LONDON — RMB’s Celeste Fauconnier shares key findings of the details of the latest Where To Invest In Africa listing which reveals that Egypt has extended its lead over SA. – Alec Hogg
The latest update of RMB’s superbly researched Where to Invest in Africa listing arrives at an opportune time.
Another Emerging Market crisis, sparked by ructions in Turkey and Argentina, is making it more important than ever for developing countries to differentiate themselves. Investors have become increasingly discerning – paying ever increasing attention to credible comparisons like RMB’s table.
Celeste Fauconnier is the editor of the easily digestible Where to Invest in Africa annual ranking of all 53 African countries.
Last year’s publication was the first year that Egypt actually overtook South Africa and now, with this year’s edition, the same thing happened. In terms of the methodology that we use, we look specifically at economic activities like growth over the next few years, the market size, and then we also look at the risk side. So how easy it is to do business in these environments. If you take the economic activity out, that is where SA has been lacking, especially looking at our growth-rates that are expected to be below 2% in the next 5 years. Compared that to an economy like Egypt which is going to grow above 4% to 5% in the next 5 years.
Then Egypt is also, when you look at purchasing power, the largest market in Africa. So from an economic activity perspective, Egypt has been the winner. If we look at the operating environment, SA is still far beyond where Egypt is. We’re still one of the most liquid markets – still the springboard into Africa –  but unfortunately our strength in that area did not help us to get the number one spot this year.
Just elaborate a little – you say that Egypt has got the biggest market in purchasing power terms so, does it mean that its economy, on a like-for-like basis, is now bigger than South Africa’s?
Indeed. A few years back the headlines had it that Nigeria is now the largest market in Africa. That was after they rebased their GDP. But consequently, Egypt has now overtaken Nigeria so, in fact, SA is now the third-largest market, Nigeria being second. While we’re saying we’re looking a PPP terms, it’s basically just to compare apples with apples so, we take that exchange rate volatility out of the equation and then, in dollar terms, Egypt is number-one. Naturally, if you do take the exchange rate into consideration, we did see a devaluation in the Egyptian pound. That was negative for their economy and it did actually reflect in its business environment, so we do take that into consideration. If we look at the forecasts from the IMF for market size over the next few years – Egypt is going to remain in the number-one spot. What is helping them is their growth rate of 4% and above, compared to Nigeria and SA with an average of 1.5% to 2%. That is why Egypt will probably retain that coveted spot as the biggest market in Africa for the next few years.
But Celeste, this has got to be a big wakeup call?
I do think it’s probably a wakeup call but I do also see that Government is realising our growth-rate is not doing very well. With the recent number, we are now in a technical recession, but then of course President Cyril Ramaphosa is actively wanting to get foreign direct investment of $100bn into the market, and I think that this strategy is already on track. We see that the Saudis have invested. We have seen, recently, how Prime Minister May from the UK came and said that they are ready to invest quite a significant amount in SA. Once we get our economy back on track again, we will easily be the most attractive investment destination again.  If you look at a market like Egypt – being one of the largest consumer markets with about 97 million people, with the growth rates that I’ve mentioned earlier, there is still more opportunity in those North African countries from a private investment perspective than in SA.
What about things like GDP per capita, how does that come into the calculations?
That indeed comes into the economic calculations and that is where we see it’s more sustainable in SA than what we see in the rest of Africa. Our level of equality is much stronger in the Southern parts of the continent than what we see in the rest of Africa. If you take that component separately, that is where a country like SA will be much stronger than other economies on the continent.
Again, just elaborate a little – when you say, our power of equality?
With countries like Gabon for instance, or even if we look at other oil exporting economies – they have very high GDP per capita. We see about US$10,000 and above. But that is not really reflecting what the people on the ground are actually equipped with as a purchasing power or an income. It is unequally distributed in the hands of only a few, because of the oil richness that this country has. In SA that level of equality and the spread of income is slightly more equal than what we’re seeing in the rest of Africa. Essentially, we’ve got more people in SA with access to income, compared to what other nations have.
That’s a very interesting point that you make there because often SA gets hammered for its GINI coefficient being out of kilter with the rest of the world. But actually, in an African context, not so bad.
Absolutely, and you can use any type of indicator when we look at SA, for instance corruption. I know that we have investors that are concerned about SA. We’ve got our own concerns as South Africans, but if you look at, for instance, the corruption perception index – we are one of the better ranked economies, with lower levels of corruption compared to the rest of Africa. Unfortunately, if we do compare ourselves to the rest of the world, Africa in general is usually much lower ranked in most surveys across the world, for instance The World Bank, and World Economic Forum Competitiveness Index. Fortunately, for us, this publication is only comparing African countries to one another and again, that is where SA shows that it is still one of the best investment destinations on the continent.
