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Speech: Investing in Africa and Africa’s Capital Markets – Why Now?

By Obiageli Ezekwesili

LONDON, October 6, 2011--Thank you very much for your very kind words of introduction.

I am delighted to be at this summit and to be speaking after Xavier and Andrew. I agree with many of the very excellent points they have made and would like to thank them for getting us off to a good start this morning. To Xavier, Andrew and Bill, my sincere thanks for your devotion to Africa and thanks to the London Stock Exchange and our friends at the Financial Times for hosting this summit on Africa in the heart of London.

Let me begin with a flash back. Let’s look back at how Africa and Africa’s capital markets were affected by the global downturn in 2008-2009. The most immediate effect was felt on stock markets across Africa, where the issues of size and liquidity of the markets were amplified rather than overlooked, as African markets were hit pretty badly. The market turnover on the Uganda Bourse dropped 60 percent during the third quarter of 2008. The Nairobi Stock Exchange 20 share index fell 31 percent. The Johannesburg Stock Exchange all-share index declined 42 percent between May and October 2008. Initial hopes that investors – weary of markets in developed countries – would seek opportunities in Africa and other developing regions were misplaced. Thus, while the price-earnings ratios on many African stock markets were above comparators in mature markets in 2007, the fallout from the subprime mortgage crisis in the United States dampened investment plans significantly. Economic growth on the continent slipped to below 2 percent.

The experience of 2008-2009 matters if we want to understand what may happen in the event of a similar or worse global economic melt-down. Today, we know sadly that nobody really knows for certain the extent of the effects of the crisis on the most fragile, debt-ridden and budget-strapped economies.

However, to the extent that there is a crisis, we expect that for most countries in sub-Saharan Africa, trade, especially trade with Europe, will be the main channel through which the current perturbations in the global economy are likely to be transmitted. Despite diversification of trading partners over the past few years, Europe still accounts for some 37 percent of Africa’s non-oil exports. So, any deepening of the Euro-zone crisis is likely to adversely impact the demand for goods and services from Africa. We estimate that for every additional one percent of fiscal consolidation carried out in the Euro-zone and a 2.5 percentage point reduction in investment due to increased investor nervousness, global GDP would shrink by 0.6 percent and sub-Saharan Africa’s GDP would drop by 0.1 percent.

Given this forecast, must we “Be Afraid”, as the headline of The Economist this week suggests? Yes and No.

Yes, because the same dampening effect that the first crisis had on investments and the failure to see weary investors flock to Africa remains likely.

No, because other forces can reverse the negative impact of a Euro-zone melt-down. For instance, a two percentage GDP growth in South Africa that triggers major intra-African trade would generate a one percentage GDP growth in other sub-Saharan African economies. Solid growth in Nigeria and a return to growth after armed conflict of a country like Cote d’Ivoire is certain to produce strong ripple effects on neighboring economies.

One of the key lessons of the past global crisis is that Africa knows how to shrug off the impact. The “Been there, done that” attitude, summarizes in a way, the perception of many African finance ministers during the last World Bank-IMF Annual Meetings in Washington, DC. It is hard to say they are not justified.

The new African economy of which we speak and that you contemplate investing in is one that has sustained many years of sound macroeconomic stability, has built the right institutions, has recognized the merit of being more transparent and accountability; has shown strong adherence to market principles and has, partly thanks to debt relief, built the fiscal space that enabled it to implement countercyclical policies in order to mitigate the last crisis. That new Africa has rebounded fastest than from any previous crisis to become the world’s second-fastest growing region. Africa attained 4.6 percent GDP growth in 2010, and is forecast to reach 4.8 percent growth levels in 2011 – just shy of the pre-crisis average growth level assuming no further significant downward spiral in the global economy. Growth for 2012 and 2013 is projected to improve to 5.2% and 5.5%, respectively. The priority for African governments, which their finance ministers acknowledge, must be to sustain those reforms as well as implement second-generation reforms… while rebuilding the fiscal space that would be needed if another storm hits the global economy. Fiscal space in many African countries got tighter after the previous crisis. For example, Kenya, Tanzania and Zambia adopted fiscal stimulus packages. Kenya’s fscal deficit rose to 5.9% of GDP in 2009 from 4.3% before the crisis. Replicating the knowledge that enabled policy reforms to precede public investments and private capital turned a loss-making sector such as telecommunications into the ICT revolution we have all witnessed across the continent.

