The commodities downturn may help force African countries to make structural changes towards diversification, but investors still face many hurdles and risks
Privatisation of Africa’s state-owned assets prompted by financial crises in several countries may be the trigger for a new wave of competitiveness and enterprise on the continent, starting this year.
Speakers at the Deloitte Africa seminar on Africa’s outlook for 2017 highlighted the opportunities that may lie in wait for the continent if it frees itself from dependence on commodities, particularly oil. The recent cyclical fall in commodities prices, which showed early signs of turning last year, could force structural reform.
Martyn Davies, MD of emerging markets & Africa at Deloitte Africa, said poor management of state-owned assets is largely responsible for the continent’s sluggish growth, notably in power and transport infrastructure.
"Private capital is the greatest force for development," he said.
In recent years the International Monetary Fund has intervened in 10-15 African countries a year. Its first step is to sell state-owned assets, which opens opportunities for more innovative privately owned companies.
Structural reform is usually impossible without a crisis, Davies said. Major reforms took place in Europe in the wake of the dismantling of the Berlin Wall in 1989, while the 1990s financial crisis in South Korea altered several economies in Asia. This year a loss of oil revenues could force reforms in the Nigerian and Angolan economies.
But Konrad Reuss, S&P’s regional manager for Africa, said despite the recent economic slowdown, not a single country in Africa has improved its sovereign credit rating; in fact in most cases structural challenges have worsened.
This year there will be more challenges: rising US interest rates, which will increase the cost of debt; higher inflation as a result of a stronger US dollar; and looming elections in Angola and Kenya, and party leadership changes in SA.
Reuss said this year the risk of a repeat of the 2008 financial crisis is slight as the US housing market and securitisation sector are more regulated than before. But there are imbalances in other countries, for example in China’s banking and property sectors, which could derail global economic growth.
Barclays Africa deputy CEO Peter Matlare said public-private partnerships are an area of potential opportunity in Africa but often take a long time to implement. Governments’ appetite for selling national assets often disappears once a crisis has passed. Privatisation works better if there is broad ownership of assets, rather than selling them only to those with access to capital.
Several speakers at the seminar discussed the difficulties that foreign investors in African countries have encountered when trying to gain a foothold.
Matlare, a former CEO of Tiger Brands, which had to write off R2.8bn in Nigeria, said group executives and analysts thought they understood Nigeria, but it is far more complex than it seems.
The lesson is that investors have to take a different approach in each country, adapting to local circumstances. Business models have to be low cost and flexible.
Several speakers agreed it is difficult to find high-level sector-specific skills because there is intense competition for them, and it is vital to train local managers.
Policies and regulations in Africa often present impediments, speakers said. Matlare said in the financial services sector regulators are intervening with negative consequences. For example, by demanding in-country data processing, they raise the costs of doing business.
In Kenya, where authorities tried to cap bank fees to protect poorer customers, established banks have limited their activities to sectors in which they can make money, which exposes poorer customers to usurious lending rates.
Though large private equity investors including Actis and KfW Development Bank have continued to make investments throughout the economic slowdown, Deloitte Africa’s Fredré Meiring said deal flow has been inhibited by uncertainty on the direction of economies, restrictions on currency outflows, and apprehension about the consequences of Brexit and US policies under President Donald Trump.
David Cooke, a partner at Actis, said promising sectors are new consumers and infrastructure spending, financial services especially for the unbanked, health care and pockets of industry. It is difficult for a large investor such as Actis to find investments of sufficient scale but it seeks businesses that can grow across regions, he said.