Talk to any group of business leaders, economists or academics about the economic outlook of sub-Saharan Africa and the responses will quickly split between the pessimists and the optimists.
The glass half-full brigade will point to recent strong growth levels and success in reducing poverty. The half-empty troupe will bemoan the slowing growth in China and tightening US monetary policy on top of rampant corruption.
That divide was thrown into sharp relief in September as two major financial events highlighted the nature of the half-full/half-empty debate that African policymakers have had to deal with.
On September 8, European commodities giant Glencore halted production at mines accounting for a large chunk of copper production in the Democratic Republic of Congo and Zambia. It was another sign of the difficulties, as China’s economy slows, facing an industry that remains crucial to African exports and investment.
But less than 10 days later, Belgian-Brazilian brewer AB InBev revealed it was in talks for a takeover of SABMiller, a successor to South African Breweries. Africa, which accounts for around a third of SABMiller’s revenues, is a big part of the motivation for what could be a merger of the world’s two biggest beer companies — a clear sign of Africa’s continued lure for investors.
Steve Kayizzi-Mugerwa, acting chief economist at the African Development Bank, says the rise of Chinese investment has been a “game changer” for Africa, allowing poor countries to move beyond loans from the ADB, World Bank or similar. “Countries such as the Democratic Republic of Congo, Sierra Leone and South Sudan would not have expected much investment if it were not for the Chinese,” he says.
Chinese direct investment in the continent has grown sixfold since the start of the millennium, according to the World Bank. Chinese official development assistance has also rocketed although it remains far behind developed market assistance. Africa’s trade with China has expanded far more rapidly than its trade with any other region and China became Africa’s biggest trade partner in 2009.
Worries about less voracious Chinese hunger for African minerals have, however, become more acute since 2012, when Chinese mining groups walked away from high profile African buy-outs.
CHINA'S MARKET CRASH
The calming in China’s scramble for Africa was already having a knock-on effect on Western mining groups’ appetite to invest in Africa, killing off the post-crisis 2008 surge in Africa-focused junior exploration IPOs. Equity investors have been less tolerant of capital spending by mining majors ever since. China’s market crash this summer suggests the fear around future Chinese mineral demand was justified.
Indeed, the World Bank warned in a report this summer that disappointing growth in China would be a blow for African exports, further bringing down mineral prices, while attendant cutbacks in production and new investment in the extractive industry would weigh on African growth for years to come. It looks set to exacerbate financing risks as dollar rates rise and aversion to emerging markets increases.
Ayo Salami, chief investment officer in African public equities at Duet Asset Management in London, says the size of Chinese direct investment in Africa as a whole should not be exaggerated. He says volumes are “not enough to change the narrative on Africa if China pulled out”.
Figures from the UN Conference on Trade and Development (Unctad) on the provenance of greenfield direct investment in 2014 show that while China was the biggest emerging market investor in Africa, it was still behind developed market investors.
In a Brookings Institution paper this summer, economists Wenjie Chen, David Dollar and Heiwai Tang showed that China’s share of foreign direct investment in Africa was quite low — although higher in states with weak property rights and rule of law, as Western investors tend to shy away from such countries.
Aside from mines and oilfields, Chinese demand for minerals is seen to have facilitated state investment in infrastructure. China has extended soft loans for public works projects in return for using Chinese contractors, perhaps secured by mineral offtake. Yet Salami points out that the equity was ultimately from Africa in such cases. “The Africans have to pay that money back,” he says.
RISK APPETITE FADES
More important, he says, are the macro-economic consequences of China’s slowdown on Africa’s terms of trade. Oil exporting nations, for example, have suffered a halving in the price of that commodity over the past year and account for around half of regional GDP, according to the World Bank.
Metals and soft commodities have suffered steep price declines too. “African economies certainly face challenges — weaker commodity prices mean their current account deficits are widening [while] foreign capital flows are slowing,” says Salami.
Lower commodity revenue does not just damage African states’ ability to invest locally or to support offtake agreements in infrastructure projects. It also makes foreigners, including portfolio investors, more wary about taking risks against the sovereign.
Consequently, many central banks in Africa have been forced to hike rates aggressively to defend their currencies. “Rates are so high, it doesn’t make economic sense to fund locally,” says Helmut Engelbrecht, head of Africa investment banking at Standard Bank.
Engelbrecht says the worries are heightened in the “single commodity countries” such as Angola, Nigeria and Zambia, which all gain a majority of foreign currency earnings from one commodity.
But one problem for perceptions, at least, is that so many of the biggest, flagship African markets fall into this category. South Africa is more diversified but still lies among the worst perceived emerging markets globally, partly due to its low growth.