That new Africa is one that is on the cusp of the same revolutions that hit China and India only a few years ago. It is an Africa where I believe that the top investment opportunity… and I know I have said this before, but it bears repeating… After the revolution in the ICTs in Africa, the next big thing for the continent will be agriculture, which also happens to be Africa’s biggest private sector. As with ICTs, ventures in agriculture in Africa have a lot of room for expansion given low productivity, low irrigation levels and the vast expanse of uncultivated arable land, estimated at 60 percent of the world’s uncultivated arable land. Investments in agricultural start-ups, agri-businesses and agro-processing in Africa will not yield some of the most rewarding profits at a time of rising global food prices, but will create millions of jobs for Africans. Nigeria alone imports $10 billion worth of food each year, meaning it has a $10 billion food market waiting for investors.

In an age of social medial, a second round of solid investments in ICTs will ensure that the 400 million Africans who now own mobile phones can upgrade to 3G and 4G networks and that they can buy smart phones. The investments needed and the profits awaited can be gigantic judging from the needs to be filled. Some 600 million Africans still do not have a mobile phone; 94 percent of Africans do not still have access to the Internet and over 80 percent await access to banking services, including mobile and online banking. As with most investments, the early investor will catch the fattest worm in the form of profit. Late comers will include those like a telephone company from a European nation which refused to take over the telecom sector in Nigeria and now lives to regret that decision.

A third area of boundless opportunity is in infrastructure investments – especially infrastructure of a regional or cross-border nature – including investments to help bridge Africa’s yawning energy deficit. Half a billion Africans currently without access to reliable and affordable power can either be seen as a problem (by the short-sighted investor) or as an opportunity (by the investors who want to take the bet on African energy generation that ICT firms took on its telecom sector just about a decade ago). The continent needs to build its network of roads, rail and water ways that will foster trade – notably intra-African trade. Then there are infrastructure needs in water and sanitation; in building the infrastructure for a rapidly urbanizing continent; and in irrigation projects needed to boost agricultural yields, create jobs and guarantee food security, among others.

Light manufacturing is a fourth area that can address some of the unmet needs of Africa’s emerging middle class. Any manufacturer and investor who is unaware of the aspirations of Africa’s fast-growing middle class should take note. One recent survey in Nigeria found that nearly one-third of the 37million Nigerians in the middle class plan during the coming year or two to buy a microwave, a washing machine, a dryer or a refrigerator. These are only some of the ocean of unmet demands requiring major capital investments. Those demands can only grow and will include investments to expand the tourism sector and to fund housing.

However, and that is where financial capital can help itself, it is not only capital that matters. Knowledge, social capital and human capital can be just as useful. The World Bank, for instance, brings knowledge of what works in development from across the globe and can help investors base their decisions on solid analysis of what works and what doesn’t. Financial capital may sometimes be better off funding social and human capital development as well. Investments in light manufacturing will yield hefty profits especially if investors do more to build social capital (promote social accountability, transparency and demand-side governance) but also if they realize it is also the business of the private sector to build human capital (to develop the skills needed to staff light manufacturing positions). This area requires urgent action because rising labor costs will force firms in China to off-shore about 85-to-90 million labor-intensive light manufacturing jobs over the next three-to-five years. Africa can lure many of those jobs.

Whatever the area or sector, high rewards await the investors who take a long-term view and find strong local partners to help them understand the continent’s investment market, its communities and peoples. My friend, Paul Collier, found in a study of over 950 African enterprises that their return on capital is on average 11% higher than in Latin America or Asia. Moreover, if you compare them with similar Chinese firms they are up to 70% more profitable. However, with so much up in the air, the question investors are asking – and rightly so – is why this is the time to invest in Africa and its capital markets. There is at least one obvious answer. While global equity markets are headed for their worst quarter since 2008, Africa’s fundamentals appear strong, and the continent’s outlook remains positive. The sheer abundance of opportunity is making stereotypes of Africa as a continent of misery, of war and of corruption less credible and even ill-informed for the market-savvy that you all are.

At least at this time of global economic doom, Africa has taught the world a lesson in macroeconomic reform and stability. As a result, businesses, consumers, investors and development partners like us at the World Bank are bullish about Africa. The belief remains unshakeable among Africans that tomorrow will be better than today and that is the kind of infectious confidence in which investments thrive. Investors who have been looking for the right market to invest just rediscovered Africa.

