Global Emerging Markets (GEMs) : Zimbabwe

Africa: The Next Big Thing?

Charles Krakoff — Thu, 01 Sep 2011 15:28:00 GMT

The world is discovering Africa. By Africa, I mean sub-Saharan Africa. The North African countries from Morocco to Egypt are generally lumped together with the Middle Eastern countries with which they share much closer ethnic, religious, and economic ties. I am writing about the other 870 million people who live on the continent.

I wrote in this blog last year about reports on Africa published by BCG and McKinsey, which – belatedly, in my view – had just jumped on the Africa bandwagon. McKinsey devoted much of The McKinsey Quarterly of June 2010 to a cover story and associated articles on “Africa’s Growth Story” . Noting the rapid growth of Africa’s population, its relative abundance of arable land, its rapid urbanization, growing domestic markets, and a higher rate of return on investment than other regions, the McKinsey survey concluded that “Global executives and investors cannot afford to ignore this. A strategy for Africa must be part of their long-term planning. The time for businesses to act on those plans is now.” In April 2011, renowned investor Mark Mobius wrote about Africa on his blog, saying, “I believe the opportunities for the development of Africa’s markets are appealing primarily because of the strong growth numbers now emerging out of the continent. Africa is expected to grow more than 7% annually in the next 20 years, due to an improving investment environment, better economic management and China’s rising demand for Africa’s resources.” He went on to tout Nigeria as “one of the frontier markets that I like.”

But before you rush off to invest in Africa, remember that Charles de Gaulle once said, “Brazil is the country of the future, and it always will be.” It may not be long before people start to say similar things about Africa.

Let me be clear. I am a strong believer in Africa, having spent much of the past 25 years living and working in places as varied as Botswana, Senegal, Nigeria, and Sudan. I have previously written in this space that by 2050, and maybe sooner, Nigeria will be a more important player in the world economy than Russia. Africa does represent tremendous opportunities, but Africa is sure to bring disappointment to many investors, just as Brazil – and also China – has done on numerous occasions.

It is not just about the risks in Africa, since in many cases African risk may be overpriced, which creates additional opportunities for investors who know what they are doing. It is more about the challenges of doing business in a continent in which more than 70% of the population lives on less than two dollars a day. Any businesses looking to serve this population will need to adopt different new and non-traditional ways of doing business. There remain plenty of traditional business and investment opportunities in Africa, mainly in the mining and energy sectors that still receive the bulk of foreign direct investment, and also in big infrastructure projects now typically financed by a combination of public and private capital. But you’d be missing a lot if you assumed that natural resources are the whole story. According to a 2011 report by the World Bank, “Between 2000 and 2008 less than one third of Sub-Saharan African GDP growth was due to natural resources, with the bulk reflecting the rapid expansion of wholesale and retail trade, transportation, telecommunications, and manufacturing.” It turns out that 870 million consumers, with a total purchasing power of over a trillion dollars, are worth paying attention to.

A few caveats are in order. Africa has 53 countries (soon to become 54, as Southern Sudan gains its independence on July 9). Some of them are tiny. Seychelles, an archipelago in the Indian Ocean, has 455 square kilometers of land area (about the same as San Jose, California), and 90,000 people. Some are huge. Nigeria has 150 million people. Sudan, until next month the largest landmass on the continent, covers 2.5 million square kilometers, more than six times bigger than California. Some are shockingly poor (Zimbabwe has a per capita GDP of $500) and some are fairly or even very wealthy. Equatorial Guinea, flush with oil revenues, has a per capita GDP in excess of $30,000, though in most measures of human well-being it ranks about the same as Tajikistan or Nicaragua. Which brings up another point. Some countries suffer under staggeringly corrupt and dictatorial governments, while others are governed reasonably well. Some countries remain too poor, too corrupt, or too chaotic for all but the most specialized investment opportunities. A single strategy for Africa makes even less sense than a single strategy for Europe encompassing Norway, Greece, and Albania.

All of this means that almost anything you can say about Africa is equally true and equally false, depending on location and context. Companies looking at business opportunities in Africa can’t use a shotgun approach. They have to choose their markets carefully and tailor their strategies to the peculiarities of each one. Many very large African and international companies, some of them present on the continent for a hundred years or more and others that hardly existed before the 1980s, have created successful business models that make sense in Africa. We don’t hear much about the ones that failed to do so.

Monitor Group last month released a report Promise and Progress: Market-based Solutions to Poverty in Africa, which distills the results of 16 months of research into “initiatives that use the market economy to engage low-income people as customers, offering them socially beneficial products at prices they can afford, or as business associates – suppliers, agents, or distributors – providing them with improved incomes.” The report is a companion piece to a 2009 report addressing the same issues in India.

