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A new economic day is dawning in Africa, but the dangerous creatures of the continent’s long night are still on the prowl

by Dan Coatsworth

Economic growth in Africa is to advance by ten basis points this year to 6.3% and 6.4% in 2009, according to the IMF. Billions of dollars are being pumped into the continent by sovereign wealth funds and institutions. Even retail punters are getting in on the action via funds investing in Africa-based businesses. It may appear to be the next investment hotspot but violence in Kenya, tax changes in Zambia, higher state involvement in business in the Congo and political collapse in Zimbabwe suggest Africa is not there yet.

Even so, China is set to invest $50 billion in infrastructure in Nigeria amid preparations to gain a greater hold on oil supplies, following last year’s $12 billion investment in the Congo on roads, power, health and education in exchange for copper and cobalt output. India has also upped its game and will double its credit lines to Africa to $5.4 billion, on top of $500 million grants for development projects.

Sovereign wealth funds may spend $20 billion-$30 billion, investment experts suggest, mainly on natural resource projects, excluding infrastructure aid; $5 billion-$15 billion may come from global institutions, says Cynthia Steer, chief research strategist at consultancy Rogerscasey. She will relay the thoughts of African financial institutions to US banks which, she claims, are eager to find ways to commit resources to the continent.

‘There isn’t an area that institutions don’t want to look at in Africa,’ she says. ‘There is growing income, a growing middle class, a burgeoning real estate market. Investment activity is everywhere – from debt instruments to hedge funds and private equity.’

Others are less enthusiastic. Richard Chase, chief operating officer of stockbroker Ambrian Partners, spent ten years in Africa: ‘We’ve been here before,’ he says. ‘Money has flowed in from the mining boom since the 1990s. Despite 15 years of very good investment and development, the continent has not moved that far forward.’

Economic growth in the most developed nation, South Africa, is also set to slow, according to the IMF, now predicting a drop from last year’s 5.1% to 3.8% this year. Tighter monetary policy has eased activity to curb inflation pressures from fuel and food prices. A wider current account deficit and worsening government finances are squeezing the rand, but construction output is growing from infrastructure improvements, says fund management group Charlemagne Capital. Inflation is also a concern in Kenya and Egypt.

African connections

UK-quoted companies with African connections also reflect upheavals. London-listed shares in Zimbabwe-based miner Mwana Africa, rose 38% to 56.75p in early April, as investors anticipated Robert Mugabe’s defeat in the presidential elections. But such hopes are beginning to look misplaced thanks to the ongoing leadership battle, and Mwana’s share price has since fallen over 16% to 47.5p.

‘The priority for capital investment is political and fiscal stability,’ says Ambrian’s Richard Chase. ‘Africa has a reputation for corruption and changing the goal posts, as recently shown in the Congo, where the state has demanded greater participation in mining projects. Zambia has raised taxes and Tanzania looks to be doing the same. People say you can operate in Zimbabwe if you can get essential raw materials and energy. The country has been curbed by inflation. If Mugabe is pushed out, it could become more politically stable and I’m sure the mining industry will take off. If he doesn’t go, there will be political unrest and no-one will invest.’

The IMF reckons Nigeria’s annual growth rate will rise from 6.4% to 9.1% this year. Nigeria may be a security hotspot, but its stock market has proved one of Africa’s strongest performers. The Nigerian All Share rose 31% between October 2007 and March 2008 to 65,910.94 but has since slipped back to 62,688.07.

Companies on the stock market appear in Standard & Poors’ new African indices, including S&P Africa 40, featuring some of the largest, most liquid companies operating purely in Africa. The indices are designed as templates for financial institutions to create their own Africa-focused investment products, with ABN Amro signed up for the first launch.

‘The macro-economic backdrop is looking better and better,’ says Steven Goldin, head of strategy and custom indices at S&P. ‘Africa is one of the last investment frontiers where you can earn extraordinary returns. Very few institutions have seats on enough stock exchanges to fully trade shares across Africa. Pure African indices are a new concept.’

Cru Investment Management says its Africa Invest fund offers the only ‘true grass roots’ way to invest in Malawi, where it set up an agricultural business operating eight farms, soon to be ten. The company has predicted annual returns of 80% but due to the ethical nature of the fund, it will help reduce poverty in Malawi and target 30-%40% profits. The agribusiness recently sold a crop of paprika for £460,000, but Cru admitted the spice’s shelf value is £69 million. ‘Between our sale and the transport and packaging, someone is making a lot of money. We are looking at the value issue now and may buy a processing plant as one solution,’ said the company.

Africa may still have asset-rich lands waiting to be tapped, yet it remains troublesome.