The IMF’s latest World Economic Outlook makes sobering reading for most of the world. Headlines have focused on the IMF’s warning that the world economy may never return to the pace of expansion it enjoyed before the global financial crisis; in the meantime, it has cut its global growth forecasts for 2014 to 3.3% and for 2015 to 3.8%, both of them downgrades from previous expectations.
But there’s a bright side: Africa.
The most readable emerging markets economist, Charles Robertson of Renaissance Capital, had this to say this morning. “The IMF 6-monthly release of economic data is a little dose of heaven to this economist. The world can focus on gloomy headlines about the IMF downgrading its projections, but… there are growth stories: They’re in Africa, which is taking the lead from Asia.”
You can download the IMF report here. It includes figures on projected real GDP percentage growth in 2014, and a close look at the data shows why Robertson is so excited: six of the the top 10 countries, and 11 of the top 20, are in Africa. While Asian countries are still in there – in fact, the top 19 are all in Africa or Asia – they are no longer the majority.
They are perhaps not the obvious names. Most portfolio investment into Africa goes into South Africa or, more recently, Nigeria, with Egypt popular pre-revolution, Kenya and Ghana attracting increasing attention, and Morocco occasionally favoured despite its modest stock market size. None of those countries appear in the top 10; Nigeria, the only one in the top 20, ranks 17th. Instead, we have oil and gas stories (Chad and Mozambique – plus, outside of Africa, the number one country on the list, weird and wonderful Turkmenistan), mining plays (The DRC and Sierra Leone), soft commodities (Cote d’Ivoire) and, a relative outlier, Ethopia, which Robertson calls “more an investment led story driven by the government”. Incidentally, the Asian countries rounding out the top 10 are a resource play (Mongolia), an emergence play (Myanmar) – and China, which ranks 10th, at 7.4% growth. Looking at African countries elsewhere in the top 20, aside from established Nigeria (now officially the 21st largest economy in the world following the rebasing of its GDP), there is a newly opened market (Tanzania), and countries at either end of the wealth and education spectrum, The Gambia at one end, Mauritania and Burkina Faso at the other. Overall, sub-Saharan Africa grew by 5.1% in 2013, and the IMF projects it to hit the same figure in 2014 and 5.8% in 2015.
The IMF says: “Economic activity in sub-Saharan Africa has continued to grow robustly – on the back of supportive external demand conditions and strong growth in public and private investment – and the outlook is elected to remain favourable for the lion’s share of the region’s countries.”
All well and good. But two points occur. One, strong economic growth does not automatically equate to a positive experience for investors. And two… Ebola.
To take the second point first, nobody really knows how bad Ebola could be. The IMF, whose blunt tone must be forgiven in what is, after all, an economic report, writes: “Beyond the severe humanitarian implications, the ongoing outbreak of the Ebola virus is exacting a heavy economic toll in Guinea, Liberia and Sierra Leone.” The man who discovered Ebola back in the 1970s, Dr Peter Piot, was quoted this week as saying: “I am so worried about Nigeria as well. The country is home to mega-cities like Lagos and Port Harcourt, and if the Ebola virus lodges there and begins to spread, it would be an unimaginable catastrophe.”
Even without that, African countries face other challenges. The IMF highlights a rapid buildup of fiscal vulnerabilities in a few countries, increasing security threats, and the risk caused by a tightening in global financing conditions (which is always a possibility when the US starts raising interest rates again).
Despite these issues, portfolio flows in both debt and equity in recent years have demonstrated renewed enthusiasm for exposure to Africa. In the bond market, for example, one sovereign after another has brought a bond to the international markets and found it heavily oversubscribed, recent examples being Kenya and Cote d’Ivoire.
Every country is different, of course; speaking of Africa as a homogenous continent makes no sense at all, given the combination of relatively mature middle-income countries like South Africa, oil-rich countries in turmoil like Libya, densely populated West African countries, places with dire security situations like the Central African Republic and South Sudan, and post-war rebounds like Angola and Mozambique. The successful investor will need to distinguish the opportunities from the duds. “In many countries,” writes the IMF, “activity will continue to benefit from the boost generated by infrastructure projects, the expansion of productive capacity, buoyant services sectors, a rebound in agricultural production, or combinations of those factors. In some middle income countries and oil exporters, however, the picture is more mixed. In South Africa, a muted recovery is expected to take hold only in 2015.”
International I write about banking and finance in Asia, the Middle East and Africa.