Riscura’s annual Bright Africa report continues to expand as it taps into new data that is emerging. The recently released 3rd edition includes research into private pension fund and insurance capital – pools that already exceed $600bn and are growing rapidly. Riscura principal and lead author of the report, Rory Ord, talks to Biznews.com’s Alec Hogg about the key findings and discusses the upside of the collapse in the oil price – an opportunity for reform that parts of the continent are grabbing.
This special podcast is brought to you by Riscura and Rory Ord, who’s the Principal at the company and lead author of the latest Bright Africa Report, is with us in the studio. This is the third edition of this report, Rory.
It is. Thanks Alec. For a number of years now, we’ve been advising clients throughout the financial market’s ecosystem in Africa, right through from Pension Funds, to insurance companies, to various players on listed and unlisted capital markets all around Africa. What we found is a very interesting perspective that comes from pulling all those different perspectives and components of Africa’s markets together into one report, which shows the current status of investing in South Africa.
It’s incredibly comprehensive. You’ve also, put it online. You can download it, etcetera. The first thing that jumped out at me was the way that you’ve broken Africa up into nine regions. People like me, living in South Africa, have this delusional view that we are Africa. In fact, when you break it into nine regions, we only come in at number four.
This is such an interesting thing. We’ve looked at Africa before. Clearly, Africa has 54 countries and from an analysis point of view, that’s quite a difficult thing to break down. This time around, we’ve looked at some of the cultural links, the trade links, and some of the ties that bind different African countries together, to form nine different markets around the continent. This makes it much easier to digest and what we can see is that e.g. when you put some of the North African market together to form the Maghreb region. When you put the East African markets together, these become much more meaningful and sizeable chunks and it becomes much easier to analyse between those different markets.
There are a number of interesting results, which came up here. What analyses/processes do you use to get to that end number?
This is one of the most difficult things about doing a report like this, which is getting your hands on this kind of data. Africa has a long way to go in terms of building its information. If you look at the U.S. for example, you can get a data statistic on just about anything but in Africa; you really have to go digging for it. We had to look into not only the standard places such as the IMF database etcetera, but looking at local regulator sites of different markets in Africa and working with our contacts around the continent to just really, dig out that content and find out about all the different parts of Africa’s capital markets.
I guess that’s the business you’re in, so it also plays to your strengths.
Absolutely. We’ve been operating in private equity, listed equity, and Pension Funds around the continent for the better part of the last 15 years, and so it’s something we’ve managed to build up over time.
A big focus is the investment side: for the first time in this edition, you looked at Pension Fund capital and some surprisingly good numbers came out.
Yes, this was a very interesting result coming out of the report this year, in that there’s around $340bn of Pension Fund capital, which has built up in the continent. Much of that is from the largest base, which is in South Africa but we’re seeing huge growth in Pension Assets in places like Nigeria, Kenya, and mostly around the rest of Southern Africa. To a lesser extent, you find it in the Francophone African countries and in North Africa, just because of the way the social security net is set up in those places. In the rest of the continent though, you’re finding a very strong growth from very young populations as they start to enter the workforce, and they start to contribute their capital into Pension Funds, and you’re seeing the investment side of that starting to be done a bit better as well (in a more formal way). All of those factors are contributing to a bigger build-up of capital.
You really can dig fairly deeply into the numbers. It was interesting to see that a big chunk of that capital (in certain parts of the continent) is being put into fixed interest. Is there a swing? When you look over a period of time, is there a swing towards more productive capital classes?
This is such an interesting point. Even if you look back in South Africa’s history, you’d find a time when there was a very strong focus on investing, particularly into Government bonds, in South Africa. This is where many of the markets are, around the rest of the continent. Currently, Pension Funds still invest much of their assets into the bond markets. As the listed equity markets start to develop more, the costs of trading come down, and the number of listed companies improve. That’s starting to encourage more investment into the listed equity markets. As regulatory change happens as well, we’re seeing more investment going into unlisted asset classes.
Into private equity.
Exactly. Private equity. There’s the beginning of private investment into infrastructure in a number of places around the continent so it’s an interesting time.
