Issue: April/June 2010

Investing in Africa

Elementary investment theory states that higher risks should be accompanied by higher returns to compensate for the risk taken. While most investors would not associate profitable investments with Africa, there has been a gradual realisation of Africa's untapped potential. There is no disputing that perceived risks are the main reason why capital inflows to Africa have been constrained over the past decades. There is still widespread perception that risks outweigh potential investment returns an investor can get. It is not until one digs deep into the research and travel to Africa that you realise the untapped potential within most of the African countries. The disparity between actual and perceived risk is where the potential for decent investment returns exist.

The question is whether perceived risks are in fact real? An important requirement when investing is the ability to get your capital back coupled with, some growth. Because of corrupt governments, volatile political environments and undemocratic regimes, investors believe this fundamental requirement for liquidity and growth may be limited. While there is acknowledgement that Africa still has some way to go to improve the investment environment, there has been significant progress over the past decades that seek to reduce the risks.

Let us first look at some of the risks that seem to be foremost in investor's minds.

A global corruption 2009 survey published by Transparency International (the web address of the relevant survey can be found at the following address:, paints a very interesting picture, highlighting that most countries in Africa are no vastly different to other less developed countries when looking at levels of corruption. What this means is that while risk of corruption exists, Africa is not an exception.

The corruption index is created from public opinion surveys that explore the public's views of corruption and experiences of bribery around the world. The measurement further assesses the extent to which key institutions and public services are perceived to be corrupt, measures citizens' views on government efforts to fight corruption, and level of state capture and people's willingness to pay a premium for clean corporate behaviour.

Recent years have seen Africa go through changes in the political environment, with an increasing number of elections taking place. There is growing pressure from organisations like African Union and United Nations to ensure that elections are conducted in a fair and free environment. The political culture is indeed becoming much more tolerant, with political coups declining from 24 during the 1960's to only 5 between 2000 -2008 ( Facts and Stats about Africa, 2009).

According to the Economist Intelligence Unit's (2009) democracy index there are only 30 full democracies in the world out of 167 countries surveyed. The index focuses on 5 key indicators: electoral process; functioning of government; political participation; political culture; and civil liberties. The index distinguishes between four categories: full democracy, flawed democracy, hybrid and authoritarian regimes. The survey found that seven African countries, including South Africa, had flawed democracies (vs 43 for the world), while 37 countries fall in the latter 2 regimes (vs 44 for the world). Hybrid regimes tend to hold elections but are perceived as not free and fair and tend to perform poorly on other measures.

* Due to high inflation and rising current account deficit Source: Fitch Ratings Reports

Another indicator of risk is credit worthiness, normally referred to as sovereign credit rating, which indicates the country's ability to pay back it's debt in full and on time. The ratings give investors a sense of investment opportunities, and could also be a reflection of corporate ratings within that country.

The accompanying table shows Fitch ratings of some of the countries in Africa. Ratings have been improving, with most outlooks being stable.

Another key investment factor to consider is future growth prospects for a country. The International Monetary Fund (IMF) is projecting GDP growth of 4% in 2010 and 5.3% in 2011 for the rest of the African continent, while developed markets are expected to grow at 2.1 % and 2.4% during respective years.

According to the Overseas Private Investment Corporation (OPIC) and the UN trade agency, UNCTAD, Africa offers the highest return on direct foreign investment in the world, far exceeding all other regions. While petroleum products are the driving force behind those returns, other sectors offer impressive growth.

Country Rating Outlook
Egypt BB+ Stable
Botswana A Stable
Nigeria BB- Stable
Ghana* B+ Stable to Negative
Kenya B+ Stable
Tunisia BBB Stable
Mozambique B Positive
Cameroon B Stable
Morocco BBB- Stable
Uganda B Positive

The potential rewards in Africa don't come without risks, similar caution as that exercised in assessing other less developed countries should be practised. However, Africa has trailed other less developed markets, with still scant infrastructure across the continent, poor healthcare, widespread poverty, and volatile political systems.

There is a trend towards ensuring that businesses take into account investor friendly policies, corporate governance, and governments are wisely spending commodity windfall revenues to develop infrastructure. Successful economic policy reforms in many countries have gradually led to more robust economies, with private sectors that are growing and contributing to the economic liberties of citizens. Seeing these changes, China and India are rapidly increasing their engagement and business dealings to assist in the development of some African countries.

While there exists potential growth across Africa, trustees looking at opportunities in Africa should ensure that they partner with asset management institutions that have on the ground research and extensive partnerships within each country in order to effectively deal with inherent risks.

For more information about RMB Asset Management's investment opportunities in Africa, please contact:

Lonwabo Dambuza
Africa Fund Specialist RMB
Asset Management
Telephone: 011 5051868