Making a Sound Investment in Africa

Despite its problems, sub-Saharan Africa can offer high returns for astute investors.
Conflict, famine, corruption, HIV/AIDS, genocide, risk—the media successfully portrays Africa as a continent of failure. But is this a true reflection of what encompasses Africa? For the savvy investor, it is not.Africa is a diverse continent rich in human and natural resources. However, due to Africa’s ill-portrayed image, investors are miscalculating Africa’s investment risk and failing to take advantage of profitable and growing markets. Certain markets in Africa offer an alternative to the traditional European, Asian, and American markets and provide international investors with unique exposures that yield considerable rates of return.Since 2000, African markets have offered high returns and low correlations with other emerging-market and developed countries. In other words, the difficulties of the global financial crisis have had minor effects on African growth rates. Thanks to fiscal restructuring and debt relief, many African countries were able to strengthen their balance sheets, resulting in significant economic growth over the past ten years. As a matter of fact, Angola, Nigeria, Ethiopia, Chad, Mozambique, and Rwanda were among the ten fastest growing economies between 2001 and 2010. According to a recent World Bank report, while the developed economies of Europe and the United States have limped along, African economies have expanded by an average of 4.6 percent in 2010 and are expected to grow by 4.8 percent in 2011. This year, the World Bank estimates that almost 40 percent of the economies on the continent are likely to see at least a six percent growth rate. (Ghana, for example, is expected to grow by 10 percent and Botswana is expected to grow by well over 6.5 percent.) The International Monetary Fund is similarly optimistic, forecasting that seven African economies will be among the top ten fastest growing economies in the next five years. These positive growth estimates, in a time when the global economy is reeling, can be attributed to both increased access to high technology among Africans (especially wireless technology) and the slow but steady expansion of democratization.The wireless revolution has directly contributed to Africa’s economic recovery and investment potential. The expansion of high-capacity optical cables, on both the west and east coasts, is providing a foundation for Africa’s growing integration into the global economy. A Deutsche Bank investment report, published earlier this year, indicated that in 2009 the continent’s broadband capacity was 120 gigabits/second. This capacity is expected to increase to 25 terabits/second (or 25,000 gigabits/second) by 2012, vastly increasing Africa’s ability to expand its wireless connectivity and prospects for investment opportunities. Mobile usage and the technological systems associated with it, such as mobile banking, have enabled Africans to become more engaged in economic activity and the rapidly expanding global market place.This changing technological landscape is enhancing economic efficiencies, and the causal effects of this evolving landscape are creating a more stable political environment. Technology enables transactions to occur more effectively and swiftly, creating economic growth opportunities in both the informal and formal sectors. This, in turn, generates political stability because stakeholders who previously did not have the ability to hold a government accountable for their actions and missteps are now able to do so through economic freedoms. Improved technology is helping to lay the very groundwork for democracy.The Arab Spring and the creation of South Sudan have had far reaching effects on the political environment of Africa. Though there are still governance struggles in Libya, Tunisia, Egypt, Sudan, and Zimbabwe, the slow process of democratization is establishing itself in these countries as well. Peaceful democratic elections in Zambia and Liberia indicate that democracy is working in parts of Africa, and other free democracies such as South Africa, Botswana, and Ghana are providing good examples for other African countries to follow.Democracy promotes investment opportunities in Africa because foreign direct investment (FDI), greater investor confidence, and trust in governments and their state institutions will generate greater economic development. For investors, economic growth mutually reinforced with democratization offers unique and profitable business opportunities. It is crucial to note that not all countries in Africa, such Zimbabwe and Equatorial Guinea to name a few, present those opportunities. Investments in such countries continue to pose great risks for foreign investors as corrupt leaders and weak institutions create an unfavorable investment climate.Nevertheless, as Africa increases its global presence financial markets and economic growth will further develop. These developments and global engagements will have positive political consequences for the continent and create stronger systems of government and accountability among Africa’s leaders. As a result, Africa presents a unique investment opportunity for international investors and should be considered a complement to other emerging-market investments.

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