeping their heads in the sand?

I think we can use two very good examples here, and that’s specifically in East Africa – Ethiopia and Rwanda. Ethiopia, now in the top 5, is one of the most attractive investment destination even though it’s a country that is marred by some political instability. We have seen in the past 2 years that they obviously have border issues with Somalia, but all of this is indicated in the rankings. We do take all of that political instability into consideration, but what these countries have been doing and what we need the rest of Africa to do, is that they are investing into their industries. They are not dependent on, specifically, foreign investment. They’re actually dependent on the government implementing changes into their own local industries.

Ethiopia, for instance, is probably going to become the manufacturing hub in East Africa, where Kenya is now the major hub. A very good example: China is entering the market to make use of cheap labour, cheaper than what we see in China, manufacturing Chinese goods in Ethiopia and not locally anymore. That’s just certain companies, naturally. Also, the spending of the Ethiopian government is actually helping the growth rate to move above 7% for the next 5 years, and we’ve actually seen that in the past 5 years. The situation is similar with Rwanda. We know the story of Rwanda adopting a very similar policy to Singapore, driving its own economy because it doesn’t have resources. It needs to actually get investment from a different path. What they’ve done is made the country so investor-friendly that investors would ask ‘why not ’ invest in a country like that?’, and then they can tap into the rest of the East African community at the same time.

Flag map of Rwanda

I heard it once defined that a developing country is one where politics is more important than, or trumps economics. It appears that when you get the politicians doing the right thing, as you’ve now identified with Ethiopia and Rwanda, they can make a huge difference. But are there examples of where the politicians on the continent are perhaps getting it wrong?

Oh yes, of course. We can sometimes look at our own country, but if we look at the rest of Africa and a country like Egypt, which hasn’t been in the number one spot, we know that the politics and what the government did during the Arab Spring almost took Egypt out of the top 10. Yes, it’s definitely improved. That is why it is number one now, but that is a good example. Another example is looking at a country like Tanzania. They need to make sure that they don’t get too involved in the mining sector and make sweeping changes. Otherwise we are easily going to see that slip.

But overall, if we look at the top 10, most of these economies have made significant strides, or governments rather. Significant strides to reform some of its business indicators. A very good example here is Côte d’Ivoire, which is ranked in the top 10 – Coming out of significant political turmoil in the past decade to being one of the shining stars in West Africa. I agree 100% with whoever made the statement that politics is very important for economics, specifically in Africa.

What about those who want to take long term decisions, and many businesses are like that? How will they look at this ranking and have their own approach, perhaps enhanced?

Number one is look at what type of business you have. These rankings paint all companies with the same brush. It’s a simple methodology that we take across to all our clients. They need to decide what their risk and reward status is like. We’ve done the research on where we see the best data and the best influences from the government over the next few years.  So that is already done. I think it now depends on the investor to decide what they actually want to do. Very important here is that if, for instance, a retailer wants to look at a country, they shouldn’t look at the country as a whole. They must look at the city because there are such large rural areas in some of these countries that they should rather focus on where the urban population is living. So, a company has to tweak their own way of implementing their Pan African strategies.

And when you sum it all up, clearly SA has to be disappointed for no longer being the number one destination, but what are the other big things to come out of the survey this year?

African countries need to realise that if they don’t diversify quick enough –  that is the age-old story and we don’t have to dig into that – that they won’t make the top 10. A very good example is Nigeria and Algeria falling out of the top 10. These economies are starting to diversify, but it’s too slow. I understand that the global markets aren’t conducive to a quick pace of diversification because demand is quite low, from a global perspective, but we need overhauling reforms in these economies and specifically their business environments.

Celeste Fauconnier is an Africa analyst with RMB, and this special broadcast was brought to you by RMB.

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