While there are risks and no one should be naïve about the many challenges facing the continent, facts are stubborn. A first fact is that until the recent crisis, African stock markets had been experiencing resurgence and displaying an energy that had not been felt for years. A second fact is that with the exception of South Africa, most African stock markets doubled their market capitalization between 1992 and 2002, from US$113.4 billion to US$244.7 billion. One overriding fact is that more capital is flowing to Africa because the continent has become a friendlier and more profitable market. Even more so, foreign investors have learned during the previous crisis that Africa, indeed, stayed stable. Meaning that they are now not rushing to withdraw from Africa in a flight to quality. As many as thirty six of the 46 African countries surveyed by our annual Doing Business report implemented serious reforms over the last five years, including those countries whose overall ranking in the report may not have improved. It is an investment proposition, not just a destination for development assistance.

As the crisis in one European nation will not be similar to a neighboring country, so too, the effects of any slowdown in Europe will obviously differ across African countries, depending on their exposure to the hardest-hit European countries (Greece, Ireland, Portugal, Spain and Italy) as well as the composition of exports. A country like Cape Verde – with a staggering 92 percent of its exports to these five European countries - could be particularly exposed. Other African economies with high exposure to these countries include Guinea (25 percent of its exports) and Mauritania (19 percent of its exports). Fortunately, for most countries on the continent, this share is less than 10 percent, minimizing their current exposure.

If a fresh round of global economic bad news unfolds, the attendant drop in commodity prices – especially oil and metals – could harm growth in Africa. Growth on the continent so far has tended to be closely linked to the evolution of international commodity prices. Heavy reliance on one or two primary commodities makes most African economies highly vulnerable to external shocks. A country like Nigeria, which depends on oil for 90 percent of export earnings, could be bruised if the crisis slows growth in its three main export markets, which are the United States (38 percent of Nigeria’s oil market), Europe (24 percent of Nigeria’s oil market) and India (10 percent of Nigeria’s oil market). The impact could extend beyond oil. The three countries combined also account for 52 percent of Nigeria’s non-oil exports. Oil prices, which have fallen by 11.3 percent from their highs earlier this year, are likely to curtail growth prospects in oil-exporting African economies, but boost growth prospects in Africa’s numerous oil-importing economies, as they devote more funding to much-needed infrastructure and social programs.

With World Bank support, more African governments are embracing the right reforms, building the right institutions, growing resilient economies and making the right policy choices, including diversifying their economies away from oil, gas and mining to the massive job-creating promise held by agriculture and small and medium-size enterprise creation.

So, what can investors, African governments and peoples, and Africa’s development partners do? Let me speak first to donors. The temptation is great when a crisis looms – as it does now – for rich countries to slash development assistance. This would be a grave mistake, not because Africa is desperate for aid, but because the global economy is desperate to see a high-performing Africa that can be the next global growth pole and its next market. Global prosperity will expand if Africa grows and prospers. Then to any company or investor still not in Africa, “today is the day African business has made. Tomorrow may be too late”. Africa is the now, no longer the future. Any CEO who has not presented his or her board of directors with their Africa strategy needs to get to work on such a plan. Any global player that continues to ignore Africa does so at their peril. To the people of Africa and their governments, I say foreigners – partners or investors – can help, but the ultimate responsibility of delivering on Africa’s development promise is that of the peoples of Africa and their governments.

Recognizing that fact, the World Bank’s first-ever Africa Strategy developed in wide consultations with the continent, is committed to partnership with Africa… working with Africa, not for Africa. We will continue to support efforts to build the foundation for good governance and grow public sector capacity across Africa. We will continue to support programs that improve the continent’s economic competitiveness; as well as its ability to embark on and sustain broad-based, inclusive and job-generating growth; and economies that are resilient to shocks and are protective of the most vulnerable segments of the continent’s population.

Investors will find in our different branches at the Bank the knowledge products they need to foster private sector-led growth. We can provide the guarantees they need for risky projects. They can count on us in resolving investment disputes; and can trust us to be the partner that continues to challenge governments to do more each year to improve the environment for doing business.

As I said earlier, this is an exciting, new Africa, at a time of unprecedented opportunities for transformation. This is the Africa that is calling all responsible investors today. My question to you is: are you listening to or have you already heeded that call? The Africa train has already left the station. You are either on it or you risk becoming irrelevant.

Thank you for your very kind attention.

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