Indicators point the right way for investors in Africa, says Insparo
The misconceptions of the risks associated with investing in Africa are most acutely expressed within the valuations of local African debt markets, says Mahan Namin, a portfolio manager at Insparo Asset Management.
In a world where the major economies are faltering amid political stalemate and diminishing returns from central bank liquidity injections as a result of fiscal austerity initiatives, there is much to be gained by incorporating the African local market space into any diversified portfolio.
African economic growth has been resilient in the face of numerous financial shocks, including the 2008-09 global financial crisis.
In the five years leading up to it, the continent’s real GDP growth exceeded 5%.
This strong performance dipped only moderately during the crisis to 2.5% in 2008 and 4.5% in 2009, well above the global average of +1.5% and -1.9% respectively. It is already back to its new-millennium norm of more than 5%.
With the IMF predicting that slightly more than half of the world’s 25 fastest growing economies over the next five years will be in Africa, this trend looks set to continue.
The key themes that underpin this level of robust economic growth include a generous resource endowment, favourable demographics (see chart one) and an improved social and economic government policy. All start from a very low per-capita economic base.
Total government debt has fallen from 57% of GDP in 2004 to 33% in 2009 due to improving budget management and a series of domestic and globally supported debt relief initiatives.
With African policy makers learning from painful mistakes in much more recent history than the developed world, they were in many respects in healthier conditions leading up to the financial shocks of 2008-09.
They were also able to use monetary and fiscal policy with a higher degree of flexibility in order to offset the adverse impact of the downturn and the aggressive shifts of capital flows.
In terms of scale, Africa represents a population of almost one billion people and has a larger land mass than the combined total of China, India, Argentina, the US and all of Western Europe.
It contains 60% of the world’s uncultivated arable land, and its catalogue of natural resources include 40% of the world’s gold and 10% of the world’s proven oil reserves.
However, its income per capita is only a tenth of the world average and it currently attracts only five per cent of global FDI.
We believe one of the purest and most attractive ways of tapping into this extremely compelling growth story is through the domestic sovereign debt markets.
African local markets can broadly be divided into three areas in terms of characteristics: North Africa, South Africa and Sub-Saharan Africa (excluding South Africa).