Big opportunities in energy – again – unpacking the granular details, which you have in the report. South Africa’s still well ahead in the energy field, but presumably, there are big opportunities elsewhere.
Yes. We’re seeing a huge energy deficit/electricity deficit in huge parts of the continent. Even though (by African standards) South Africa’s electricity infrastructure and production capability is relatively high, we still feel the effects here of the lack of capacity. That’s only a much bigger issue around the rest of the continent but what that is creating, is opportunities for the private sector because Governments around the continent don’t have enough capital to fill that gap. I think the World Bank estimates that Africa needs around more than $90bn per year to be put into infrastructure, to close the infrastructure gap, and African Governments simply don’t have that amount of money.
So you could suck up this Pension Fund in a matter of a couple of years. Maybe bring in the Insurance Funds and suck that up quickly, and you still wouldn’t get to where you need on the energy equation.
Yes, and clearly, there’s a role for all players here. There’s a role for Governments to play to start filling that gap and provide the regulatory frameworks, which are necessary for private investments. There’s a role for offshore players and development finance institutions and clearly, there’s a role for local capital on the continent.
Rory, as an overall perspective (because you have seen, and I can’t stress enough how much detail there is in this report – that people can go in and look at), are the opportunities on this continent outweighing the threats? There are very clear drawbacks.
Absolutely, and this is something we haven’t shied away from, in this report. We’ve made it quite clear that there are many risks associated with investing in the continent, as there are in all places in the world. Every investment comes with risks. We think the growth levels that are happening in much of the continent, the formalisation of economies, and the boost that the resources cycle has given to Africa over the last decade or so has really kick-started the process of developing many economies and is creating many opportunities for private investment.
You mentioned the energy. Well, we’ll look specifically at oil. From the breakdown that you have on the exports from the continent, oil is very important. It’s halved in price in the past year. How is that going to affect?
The main area, which this is going to affect, is in Government finances. It puts a bit more risk on the exchange rates of African countries as well. When the oil price dips, you see that demand/supply balance of the local currencies actually shifts as countries no longer sell as much of that export commodity, so that’s the place you feel it first. Then, in the royalties that Governments normally earn from those exports, you’re feeling some reduction there. In many of my conversations with people around the continent, this is actually being seen as a great opportunity for reform for countries that have perhaps, relied a bit too strongly on things like oil exports.
Aren’t you worried that the reduction in the export earnings (because of the oil price fall) might spike the African Renaissance?
Look, I think there are going to be some short-term challenges but the interesting thing is that the economic growth that has been driven over the past decade has only been partially driven by oil and the other commodities. Some interesting studies have been done around how economies that don’t have resources, have done compared to those that do and there’s actually only been a small difference between them. This leads us to believe that while this will be a short-term setback, it’s certainly not going to derail the African Renaissance (as you put it).
To close off with, if you have a client asking you today, which of those nine regions that you’ve broken them into, is the most appealing and they can only investigate one, which would it be?
I think you’re trying to shortcut my answer. They should always take a diversified approach. Particularly in Africa, where we see there is currency risk, individual country risk, and individual political risk. We think that when investing right across the continent, that’s a way to mitigate those risks and take advantage of the growth as a whole. That said; there’s currently a lot of optimism about East Africa and the way they’re performing. For example, the trade unions between the different countries and the way they’re trying to work on their infrastructure shortages as well so I think there’s a lot of optimism about East Africa at the moment.
So you would up-weight East Africa. Who would you down-weight?
Look, I think all of these things are quite difficult to do in practice, just because of the nature of investments. The listed markets tend to be fairly illiquid, so you would have a longer-term strategy of allocating across the continent. What we’re also seeing is North Africa (and Egypt, in particular) starting to stabilize and come back quite strongly. Clearly, the oil-producing economies are going to experience some bumps in the road as we go along this lower oil price discovery. In the shorter term, we would probably down-weight there.
Rory Ord is the Principal at Riscura and the lead author of the Bright Africa 2015 Report, and this special podcast was brought to you by Riscura.