Bulls n Bears Entrepreneurship Zone :: Itumeleng Mukhovha: Investing in Africa – an outlook on Nigeria and Ethiopia

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One can easily assume that international investors are deterred from
investing in Africa given the growing need to weather a global financial
crisis, which has been distorted by Brexit, rising geopolitical tensions,
tightened global liquidity conditions, leveraged loans and sketchy debts
that continue to riddle bank systems, idiosyncratic governments and the bond
yield curve that is trending toward inversion.

However, this is not the case. Conversely, the global financial crisis and
the desperate search for growth, yield and solvency has led investors to pay
more attention to emerging markets in Africa, and in particular frontier
markets with favourable growth paths, moderate debt levels and high returns
on investment.

The stock markets across Africa have reportedly exceeded a market
capitalisation of US$100 billion and are substantially larger than those in
Central Europe and Russia in the mid-1990s, when they first opened up to
foreign investors.

According to the International Monetary Fund, the African markets have been
a strong bull run and shown a compound annual growth of 3.5% in 2018 and are
projected to pick up to 3.9% in 2019. There are many factors that make the
African continent an attractive destination for institutional investors,
such as the economic prospects, a favourable demographic profile, high
urbanisation and the rise of the African consumer. The acceleration in
growth has also been driven by cyclical improvements and supported by
favourable regional conditions. These favourable conditions include the
restoration of oil production in Algeria, Angola and Nigeria, the improved
external financing conditions, the moderate increase in commodity prices,
surging foreign direct investments and the narrowing current account deficit
in certain jurisdictions. In Ethiopia and Nigeria, this growth has been
spurred by partial privatisation of state-owned companies and high commodity
prices, respectively.

Contrary to the images that would previously conjure up at the mere mention
of Ethiopia, the country has made commendable economic progress in reducing
poverty and improving living standards. While the market outlook continues
to be somewhat subdued for Ethiopia, due to dynamics that were historically
hampered by poor government policies and state-owned monopolies, foreign
exchange shortages, and weak prices for traditional exports, Ethiopia has
displayed economic growth potential. In the last quarter of 2018, the
International Monetary Fund’s World Economic Outlook Report predicted
Ethiopia to be the fastest growing frontier economy in Africa with 8.5%
growth, thereby far outstripping the growth of advanced economies.

Ethiopia’s economic growth has been driven by an increase in industrial
activity and the availability of domestic and foreign investments in certain
industries such as infrastructure, manufacturing and telecommunications. The
reduction in its current account deficit to 6.4% of the real gross domestic
product in 2017/2018, the flexible exchange rate regimes and the various
attempts to bring inflation back on target have all supported Ethiopia’s
economic growth. In addition, the current Prime Minister’s reform agenda is
driven by a strategy to shift the engine of economic activity to private
sector development while allowing the public sector to be consolidated into
such development.

For instance, the Ethiopian Government has accelerated its efforts to
bolster network expansion and improve the hardware capabilities and
infrastructure of its state-owned telecommunications company, Ethio Telecom,
which boasts over 60 million mobile subscribers and 18 million internet
users. To this end, the Ethiopian Government has reportedly opened-up Ethio
Telecom’s assets and shares, for acquisition by local and foreign investors
as part of a multi-billion dollar investment. This investment is aimed at
accelerating fixed broadband and internet penetration and ultimately,
fast-tracking the development of Ethio Telecom’s infrastructure. Although
the telecommunications monopoly seems to be the main prize, because of its
protected market and the absence of competitive broadband services, other
major state-owned companies facing partial privatisation in 2019 include
Ethiopian Airlines, Ethiopian Shipping and Logistics Services Enterprises
and Ethiopian Electric Power.

Turning to Nigeria, the upgraded forecast reflects improved prospects for
Africa’s most populous nation and the growth of its real gross domestic
product is projected to increase to 2.3% in 2019. Although the sharp
recovery of oil prices and various portfolio outflows have provided some
relief to Nigeria’s 1.5% annual contraction and technical recession recorded
in 2016, the country’s improved economic growth still falls short of the
levels seen during the commodity boom of the 2000s. Although crude oil and
gas products accounted for over 94.4% of Nigeria’s foreign exchange earnings
in 2018, Nigeria is under immense pressure to introduce reform policies in
order to adjust to the global pursuit of sustainable energy alternatives,
which include solar energy, wind power and geothermal energy. The Nigerian
economy’s vast dependence on its crude oil and natural gas resources also
makes it vulnerable to oil discoveries in other African countries, the
global push towards technologies that promote energy sustainability and
fluctuating commodity prices. The extent to which the Nigerian economy moves
towards its near-term development aspirations will depend on the success of
its import substitution policies, the fast-paced implementation of
structural reforms and economic diversification of non-oil economic
indicators.

In order to address Nigeria’s economic diversification and growth, the
federal government launched the Economic Recovery and Growth Plan (ERGP) in
April 2017. The ERGP is a medium term all-round developmental initiative for
the period 2017-2020, focused on restoring economic resurgence and building
a globally competitive economy. Some of the objectives of the ERGP include
stabilising the macro environment, increasing non-oil revenue generated from
the agricultural sector, improving transportation infrastructure, driving
the industrialisation of small and medium-sized enterprises and ensuring
sufficiency in energy and petroleum products.

Although there have been challenges in achieving the ERGP objectives,
positive results are already manifesting in key economic indicators. For
instance, the Nigerian economy has witnessed an increase in non-oil revenue
generated from the agricultural sector, which has reportedly shown a steady
growth of 18.58% in the last quarter of 2018 and contributed 14.27% to the
nominal gross domestic product. In addition, the ERGP task team has launched
a number of agricultural projects such as the commissioning of the West
African Cotton Company Limited rice mills in Argungu, Kebbi State, with a
production capacity of 120,000 metric tonnes, geared towards enhancing
productivity in the agricultural sector. According to the most recent data
published by Nigeria’s National Bureau of Statistics, other non-oil sectors
that are contributing to Nigeria’s economic growth include trade,
telecommunications, mining and quarrying, real estate services, finance and
insurance and construction.

Evidently, there is great investment potential across the African continent
and the outlook on African countries remains positive despite the reported
downgrades for the global economy.--Howwemadeitinafrica



Itumeleng Mukhovha

 

 

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