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WHY INVEST IN Sub-Saharan Africa? Well, for one thing, yield. The quest for returns has, in these days of ultra-low interest rates, become almost mythical, like the hunt for an elusive elixir. Hence the clamour for African government bonds over the past few years.
Despite some lean quarters, a surprising number of regional sovereigns have in recent years issued debt securities, from Ghana and Kenya to Senegal and Côte d’Ivoire. Sub-Saharan African sovereigns printed paper in record volumes in 2014, issuing $9.17 billion of bonds, against $6.28 billion the previous year. That was partly pre-emptive, as governments sought to raise capital before the US Federal Reserve hiked interest rates.
But yield offered a further incentive, with global investors hungry for returns and finding them, notes Ravi Bhatia, director, sovereign and international public finance, at Standard & Poor’s, in “high-growth” sovereigns. Typical of returns on offer were yields on Nigerian 10-year bonds, just shy of 14% on 30 April.
The region has also become a new focus for the Islamic finance and bonds market. In late April, Côte d’Ivoire became the latest regional sovereign to issue an Islamic finance bond, or sukuk, raising $490 million to pay for infrastructure projects. South Africa launched the continent’s first Shariah-compliant US-dollar debt facility in September 2014, with Niger launching its own $258 million sukuk in February 2015. Two months later, the National Bank of Ethiopia announced plans to launch a secondary bond market in 2016.
IPOs gain depth and diversity
Nor have the equity markets been quiet. More than $1.3 billion was raised in 2014 through regional initial public offerings, according to Dealogic, up from $471 million in 2013 and $390 million in 2012. The nature of the IPOs also highlighted the increasing range, depth and diversity of equity capital markets: the list included the $538 million dual listing in London and Lagos of Nigerian oil exploration firm Seplat, and the $100 million IPO of South African FMCG specialist Rhodes Food Group. Smaller listings peppered usually illiquid stock markets in Botswana, Gabon and Uganda.
All these sales happen for a simple reason: Sub-Saharan Africa offers the sort of reward found only in a few other pockets of the emerging world. To some, the central reason to invest is people. The region is growing both more crowded and more wealthy: the UN tips its working-age population to exceed that of the rest of the world combined by 2035, with two-fifths of the global workforce. Economists talk of Africa becoming the next natural home for manufacturing and outsourcing as production moves away from Asia, given improving levels of education, a solid language skill-set and lower labour costs.
“Africa’s human resources are particularly a big plus for local and foreign direct investors,” notes Albert Essien, group CEO of Ecobank, which has offices in 36 regional countries. “Africa has the highest fertility rate in the world…and by the end of this century there will be 4.2 billion Africans, or half of the world’s under-18 population. This presents numerous opportunities for investors to provide goods and services to this booming population, over half of which is now urbanised and has rising disposable income.”
This means more money and more wealth to spread around. “Consumer demand for products is likely to rise, while demand for luxury goods is rising and there is a scope for large economies of scale,” notes Angus Downie, head of economic research at Ecobank. “The region has not yet matured, which suggests that there are a lot of untapped resources and opportunities. A number of opportunities could lie in the road, transport and communication sectors, especially given the growing drive by African governments to issue Eurobonds to boost infrastructure in their countries.”
Opportunities are legion
To Irmgard Erasmus, an economist at independent South Africa-based consultancy NKC, key rationales for investor interest are rising productivity and the region’s ability to spend capital wisely on infrastructure. Erasmus points to the “tantalizing drawcards of high economic growth, a favourable demographic dividend and vast natural resources”. The opportunities for business, and private equity investment, “are legion, especially against a global backdrop of sluggish economic recovery”. The latest data from Euromoney Country Risk shows financial, fiscal, economic and political security rising in virtually every country across the region, bar cases like Zimbabwe. Finally, there’s natural resources. Much of the reason for the frenzied activity surrounding euro- or dollar-denominated sovereign bonds, or chunky corporate IPOs, circles back to rising demand for hard (metals, energy) and soft (wheat, fruits, soybeans) commodities.
But the main reason to invest, says Edward George, head of group research at Ecobank, remains the region’s “resources, both mineral and human. The continent sits on a large share of the world’s mineral resources, most of which are unexploited, and is a leading producer of [agricultural] cash crops for the global market”.
This, he notes, presents virtually endless possibilities for investors looking to provide goods and services to an increasingly urbanized and wealthy population. “Whether developing agribusiness value chains, or offering mobile banking services,” or everything from motorbikes to new homes, “there is a wealth of investment opportunities, and relatively little competition,” George notes. “But it won’t remain this way for long: investors who continue to profess a desire to invest in Africa but do nothing about it could miss the boat.”