The market-based solutions (MBS) that Monitor highlights are intended to meet the needs of the poor, but in ways that make a profit for the solutions providers, whether they are micro-enterprises or multinationals. Typically, they are based on value and supply chains that involve both. Some use leading-edge technology for things like mobile phone-based payments systems, often for people without bank accounts. Others are relatively low-tech. Monitor cites the example of Voltic, Ghana’s leading bottled water producer, which introduced a new brand, packaging, and distribution system targeted at the poor, which enables informal street traders to sell 500-ml sachets of pure water for three cents apiece. Though Voltic employs only 450 people directly, its distribution chain has created an estimated 9,000 jobs. The business proved so successful that brewing behemoth SABMiller bought it in 2008.

My own experience and research show that many old-line companies, including the big breweries such as Heineken and Guinness, as well as Coca-Cola, have developed new products for local markets and mastered lower-cost production and extensive distribution systems that engage independent wholesalers, retailers, and street vendors in networks that provide both products and income to millions of people.

Africa may be poor, but close to half of all Africans over the age of 15 have a cell phone. Companies like Vodaphone and Celtel and MTN pioneered business models would never have been tried in developed markets, but which have proven immensely profitable. Bharti Airtel last year paid $8.3 billion to acquire the African operations of Zain, a Kuwaiti company that acquired Celtel in 2007. MTN Nigeria, part of the South African MTN Group, which owns cellular operators in 22 African and Middle Eastern countries, recorded some $5 billion in revenues and $1.25 billion in net profits in 2010. They did not do this by selling iPhones and expensive data plans.

The takeaway message here is that profit-making companies, not donor and charitable organizations, are the key to improving Africans’ lives. In 2009 Africa received about $48 billion in official development assistance. That’s a lot of money, but it amounts to only 4% or so of the continent’s GNP. Although a lot of it is wasted, it is still useful, mainly to the extent that it improves conditions for private business by improving infrastructure and education and removing administrative and regulatory barriers to investment. Aid alone cannot do the job.

This is far too big a topic to cover in a single blog post, and indeed Monitor has produced a 236-page book, which I am still reading. Look for future posts expanding on these, and related, themes.

African Risks and Opportunities

Charles Krakoff — Tue, 27 Oct 2009 19:21:00 GMT

I subscribe to the “Stock Gumshoe” blog, which specializes in ferreting out the truth behind those teaser ads for scores of investment newsletters and tipsheets that promise you 1,400% returns in six months, but only if you take advantage of this limited time subscription offer, a $1,000 value for only $695. In addition to debunking these extravagant claims, the blog’s publisher and author, Travis Johnson, analyzes various investment opportunities he finds interesting, some of them off the beaten track, and he doesn’t charge you hundreds of dollars to reveal the names and details. Recently he posted a lengthy article on Africa, with a particular focus on Lonrho, a U.K.-based company with a long history in Africa and a newly revitalized Afro-centric investment strategy. Here is my comment, posted on Travis’s blog:

I am a big fan of Africa, probably a function of my having worked and/or lived there for about a third of my adult life, and I thank you, Travis, for focusing on a much-maligned and -neglected part of the world. As a business consultant and sometime private equity/finance adviser and investment banker, I lived in South Africa for seven years, most of the time working in the financial sector. I have also lived for extended periods in DRC, Botswana, and Zambia, and I have worked or done business in about 30 countries on the continent.

I believe that African risk, more than almost any other region’s, is overpriced. Part of this is because most people, especially in the U.S., think Africa is one country, and can’t distinguish between Sudan and Senegal. Of course there are risks, but most of them can be managed, and there is certainly a risk premium for investing there, but I have come across far too many supposedly sophisticated investors who won’t touch any part of Africa with a barge pole.

There are a lot of ways to get African exposure, but apart from investing in various Africa-focused ETFs or buying the shares of African companies with ADR listings, there aren’t too many pure Africa plays. You could invest in big mining companies like BHP, RTZ, or Freeport McMoran, junior mining companies, mainly listed on the TSX, or in various energy companies both big and small that operate around the continent. But except for a few juniors, most of these companies have exposure all across the globe. The same goes for companies like Diageo (which owns Guinness), Heineken, and SAB Miller, which dominate brewing across Africa, and for telecoms firms like MTN, which have extended (some would say overextended) into Asia and the Middle East. The big companies listed in Johannesburg, many of which have primary or secondary listings in New York or London, are not pure African plays either. SASOL, Sappi, Old Mutual, Anglo American, and others, have their roots in South Africa, but operate all over the world.

