Optimist About Africa Despite Threat From China Downturn

Suggest investing in Africa and you could well face furrowed brows and questions about your sanity. Western impressions of “the dark continent” are often unfavorable – driven by intermittent TV coverage dominated by disease, famine and war.

Many recoil in horror at the idea of engaging in African business, citing lawlessness, poor infrastructure or Nigerian e-mail scams. Beyond the stereotypes, though, Africa is actually among the world’s hottest investment trends.

Boasting a host of metal and mineral reserves, plus a tenth of all known oil and gas, natural resources have long been the main draw in the “scramble for Africa”. These days, though, the attraction goes way beyond raw materials. Overseas businesses are increasingly interested in Africa’s fast-growing middle class, which is demanding ever more consumer goods, and financial and technological services, helping to drive a foreign investment boom.

Yet signs of economic weakness in China pose a danger. Such is the scale of trade with the People’s Republic that slowing growth will doubtless impact Africa. That’s certainly the majority view in Ghana, where I spent much of last week. Chinese goods are ubiquitous in this vibrant West African country, as are signs of Beijing-inspired investment. Yet local newspapers are full of speculation that the recent yuan devaluation, and possible collapse on Chinese financial markets, could soon stymie the flow of cash from the Orient.

During the early 2000s, Africa benefitted from a general investment flows toward emerging and frontier markets. Shares soared, often on local stock exchanges just a few years old, as Western cash chased ways of profiting from rising commodity prices. The 2008 financial crisis put paid to that, though, as foreign investors “rushed from risk” and African equities crashed.

Recent flows into Africa have been different. Rather than short-term money moving into shares, many overseas investors have channeled cash directly into companies, infrastructure and other projects. Such foreign direct investment into Africa grew no less than 65pc last year, reaching £87bn, with almost two-thirds of that heading for sub-Saharan Africa – the poorer, typically less-attractive part of the continent.

“Private equity” – investment funds, which take sizeable stakes in unlisted companies, sometimes helping to manage them – is also on the up. Smart fund-managers based in New York, London and Johannesburg are scouring Africa looking for bespoke investments. Such money tends to be “sticky”, and therefore well well-suited to the continent – allowing long-term investors to ride-out, and even take advantage of, bad headlines, cyclical downturns and various other crises. While a third of last year’s FDI inflows went to African oil and gas projects, sectors such as real estate, telecoms and other forms of infrastructure weren’t far behind.

Burgeoning FDI, and particularly private equity, reflects the so-called “search for yield”. With Western interest rates at rock bottom, and sovereign bonds offering minimal or even negative real returns, sophisticated overseas investors are pursuing steady income streams from real estate and infrastructure deals, including in Africa, rather than quick speculative gains.

Africa’s growth story has helped win such investments. In 2014, GDP expanded 5.1pc, with sub-Saharan Africa up 6pc – a return to the fast-growth days of the early 2000s. Starting from a lower base than the big emerging markets, and with a young and largely debt-free population, many Africa counties stand a good chance of out-performing the likes of Brazil and India over the next few years.

Chinese money has also clearly played a role in restoring buoyant African growth. Sino-African trade reached $220bn in 2013, more than twice that with the US, largely reflecting China’s voracious demand for Africa’s natural resources. As recently as 1999, trade between America and Africa was over three times that of China.

“Africa is on the move” remarked President Obama during a visit to Kenya earlier this month. Yet Washington’s influence has, perhaps, been eclipsed by that of Beijing. Nairobi, where Obama was speaking, boasts several highways built with Chinese money. Across the continent, the People’s Republic has bank-rolled the construction of roads, railways, mass housing projects and even entire neighborhoods. As tens of millions move from rural villages each year, Africa is now urbanizing at the same pace China has in recent decades, in a process partly facilitated by homes and utilities built by Beijing. China’s is looking not only for a steady financial return but also, given Africa’s natural resources and growing markets, unassailable political clout.

Such China dependence, though, makes Africa vulnerable. Since Beijing devalued a couple of weeks ago, currencies across the continent have tumbled, amid worries that Africa’s biggest trading partner will curtail investment, while demanding less copper from Zambia, gold from South African and oil from Angola and Nigeria. Fears that China’s buying power will weaken are escalating across the continent, amidst an increasingly widespread view that growth is less than the official 6-7pc claimed by Beijing.

I left Africa last week with a sense of optimism. Growth remains robust and there is increasing evidence of good economic policy-making. Average inflation across Africa is down from 60pc in the mid-1990s to under 10pc today. External debt has fallen from 80pc of GDP to less than 50pc over the same period. Corruption, while still a major problem, is on the wane – not least due to the steady, if still patchy, spread of democracy.

Extremely diverse, Africa’s 58 nations range from relatively well-run democracies to volatile dictatorships, complete with sleazy generals surrounded by machine-gun-totting thugs. But the recent peaceful transfers of power in Ghana, Nigeria and (eventually) Kenya were encouraging.
There remains vast room for improvement, of course – even Ghana, with a reputation for reasonably competent economic management, is currently propped-up by the International Monetary Fund. The trend of broad continent-wide progress, though, particularly in sub-Saharan Africa, is clear.

For now, China’s slowing demand means Angola is suffering from a foreign exchange squeeze and workers are being laid off by Zambian and South African copper and gold mines. The rand, in fact, hit a 14-year dollar low last week – a sign of the serious potential impact of this Chinese growth blip even in a country with a diverse production base that goes way beyond natural resources.

Some African countries could benefit from a weaker yuan, as it cuts the cost of imports from China – particularly capital goods such as machine tools and power-generation. If countries like South Africa and Kenya start paying for such goods in a weaker Chinese currency, domestic inflation would be lower. The spread of yuan invoicing across Africa also plays to China’s aim of reserve currency status, promoting the yuan as an alternative to the dollar.

The Chinese economy, while far from stagnant, is now showing the signs of years of poor investment decisions and the creation of domestic over-capacity. Non-performing loans are set to escalate, which could yet provoke a banking crisis. Having built up a taste for Chinese cash, many African economies will suffer as a result of Beijing’s economic mismanagement, perhaps enduring some significant capital outflows.

This is happening, ironically, just as the actions of the big Western economies and particularly the US – apparently soon to raise interest rates, after years of keeping them artificially low – is also causing a rush of capital away from the emerging markets.

Increasingly rivals in Africa, China and America appear united, it seems, in conducting macroeconomic policies over the next few years which could adversely impact the continent’s economy. We must hope this squeeze, while considerable, won’t threaten the progress that many African countries have made.


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