It’s a phenomenal publication, it really is, and there’s so much detail in there. Just to get back to the headlines. Good news, clearly, for Egypt, which we’ve touched on. Not such good news for SA, but the future could be very different if certain things fall into place. But the other countries that really did well, in this survey, are led by Nigeria, just before the latest fracas that’s going on there with MTN. Now, would the MTN development in the past couple of weeks, had that happened weeks ago while you were doing your research, have affected Nigeria’s ranking, which on paper here, looks extraordinary – they’ve gone from 13th place to 8th place. The biggest increase of all the countries and 20 points on their index?
Yes, of course. We know with all indices you only have the data available at that time so, in a few weeks’ time something else will happen in a different country that can actually move their rankings. The MTN situation would affect its overall business environment rankings, but that will probably only be reflected in next year’s global surveys that we use to get to our conclusions. The sentiment drops when a country fines companies hefty amounts, and extra taxes get implemented. I do believe that Nigeria will remain in our top-10 most attractive investment destinations for the foreseeable future. In terms of our methodology, and economic activity specifically, it is a very large market with the largest population. From a consumer market it still has a lot of opportunity for international investors and private sector investment. We also see that the significant liquidity crunch that Nigeria faced in the past two years has now eased, and that’s only because oil prices increased. They’ve implemented market friendly regulations so that the liquidity crunch has now been alleviated. You don’t have to queue for dollars at the Central Bank anymore. That’s why I believe it will remain in the top-10.
It’s good news in East Africa, because there you’ve got 4, 5, 6, and 7 positions held by East African countries – Ethiopia, Kenya, and Rwanda all improving their positions. Well, Ethiopia is still fourth. But Kenya and Rwanda moving up the table. Is there something happening in East Africa that perhaps the rest of the continent can learn from?
Yes. Number one – they are going to be the growth driver for Africa over the next few years. They have discovered oil and gas which is going to diversify their economies even more. The biggest learning from East Africa is the fact that these economies are more diversified. They’ve got different avenues for dollars coming into their market, and not just into one type of commodity like we see in Nigeria or in Angola. They not only have agriculture, but they’ve got tourism sectors, very strong services sectors, like ICT. In this respect, Kenya is attracting a lot of foreign direct investment. Whenever there’s a commodity price downturn, like what we’ve seen over that past two years, East African countries are hardly affected, and you can see that in the performance of their currencies. Hardly any volatility in the Kenyan shillings or the Tanzania shillings. Also in Rwanda, because there is access to dollars from different avenues. So the teaching that East Africa can give to the rest of Sub-Saharan Africa, is to avoid the age-old problem we have in Africa – low diversification.
Before we talk on a more, broad scale, Ghana again sticks out like a sore thumb, falling from position 5 to position 9. What went on there?
I think we shouldn’t be too concerned that it was fundamentals in Ghana that pushed their rankings down. Other countries simply replaced it as they have been doing better than Ghana. So you still have strong growth. You’ve got oil and a gas sector that’s picking up quite nicely. Over the past year we’ve actually seen their production increase quite significantly. The political stability is one of the strongest in Africa, but what may be helped drag down their rankings, is a large public debt burden. They did need the IMF’s help over the past three years to be able to consolidate their fiscal position – which they have done, so Ghana will not move out of its Top 10 positioning. It’s still a very friendly business environment compared to the rest of Africa, but they must be careful not to become too dependent on the oil and gas sector, thereby avoiding another Dutch-disease where they are dependent on what commodity prices are doing. Essentially, that number 9 spot was mainly because other countries were doing slightly better over the past year.
I wish you could say that for SA’s neighbour, Mozambique, but that fell like a stone, 73 points in the index, 11 places down. That’s also to do with the debt scandal.
Absolutely. In 2016 the debt scandal rose and that meant that most of the inflows that Mozambique received, actually dried up, like support from the IMF and donor funding, as sentiment dropped significantly. Those are two very big avenues of revenue earnings for Mozambique, and that meant that they had a massive struggle with their currency. We saw significant volatility and a depreciation. Fortunately for Mozambique, the coal price started recovering again. The significant influx of dollars along this avenue means foreign direct investment is still relatively strong, but it’s highly focussed on the resources sector. So the question is – what will happen to Mozambique if coal prices all of a sudden drop again? That is a key risk factor that we need to highlight to our clients. It will mean that their biggest revenue earners are also drying up, while donor funding is also not forthcoming. That means we can see a significant struggle over the next few years. A significant drop in prices is not our core view, though. The oil and gas sectors are also growing significantly, as well as coal production. At least we know that funding will still come through over the next few years, but that the country really needs to be careful and diversify.