Lonrho (LONR in London, LNAFF on the pink sheets) is an exciting company, resurrected from the ashes of Tiny Rowland’s old company, which operates in some of the most promising growth areas on the continent. They do mine for diamonds in South Africa (not too exciting), but the real excitement is in some of the areas Travis mentions: the Luba Freeport in Equatorial Guinea, the new Fly540 airline operating out of Kenya, and big agribusiness plans across Southern Africa. As the world, and especially the Gulf countries, look to secure their food supplies, they are turning to Africa, which presents huge opportunities for investment in the sector. Lonrho also offers one of the few Zimbabwe plays around, and if you think this is a bad joke, don’t. Zimbabwe is starting to come back, and sooner than you think it will once again be a huge agricultural exporter, manufacturing center, and tourism destination. I think Lonrho is a classic buy and hold opportunity. Buy it now, forget about it, and in several years you could be holding something pretty valuable.

Lonrho, and Southern Africa, are not the only play on the continent. I have said before (you can look it up on my blog - http://www.emergingmarketsoutlook.com) that in the next 20-40 years Nigeria will be a more important economic (and possibly political) force than Russia, and I still believe that. Nigeria has a long way to go, but it looks like following a similar path to Indonesia’s, which has gone from military dictatorship to genuine democracy and which has made a significant dent in corruption.

By all means do your own research. If you are looking to start living off your retirement funds in the next five years, Lonrho and other Africa plays may not be for you. But if you are looking at the longer term, take a close look at these.

Disclosure: T. Rowe Price Africa and Middle East Fund (NYSE: TRAMX). Market Vectors Africa ETF (NYSE: AFK).

The World's Worst Job?

Anonymous — Fri, 17 Jul 2009 17:21:00 GMT

The day after the U.S. Presidential election last November, the satirical weekly The Onion led with the headline “Black Man Gets Nation’s Worst Job”. The July 12 lead article in the South African non-satirical weekly, The Mail & Guardian, makes it clear that Barack Obama has no reason to envy South African President Jacob Zuma.

A senior member of President Zuma’s Executive Council recently threw cold water on demands to nationalize the country’s mining industry. “Our key strategic agenda at the moment is to maintain the infrastructure development and grow the economy to create decent jobs,” the executive member said. “Nationalization is definitely not on the agenda.”

This came less than a week after ANC Youth League President Julius Malema called on President Zuma to fast-track implementation of the so-called Freedom Charter, which calls for transfer of the nation’s mineral wealth to the people. Mr. Malema, famous for his incendiary comments, is perhaps best known for having said: “We are ready to die for Zuma…Not only that, we are prepared to take up arms and kill for Zuma.” Since then, he has criticized the Zuma administration incessantly for failing to enact the radical agenda embraced by many ANC rank and file members.

Mzolisi Diliza, boss of the South African Chamber of Mines, which represents the mining companies, has said that in the current economic crisis the government is unlikely to consider calls to nationalize key economic assets, pointing out that the mining industry alone is worth more than R2-trillion ($250 billion). Though Mr. Diliza represents powerful economic interests, and happens to be right, his statement may not reflect majority opinion.

David Masonda, Chairman of the Young Communist League (the Communists are part of the ruling ANC coalition, along with COSATU, the Congress of South African Trade Unions), has attacked the ANC’s approach to nationalization of the mining industry, saying: “The Mineral and Petroleum Resources Development Act is not nationalization. It is essentially a tool to transfer mining equity from the white elite to the black elite by the state elite.” There is a lot of truth to this statement. The ANC’s Black Empowerment policies have enriched a small number of well-connected black businessmen and political figures, while doing little to improve the lot of poor, mainly black, South Africans.

But Mr. Masonda then veers sharply leftward: “This is the most appropriate time to nationalize the mines and banks. This will ensure that the state does not depend solely on the whims of private individuals to generate funds for its industrial strategy and social programs such as free education…Our mines must be transferred back to us without any compensation. Business has no moral authority whatsoever to claim a cent for transferring what belongs to the people. And if they refuse to hand over these mines, they must be forced to do so.” When asked if calls for nationalization would chase investors away, Chairman Masonda said, “Investment for what and for whom? Investors must invest on our own terms and we must have control over the dividends of our work and resources.”

