Africa’s burgeoning economies have fuelled fund managers’ interest in the region. Political stability, better infrastructure and global hunger for commodities add to the region’s appeal.
Africa has had an “extreme makeover”, in the parlance of reality television shows. So fashionable is the continent that Vanity Fair saw fit to run an Africa issue this year. But statistics from the International Monetary Fund (IMF) suggest this is more than a facelift: the sub-Saharan region recently posted its strongest growth and lowest inflation in more than 30 years, according to October’s regional economic outlook.
This expansion has been strongest in oil exporters as commodity-hungry nations, led by China, court African governments. But it is more than an appetite for natural resources. China made potentially its largest foreign direct investment (FDI) in Africa last month with a bid by the Industrial and Commercial Bank of China to buy a 20% stake in South Africa’s Standard Bank for R36.7 billion (£2.7 billion).
Closer to home, British fund managers have launched new investment vehicles targeting Africa – New Star Asset Management among them. Besides the growth story, New Star pointed to increasing political stability, a falling debt burden, more sophisticated financial markets, increasing FDI and better infrastructure.
Pieter Laubscher, chief economist at the Bureau for Economic Research (BER), an independent research company in South Africa, says this spiked interest in Africa is part of a broader emerging markets story of increased stability, accelerating growth and improved macroeconomic fundamentals. Looking ahead, he says surplus generated from FDI should now be channelled for maximum benefit into secondary industrial development and value-added beneficiation strategies.
The view is not all rosy. South Africa, which contributes a third of sub-Saharan GDP despite having only 6% of its population, recently received a shot over its bow: it slipped this year in global annual competitiveness rankings by eight positions to 44th, according to the World Economic Forum. The report highlighted an inflexible labour market, shortage of skilled labour, infrastructure issues and lack of security.
Laubscher also says the first clear signs of slower economic growth are apparent: measured real GDP growth slowed to 4.5% in the second quarter (from a peak of 5.6% in the fourth quarter of 2006). But he expects the slowdown will just be “a breather”, with 5% real GDP growth well in sight for 2007.
The risk, according to BER, is that global economic conditions deteriorate, led by an American recession, commodity prices fall and domestic inflation risks and expectations unravel as the rand comes under further pressure. This would send interest rates even higher, leading to a harder domestic economic landing. There is also concern about the country’s current account deficit: it is expected to rise to 6.7% of GDP this year, from 6.5% in 2006. The Treasury forecasts the shortfall widening to 7.7% in 2009 and 7.8% in 2010.
Robert Burgess, the deputy resident representative for the South Africa Office of the IMF, highlights some reassuring factors that could help to mitigate the impact of a sudden halt in capital flows. These are: the sound position of public finances, the low level of external debt, stronger foreign reserves, a flexible exchange rate and a sound financial system. But he agrees the mix of inflows, dominated by portfolio flows, is a problem. It is easier for a foreign investor to sell an equity stake than a large “greenfields” investment.
But inflation could be a more immediate concern: it has stayed above the 6% target since breaching it in April and is expected to peak above 7%. The Reserve Bank has raised interest rates seven times since June last year – by 350 basis points. “We are in a phase of monetary policy tightening, so everybody is looking forward to seeing the end of that,” says John Green, managing director for Africa of Investec Asset Managers.
Surprisingly, perhaps, consumer confidence is still quite high, aided by the good run of South African equity markets. General equity funds have returned an average 35.5% for the year to September 30 (based on a lump sum investment), according to the Association of Collective Investments. Boutique investment managers have flourished in the market’s wake: Imtiaz Ahmed, chief executive officer of Investment Solutions, a multi-manager, wrote in a newspaper article that South Africa has seen the launch of more than 24 start-up investment managers in the past three years.
South African equity markets’ ability to more or less shrug off the American subprime crisis has also helped. But Jac Laubscher, group economist at Sanlam, a financial services company, says the problems are not yet over: “This is an 18to 24-month story, so in six months’ time we should hopefully know more.”
All eyes for the near future are firmly fixed on the ruling party’s national conference on December 16-20, where the next African National Congress (ANC) president will be decided. The party president is usually, but not necessarily, the country’s next president. If Thabo Mbeki, the incumbent, wins, the current impasse will be deferred until general elections in 2009 when the country’s president is elected – a position Mbeki is precluded by the constitution from holding for a third term. The other frontrunners for party president are Jacob Zuma, the ANC deputy president, and two businessmen: Tokyo Sexwale and Cyril Ramaphosa.
Investors are watching closely. BER’s Laubscher says: “It is not clear what will happen. There seem to be tensions and infighting, which could prevent policy decisions being taken. It is not apparent yet whether the December conference will clear that. It might be a deferred tension, a damaging stalemate until the end of next year.”
But Sanlam’s Laubscher is a little more sanguine. The important thing is not the personality but whether or not there will be policy changes, he says, adding that the investment community has been assured that the ANC president implements the will of the collective. Laubscher says: “The question is not about the person to be elected but who will be best able to implement the policies the ANC has decided upon – although, at the margins, the personality will have some effect and perhaps bring a different emphasis.”