Investors facing losses in Africa

DRC among bright spots

The growth scenario in Africa is still excellent. The problems pale beside the opportunities.

JUST a year ago, Africa was touted as the next investment El Dorado. Two decades of record growth, a rapidly urbanising population of 1.1 billion, rising incomes and vast untapped mineral reserves would lead to the creation of a broad middle class, the theory went.

General Electric and Marriott International announced African expansion plans, while buyout firms Carlyle Group and Helios Investment Partners set up funds targeting the continent. The region attracted $128 billion (R1.7 trillion) in foreign direct investment last year, up from $52.6bn in 2013, according to accounting firm Ernst & Young.

US rate hike

Now a slowdown in China – Africa’s largest trading partner – a commodity price rout and a power shortfall are separating the losers from the winners. The Morgan Stanley Capital International Emerging Frontier Markets (MSCI EFM) Africa index has dipped 18 percent this year, five percentage points more than a gauge of stocks across 24 frontier markets. And 22 of 24 African currencies have lost ground against the dollar as the Fed- eral Reserve prepares to raise interest rates.

To Marlon Chigwende, subSaharan Africa managing director for Carlyle, the world’s second-largest private-equity firm, the message is simple: Africa is not a country.

“There are individual forces at work within each of the 55 countries making up Africa,” he said. “There will continue to be investment opportunities.”

The combined economies of sub-Saharan Africa should expand 4.4 percent this year, the International Monetary Fund said in July. That’s one percentage point less than predicted a year earlier and below the 5.4 percent average of the last decade. The peak was 7.1 percent in 2007.

The data is driven largely by Nigeria and South Africa, which together account for 55 percent of the 48 sub-Saharan African nations’ gross domestic product. A collapse in oil prices saw growth in Nigeria slump to 2.4 percent in the second quarter, the slowest pace in at least five years. South Africa’s economy contracted by an annualised 1.3 percent as power shortages curbed output.

“It’s about the weakness of the giants,” said Akinwumi Adesina, president of the African Development Bank. He spoke from Abuja, Nigeria’s capital. “The countries Africa exports to have slowed down significantly.”

Bright spots remain: Democratic Republic of Congo (DRC) is expected to be Africa’s top performer this year, forecast by the IMF to grow by 9.2 percent, followed by Ethiopia, with a projected expansion of 8 percent. Congo is emerging from a decade of civil war, while Ethiopia is opening up to foreign investment and improving its transport links.

The commodities rout has also hit oil producers like Angola and Ghana, as well as Zambia, Africa’s second-biggest copper producer. The price of Brent crude has plummeted 51 percent over the past year, while copper fell 22 percent on the London Metal Exchange.

“Investors that look for riskadjusted returns will continue to look at Africa, but they’ll have to temper their expectations,” said John Mackie, head of Stanlib’s pan-African investment portfolios. The possibility of US interest rate increases and China’s failure to curb its stock slump are having “a massive impact”.

Mark Mobius, the Franklin Templeton Investments money manager who’s been investing in emerging markets for more than four decades, remains optimistic. “The growth scenario is still excellent,” he said. “We do not want to scale back our investments. The problems pale beside the opportunities.”

General Electric, Marriott, Carlyle and Helios all said they wouldn’t curtail their African expansions.

Topping the list of Africa’s infrastructure concerns is a power shortfall. An estimated 600 million Africans lack access to electricity.

“Africa should have been growing at 7 or 8 percent if it had sorted its power out a decade ago,” said David Cowan, an Africa economist in London at Citigroup.