There are 53 countries in Africa, and Zimbabwe has been pretty much close to the bottom for much of the most recent period, but it jumped up 11 places, to 34th, and one of the biggest index growths, 76 points. I guess the international community, or certainly the data that you’re looking at, is showing it hasn’t even got to Mozambique yet, but it does seem to be moving in the right direction.
Yes, absolutely. Again, when we look at the data that we use, specifically from an economic activity perspective – we use the numbers from the IMF. When the political dispensation changed, the IMF upwardly adjusted their GDP growth forecasts quite significantly, expecting more foreign direct investment to come in and some sanctions to be lifted. Of course, we believe that it’s a bit too soon to tell. Nothing like this has happened in our lifetime, with Zimbabwe now having a new president. It’s very hard, without historical knowledge, to predict what’s going to happen to the economy over the next few years. Also, it’s very hard to predict whether the new political dispensation will actually be more business friendly. They’re making all the right noises, but whether that will be implemented, is something that we’ll have to wait and see. I think the biggest growth driver there would be the mining sector. We’ll just have to see what type of regulations and policies the new government will change, to be able to benefit from the resources that the economy has.
So, it’s a little bit like a boxer getting off the canvas but now he’s got to fight for his position into the future. It’s been an interesting time to look at your survey and a really good time to come out, given that last week we had the once every three-years get-together-summit between China and African countries in Beijing. There was a lot of focus there on infrastructure and how the Chinese, in fact, when the Chinese got their own economic miracle going – their call to action there was first we build a road. Can you see that having an impact in Africa, in the time ahead?
Definitely. Obviously, them getting together this week is based on what we saw in 2015, where they decided they will invest $60bn into Africa. So that is a big benefit for our economy. Of course, there’s also the other angle of the argument that they are colonising Africa. I do, however, think that the benefits have definitely been outweighing the risks of such large investments from China into Africa. It is largely into infrastructure, that is China’s main focus on the continent. Essentially, it is to extract some of our resources to the benefit of China. The roads, the railways, the ports – infrastructure investment that we’ve been seeing from China, has been more beneficial than detrimental to the economy. Also, I do believe that the growth in China is a bit slower than what we are seeing in the numbers being published. So, we must be a little bit careful of what the China’s demand is going to be, globally, and naturally for African goods, as China is now Africa’s largest trading partner. But I believe foreign direct investment from China will continue to grow annually, and specifically into infrastructure. I think one area that is going to benefit, is East Africa. We are seeing a lot of investment from China into Ethiopia to be able to grow their manufacturing sector. I believe it’s because of the low cost of labour that we are seeing in a country like Ethiopia. But again – beneficial for the inflow of currency into these markets.
Ethiopia is already number 4 on the table and the gap between Ethiopia and SA contracting from 61 points to 47 points, so that’s another challenger to the country’s position. Just to wrap up. In the tax world they talk about a tax gap (the money that disappears) – what’s the infrastructure gap in Africa? How much does Africa need and how much is it getting on an annual basis?
A few years back the Africa Development Bank said that the deficit is about $90bn annually, for the whole continent. Now, recently they’ve increased that number. It’s about $130bn to $170bn. We have economies that are trying to fiscally consolidate because they’ve been spending too much. What does that mean for infrastructure investment? It will probably be lower, which means that the private sector now has a massive opportunity to get involved in these economies and build that infrastructure. Africa needs to change some of its regulations and policies to be attractive for the private sector.  Specific areas that need the most attention is, of course, electricity. Imagine a country like Nigeria that used to grow by 7% to 8%, with 190 to 200 million people. Imagine they had 100% electricity capacity and what that economy could do, and how it can grow over the next few years? We saw the same happening to Asia about 20 years ago. Investment into electricity is a key element. We also see a large increase in investment into the renewables side. I think that is where the policies and regulations, from a government perspective, makes investment easier than what we see in your State-Owned Enterprises providing electricity for these countries.
What about just basic stuff, like roads, dams, railways?
A few years back, if you look at what investment into infrastructure was focussed on, it used to be ICT. That’s why we saw a significant boom in countries like Kenya, and other major East African economies. But now, we have started seeing a change again. Again, it is electricity, roads, railway that is starting to see investment. We are seeing large railway initiatives across the continent, specifically from the AU, from the AFDB, from SA – who are investing and hosting programs and conferences on this. I think we will see a nice increase in investment over the next few years. Getting your goods from point A to B is more difficult in Africa than in the rest of the world, and eventually exporting it. So, most of the trade in Africa is seaborne because we don’t have proper road and railway. Again, imagine an Africa where regional trade is dominating, and costs are cheaper. Watch this space, it’s an exciting opportunity and hopefully with all the free trade agreements coming along we will see regional trade increase significantly.
