Final frontier

As growth dries up in the limp OECD and overvalued Asian economies, ME investors are eyeing Africa nations for lucrative growth. Here's a look at four African markets with great potential.

08 February 2012
As Middle East investors scan the global investment landscape, they can see few opportunities across the horizon.

Already over-exposed to limp European markets and the anaemic U.S. economy, regional investors are looking south-west for more fertile markets - Africa.

Asia, of course, is getting the most attention from Middle East investors but the competition from other investors in China, India, South Korea and other Asian markets is too intense with many of the assets already overvalued.

Indeed, Societe Generale's stalwart chief economist Albert Edwards is calling for a hard landing in China and expects growth to slow in India.

Africa is a relatively less crowded market, even though the Chinese government has already beaten everybody else and has camped out in Africa, attracted by its natural resources.

The Chinese are pouring billions and building projects in Libya, Zambia, Sudan, Kenya and South Africa among others, sweetening the deal with African governments and entrenching themselves in the continent that's eager to move away from meddlesome Western powers.

Beijing is already a key mediator to resolve the conflict between newly created South Sudan and rival Sudan.

For their part, the Middle East investors are looking to go beyond their comfort zones of Egypt, Tunisia, Libya and Morocco to tread further south in the heart of Africa.

Dubai's DP World already manages a container terminal in Djibouti and is developing health and educational capacity along transport corridors in Africa and has opened an internet-connected, solar-powered community station in Djibouti.

The company is also looking to do some social contribution and open a much larger, primary-care clinic close to the facility, two internet connected solar-powered clinics in Mozambique and Senegal this year, and a series of health posts in Puntland, Somalia by the end of 2012.

But it's the adventurous regional telecom giants that have pushed deep into Africa.

Etisalat, which is now looking to selling its mobile towers in Africa, has assets in Egypt, Sudan and the Africa-wide Atlantique Telecom. Meanwhile, the struggling Mobile Telecom Co, or Zain, has interests in Sudan and Morocco.

Emirates Airline, Qatar Airways and Etihad already fly to various African capital and business hubs and looking to expand their networks as opportunities open up in the continent.

Mideast governments have also bought large tracts of land in Africa to manage some of their food security demands - a move which has been criticised by human rights groups. There is a now sense that the savvy sovereign wealth funds should not just treat Africa merely as their bread basket

Nevertheless, the food security is compelling. Certain MENA countries that have constrained supply of land and water, but ample capital are establishing a long-term solution - farmland investments - to solve food scarcity, notes an Al Masah Capital report on food security.

"A World Bank report revealed that large-scale deals for approximately 45 million hectares of farmlands were announced in 2009 compared to an average of 4 million hectares per year in the decade up to 2008. Most investors prefer African countries such as Ethiopia and Sudan," noted Al Masah.

But Mideast investors are taking a deeper look at the continent that goes beyond food security.

"Many global institutional investors are now seriously intending to take a significant step into Africa. This is obviously good news, as it shows that large pools of capital are available to sustain the current high single-digit growth needed to absorb a growing and youthful population into the workforce," said Nazem Fawwaz Al Kudsi, Chief Executive Officer of Invest AD, in a foreword to an Economist Intelligence Unit (EIU) report on Africa's economic potential.

As investors see the potential for high returns in such ventures, they will commit capital, which in turn will create jobs and helps lift incomes. This virtual cycle has played out in Asia and Latin America in recent years. It is now Africa's turn for an economic lift-off, says Al Kudsi.

The EIU report picks four countries from the multitude of countries that offer tremendous opportunities for the more adventurous investors: Nigeria and Kenya, Zimbabwe and Egypt.

The inclusion of Zimbabwe, the country ravaged by the oppressively maverick Robert Mugabe, is a surprise, but the EIU argues that his eventual departure could pave the way for an economic turnaround.

Fifty-one per cent of the investors surveyed for the report picked Nigeria as the country that offers the best prospects overall for investment returns over the next three years.

Kenya was second with 41% of investors hoping for growth, while 35% favoured Zimbabwe and 34% Egypt. Libya also fared reasonably well, with 22% investors thinking the troubled country could still return decent profits within three years.

However, investors had less confidence in other North African countries with Morocco garnering the attention of 16% of investors, and Tunisia and Algeria earning the confidence of only 8% investors.

Nigeria, the second largest economy in Africa, has been in the news lately, but for all the wrong reasons as Islamic militants Boko Haram stirs trouble in the country. Even without Boko Haram, the oil-rich nation has its share of problems such as corruption, but there are opportunities on the back of significant economic reforms.

The EIU says the country's consumer prospects are huge, and most companies expanding into West Africa see Nigeria as the gateway to the region.

Despite this vast potential, there is good reason for caution. Corruption is endemic, bureaucracy is slow and crime rates are high. Ethnic and religious conflict leads to sporadic violence and uncertainty over Nigeria's stable democratic future... Infrastructure spending is increasing rapidly, but much existing infrastructure is creaking, particularly in power generation and transport.

"Nigerian businesses also have to cope with an inconsistent regulatory environment, restrictive import regulations, inadequate access to capital and a relatively weak judiciary," notes the report.

Egypt, of course, remains on the radars of regional investors despite its problems in the post-Mubarak era.

"While the country spans nearly one million square kilometres of land, just 5% is inhabited and cultivated. This makes it a relatively accessible market for many companies. Its location at the crossroads of Europe, Africa and the Middle East also makes it an important and influential market," notes the EIU report.

A further reason for optimism is the country's sizable middle class of around eight million people, with similar spending power as some developed countries. This number will likely grow rapidly: the Economist Intelligence Unit forecasts GDP per head to expand by 70% between 2010 and 2015.

Regional investors including sovereign wealth funds are no longer looking at Africa merely as a bread basket, but examining potential in its listed companies, natural resources and large and young consumer markets that are poised for growth.

While the continent is dotted with troublesome, fragile democracies, inadequate infrastructure and regulation and rife corruption, there are huge pockets of opportunities, especially in the new investment world order where the Northern Hemisphere offers few opportunities and Southern Hemisphere countries are not on the radar of most investors.

"At a high level, this reflects a long-overdue assessment of highly performing individual African economies, rather than the continent as a whole. The same process has been under way for the past two decades in China, as investors have shifted from simply making a "China play", to more targeted investments within specific regions," the EIU report concludes.

© 2012

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