With prospects for the Sub-Saharan Africa (SSA) region as a whole being subdued amid the slump in commodity prices and the Chinese slowdown, SSA struggled with growth at 3.7% in 2015 and a projected growth figure of 4.3% in 2016, still below 2014’s 4.8%. However, despite these difficulties, SSA still offers some exciting investment opportunities, especially in the countries making up SSA’s Big 5, namely Côte d’Ivoire, Ethiopia, Uganda, Kenya and Tanzania. All of these countries are classified as Frontier Markets, known for their different drivers which include a mixed bag of factors such as political instability, undefined regulation, volatility and higher degree of relative illiquidity together with the potential high returns which often define these markets.
Despite these factors, these regions have shown impressive growth in the past decade due to macroeconomic reforms, better business environments and high commodity prices, seen in SSA real GDP growth rates which were the second highest in the world in 2014, behind Developing Asia.
Added to this is the population growth, one of Africa’s strongest differentiators compared to other emerging regions including China, India and Brazil. This growth is also youthful which sets Africa apart from the other emerging regions. SSA is also rich in natural resources, with significant reserves which are generally untapped.
From a macroeconomic perspective, SSA countries are attractive in terms of their investment opportunities, given their high economic growth rates, large, youthful populations, fast-growing middle class, rapid urbanisation, generally untapped natural resources and lower debt levels relative to its more developed counterparts, presenting significant opportunities for investors. The Big 5 countries are less exposed to the fall in commodity prices, and Tanzania’s exposure in particular is counterbalanced by decent progress towards economic reform, infrastructure investment and/or economic diversification.
Taking a look at the Big 5 in terms of their pros and cons, shows the following:
Côte d’Ivoire is one of the most attractive investment hubs in SSA as it offers strategic operational advantages for businesses looking to invest in the region. Factors contributing to this include:
- increasingly investor-friendly business environment
- growing economy
- relatively stable political environment
Ethiopia is another top investment destination in the region due to:
- favourable economic outlook
- large pool of available labour
- abundant natural resources
Uganda presents benefits to investors in the form of:
- Government’s favourable trade and investment policies
- Improved business environment and encouraged investment
Kenya’s internal policies have had positive impact on investment. These include:
- bureaucratic reform
- infrastructure developments
- increased commitment to anti-corruption drives
Tanzania is attractive due to:
- moderate level of operational risk by regional standards, reduced by the importance of its maritime
connectivity
- the high availability of labour
- diversity of trade and economic opportunities
- moderately low labour costs
- wealth of natural gas reserves
Investors and companies need to be highly strategic in their expansion strategies in SSA, and furthermore, mindful of the significant variable operational risk environment across Africa. Many companies are finding success through partnerships with local companies and takeovers of existing players. Building important political and business relationships in quasi-monopolistic markets as Africa, is necessary as most operators and project sponsors in infrastructure development for example are typically state-owned monopoly players (e.g. railroads, airport companies, or road agencies). The solution often lies in finding the right local company with whom to partner in order to give investors or companies instant access to excellent political and business relationships, and expertise in managing local labor and regulations.
Risk is very often part and parcel of interactions with these countries and for this reason, it is best to make use of the expert services of a third party that understands what is involved and which risks increase the difficulty of doing business in each country. In that way alternative solutions may be sought and risk may be mitigated.
Elements of risk include:
Côte d’Ivoire
- the partiality of the judiciary
- limited availability of skilled labour
- high prevalence of crime
- the limited availability of government healthcare resources
- corruption
- high overall tax burden
Ethiopia
- poor internal transport network
- poor infrastructure
- restricted access to credit
- over-reliance on government investment and foreign aid
- largely unskilled labour pool
- corruption
- political risk
- security risks stemming from regional insecurity and increasing terrorist threats
- internal crime and security environment
Uganda
- disruptions to energy and water supplies
- poor infrastructure increases transport costs
- corruption
Kenya
- risky security climate – increasing levels of crime and terrorism
- corruption
- inefficient bureaucracy
- high levels of tax
Tanzania
- limited transport network
- cumbersome trade procedures
- corruption
However, despite the risk factors, these markets have a beneficial impact on an investment portfolio, enabling investors exploring opportunities in Africa to diversify risk, improve efficiency, and unlock value in a high risk high reward framework. The limited integration with the global economy makes frontier markets less correlated with other markets.
Inherent in the potential high risk factors of these countries is the equally high potential of high rewards. Although risk has to be taken into account, in-depth, country-specific risk analysis prior to investing in a particular jurisdiction can serve as a buffer against loss.
Analysts have shown that understanding the local culture and forming strategic alliances can go a long way in mitigating risk as follows:
- Creating strategic local partnerships with key players who have been carefully identified
- Conducting due diligence of businesses to ascertain stability and economic feasibility of a venture or
business
- Obtaining local knowledge through mediators
- Taking cognisance of cultural traditions in order to acquire understanding of different cultures to facilitate
communication and negotiation
- Using insurance policies to further mitigate risk
Economies across African regions are heterogeneous, with risks and rewards varying greatly from country-to-country. Investors should gain a deep understanding of the broad trends shaping specific countries e.g. demographic, socioeconomic, technological, and political and combine that with access to the best on-the-ground data available.
Strategies need to be adapted according to each specific country. Furthermore, collaborating with companies and experts who have the ability to manage stakeholders, engage government officials and develop partnerships will give an investor or company the competitive edge in order to reap the benefits of the high returns associated with these markets.