FDI GROWING
If these big markets are at the centre of the storm, they are naturally home to bigger regional companies — like Nigerian industrial group Dangote — which could boost intra-African investment.
South African companies, such as retailer ShopRite and Standard Bank, have invested much in the rest of Africa. Engelbrecht says South African firms will now be more careful about deploying capital due to domestic problems. “I don’t think they will pay much for transactions,” he says.
Nevertheless, there is reason to hope that African investment will continue to grow despite China’s slowdown. Unctad figures show foreign direct investment in Africa last year continued to increase in absolute terms and as a proportion of global FDI flows. Figures from Dealogic show 2014 was the best year for Africa-targeted M&A since 2010, at around $40bn.
One investment banker points out there is a lag between M&A deals being planned and announced, so the result of lower commodities prices may be seen later.
But Andrew Alli, chief executive of the Lagos-based Africa Finance Corporation says Africa can still offer its own growth story — albeit one from a low base, dented by commodities. “If the US is the only large economy that is growing, companies may look for other countries and regions to invest,” he says.
The IMF said in its regional outlook earlier this year that oil importers in sub-Saharan Africa, excluding South Africa and the three western African economies hit by the Ebola outbreak, would still grow at around 6%. Oil exporters would see around two percentage points shaved off their average growth rate, it said, but would still see output rise at more than 4%.
That is encouraging for businesses focused on domestic demand. And most of the top 15 Africa-targeted M&A deals announced in 2015 were outside the resources sector, from telecoms, to real estate and fast moving consumer goods, according to Dealogic — although oil and gas was the biggest single sector.
This domestic story is attracting private equity, with US groups KKR and Carlyle making their first fund launches and buyouts in Africa. Private equity managers in Africa raised a record $4bn in 2014, according to the Emerging Markets Private Equity Association. Record fundraising levels continued in the first two quarters of 2015, according to EMPEA.
Hurley Doddy, co-chief executive at Emerging Capital Partners, one of the oldest and biggest Africa-focused private equity firms, says his business has focused on domestic-orientated companies for almost 10 years, largely as revenues there are easier to predict. “We can tell that there aren’t enough good restaurants in Nairobi; we can see the demand for education; we can feel the need for better internet services,” he says.
CHINESE-AFRICA STORY INTACT
Doddy says it may be harder to raise private equity funding for Africa today but his firm’s recent exits, particularly in insurance, show there is still much investor interest in Africa. “Lower commodity prices have knocked African growth off a bit, but it’s still safely above developed market levels,” he says.
Engelbrecht adds that multinationals from outside Africa are “taking a long term view” on Africa’s growth story, even if multiples in consumer-related acquisitions will be at what he deems more reasonable levels.
But the $750m that Kellogg said in September it would pay for 50% of Nigeria foods sales and distribution firm Multipro is “not cheap” at around 13 times Ebitda, according to Salami. “Valuations are not drastically lower for domestic-orientated companies,” he says. “These investments are more in something structural and long term.”
Urbanisation and the growth of the middle class had begun long before the commodities super-cycle started in the mid-2000s, according to Salami. “Nigeria needs oil to keep the lights on in the civil service, not for growth,” he says. Tighter monetary policy across Africa is a temporary measure, in his view.
Meanwhile, the World Bank said in June that Chinese economic engagement with Africa would continue to grow, further propelling growth in domestic demand via projects like a multi-billion dollar rail network in East Africa, announced last year. “Chinese-built infrastructure is helping to open up the continent,” agrees the ADB’s Kayizzi-Mugerwa.
Others show confidence that China will remain an important partner. Colin Coleman, head of sub-Saharan Africa investment banking at Goldman Sachs, notes China’s GDP is now more than $10tr and still growing at almost 7%. “China has such a strong alliance with Africa that it will inevitably continue to play a big role,” he says. “The China-Africa story will remain.”
Far from leaving Africa, the Chinese are now beginning to set up more factories locally, especially for heavy or bulky items like packaging, according to Alli — moving away from simply giving soft loans and doing infrastructure contracting.
He echoes a view from the World Bank, noting rising Chinese wages are encouraging Chinese companies to open facilities in Africa — sugar refineries in Mali, textiles and steel piping in Uganda or cars, footwear and glass in Ethiopia.
Alli says African labour still tends to be relatively expensive — if with some exceptions, notably Ethiopia — due to infrastructure and others shortcomings. But he says the proximity to raw materials and consumer markets is a big draw. A zero tariff regime with China in some 30 African countries helps, according to the World Bank. “The competitive advantages are different, but Chinese companies are moving to Africa in the same way they are moving to places like Vietnam” says Alli.