These criticisms must sting Mr. Zuma, whose campaign theme song was “Bring Me my Machine Gun,” and who initially based his presidential campaign on opposition to the previous ANC government’s accommodation of business interests and failure to provide jobs and housing for the masses. But Jacob Zuma, for all his legal problems, corruption allegations, and populist rhetoric, is nothing if not a shrewd politician. Later in his campaign he sounded much more conciliatory towards the business community, and after his election he named a Cabinet that promised no radical shift from existing economic and social policies. There is no saying what Mr. Zuma truly believes, but he seems to have realized it would be both political and economic suicide to follow the prescriptions of his communist and syndicalist allies.

The real question is whether – and for how long – the center can hold. I don’t see South Africa following Zimbabwe’s path to self-destruction. A lot can change in the next 10 years, but I would be astounded if Mr. Zuma, even if he serves two full terms as President, trying to amend the Constitution to allow himself a third term, and even more astonished if he were able to muster enough votes to do so. Nationalization of mines, banks, or any other important sector is highly unlikely. Government introduced a bill in 2002, proposing to impose mineral royalties for the first time, but seven years later royalties legislation is still being debated in Parliament and discussed with the Chamber of Mines. It is almost certain that any law ultimately passed will be something both sides can live with.

South Africa, which has an open and dynamic financial sector and a diversified industrial and service economy far less dependent on mining than 20 years ago, saw GDP growth fall from over 5% in 2007 to 3.1% in 2008. This year’s forecast growth is 1.1%, but the economy is expected to rebound to around 3.5% in 2010. Not great, and not enough to turn South Africa from a middling-poor country into a nearly rich one, but not bad in the current circumstances. My best guess is that South Africa will continue to be the financial and economic hub for most of Africa that rule of law will prevail, and that business and government will continue to work things out in a reasonably amicable and satisfactory way. Much like Obama’s America, come to think of it. It may be far from optimal, but it’s probably not bad enough to scare away investors in any significant way. (Disclosure: I don’t directly own shares in any South African companies but I do own shares in the T. Rowe Price Africa and Middle East Fund – TRAMX and in Market Vectors Africa Index ETF – AFK).

Kilowatt-hours, cigarettes, gold, and fine wine: new currencies to replace the U.S. dollar?

Anonymous — Wed, 08 Jul 2009 15:21:00 GMT

Here is a comment I have posted in a LinkedIn forum on the global economic crisis, in which various serious and fanciful proposals for replacing the U.S. dollar as the world’s reserve currency have been discussed.

Carbon emissions credits or kilowatt hours are a poor medium of exchange for the same reason that cigarettes or rare wines or tulip bulbs or even barrels of oil are: they are unstable and they have utility apart from their value as units of account. Until we have batteries capable of storing all the electricity generated and a much more efficient electric grid, a kilowatt hour produced but not consumed is lost forever. You can’t save it and use or spend it tomorrow. And because of transmission loss, a kilowatt hour generated in California is something less than a kilowatt hour when it reaches New Jersey.
If used as currency, even if you can overcome the storage and transmission problems, every transaction based on the kilowatt-hour becomes a decision about consumption. Do I use it to keep my refrigerator cold, or to spend on something else? Once consumed, a kilowatt hour – like a cigarette – is no longer usable as currency.

This is why we typically use something stable and unsuited to most other purposes as currency. Gold bars and coins fit the bill remarkably well. They don’t biodegrade, and apart from dentistry, they have few other practical applications. Silver, copper, and platinum, because of their many industrial uses, are much less useful as currency. The huge stone wheels used on the island of Yap are also a good currency, since they meet another important standard: it is not easy to make more of them.

It is possible to make (or extract and refine) more gold, but the high cost of digging new mines limits the potential rate of increase of a gold-based money supply. This is where fiat money – paper or strings of zeroes and ones on a computer screen backed by “the full faith and credit” of a government – becomes problematic. Highly-indebted governments are tempted to inflate their way out of their debt. If your currency is worth only 10% of its previous value then so is the amount you owe. This solution, poetically known as “debauching the currency,” does not work so well for savers, creditors, and pensioners, who end up getting only 10 cents on the dollar, like the General Motors bond-holders. Germany did this in the 1920s and Zimbabwe earlier in this decade, though instead of 10 cents it was more like one-billionth of a cent.

Remember the phrase “sound as a dollar?” We don’t often hear that any more, and we are likely to hear it even less now that Presidents Bush and Obama, having super-sized the national debt, have all but guaranteed future inflation.

Neither our government nor any other is likely to return to the gold standard any more than they will adopt electric power as a new backing for the money supply. As individual investors, though, we have a number of options. We can buy gold, of course. We can short the dollar, though in favor of what? We could even start to collect rare wines and fine art. There may be plenty of good reasons to put up a wind turbine in your back yard, but giving yourself a hedge against inflation or a perpetual money-making machine is probably not one of them