Thomas White Global Investing
Africa
Africa Stamp
May 20, 2011
A Postcard from Africa
Africa: Chronicle of a Growth Foretold

Table Mountain forms the backdrop for Cape Town

South Africa is the fastest growing economy in the African continent.

From an investor’s point of view, it seems that South Africa has long been the only sunny side to the “Dark Continent”. The region’s largest economy has always been in the news for the right reasons, be it the country’s rich mining reserves or its emerging middle class with enormous purchasing power. Sadly, the continent has also lived up to its infamous moniker in recent times with the continuing unrest in Libya and the just-ended civil war in Ivory Coast, the world’s largest cocoa producer. Still, the geographical region, which was ravaged by colonizers for centuries, may yet remain an enigma to global investors, but professional services company Ernst & Young seems to think that Africa is the biggest untold story of the decade.

E&Y’s recently published Africa Attractiveness Survey projects foreign direct investment of $150 billion into the continent by 2015, compared to less than $100 billion in 2010. The report says the region appears attractive to international investors in emerging markets looking for long-term opportunities. An FT report observes that the continent is also sustained by demand from Asia for its commodities. According to the survey, 86% of Africans agree that their continent has made good progress in the last years, while 74% of emerging market investors say that Africa now looks more attractive to them. The report also notes a divergence in investment flows into the region, with the focus shifting from extractive industries to sectors such as construction, tourism, financial services, and telecommunications.

The proof of the pudding, as the saying goes, is in the eating. Businesses across the world are eager to have a slice of the African pie, going by the recent corporate developments. Wal-Mart, the world’s largest retailer is all set to embark on an African safari by acquiring a majority stake in retailer Massmart Holdings Ltd. And investor attention is not limited to South Africa alone. Private equity firm Carlyle Group launched a sub-Saharan Africa investment group in March. What’s more, FT has cited a Citibank report that sees Africa’s share of global GDP rising from 4% in 2010 to reach 7% in 2030 and 12% by 2050. If one wants further proof of the paradigm shift, British bank Barclays Plc, which had moved its Africa headquarters to the business hub of Dubai four years back, now plans to relocate the office back to South Africa. The bank is rolling out its expansion plans for the African continent, joining hands with South African banking group Absa, recognizing that it makes sound business sense to have its office in a region that comprises nearly 54 diverse nations. Among the other African nations, Nigeria looks stable after the recent presidential elections, while its business capital Lagos is prospering under an efficient governor. Morocco, with close trading ties with Europe, is also one of the fastest growing economies in the region.

Notwithstanding corruption and militancy which continue to plague many of its neighbors, South Africa has cruised along a path of democracy and relative stability since the collapse of the apartheid regime in 1990. While it may not be anywhere close to becoming a “rainbow nation” as envisioned by its founding father Nelson Mandela, the economy’s progress over the last two decades has made the world sit up and take notice. Small wonder the country earned a seat at the high table beside the famed BRIC quartet at the summit held in China recently. And for all the investor attention South Africa has been receiving, the nation has also managed to latch onto the latest alphabet soup acronym coined by the Economist Intelligence Unit for the second-rung emerging economies, CIVETS.

South Africa’s projected GDP growth rate of 3.5% this year may not equal the scorching pace of its fellow BRICS club members but South Africa wins hands down among its new-found friends when it comes to world rankings on corruption and transparency. On the list brought out by Transparency International, which ranks the least corrupt nations from the top, the African nation is ranked 54th out of 178 countries assessed, while China stood at the 78th position, followed by India at 87, and Russia at a dismal 154th rank. As India’s global reputation took a beating after the recent telecom scandal, Russian President Medvedev is trying to keep ministers off the boards of state-run companies. China’s standing is no better as its railways minister was forced to quit following allegations of corruption in high-speed rail schemes.

Investors are slowly waking up to the bright prospects of investing in the African dream, much like unearthing a hidden gem buried deep inside a South African mine. Still, except for a few thriving economies, the region is generally perceived as one fraught with political instability, while creaking infrastructure makes it a difficult terrain for customer-focused businesses. Yet, hard-nosed investors stand poised to rush in where skeptics fear to tread, as the rewards are tempting and competition limited.

 

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