African economy on the rise

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By Gabriel Yap

lagos-nigeriaAfrica has posted economic growth of 5% per annum over the past five years. A figure forecast by the IMF to increase to 5.5% this year and 6% in 2014.  It seems that the Eurozone crisis or the Fed Reserve change in monetary policies won’t affect the African continent at all.

In Nigeria, for instance, the continent’s most populous nation with 170 million people, consumer consumption has been on the rise and now accounts for 20% of GDP.  The Nigerian government plans to build four airport terminals costing US$500 million and a gargantuan 20,000 MW electricity supply grid costing US$20 billion.

To finance the aggressive expansion plans, Nigeria turned to the international bond market for the first time in two years amidst the selloff in equity markets roiled by Bernanke’s comments on a possible tapering in QE on 22 May 2013.  It offered $1 billion Eurobonds – $500 million of five-year notes yielding 5.375% and $500 million of 10-year notes yielding 6.625%.  Both were arranged by Citigroup and Deutsche Bank AG.

What surprised most investors was that the bonds were very well subscribed up to four times.  In addition, the respective yields were even lower than the first offering – for instance, the 10-year tranche sold at a higher 6.75% when Nigeria came to the markets in 2011.

Nigeria has put in place a Eurobond yield curve with the new issuances, with outstanding issues now due in 2018, 2021 and 2023.  This will go a long way to buffer the volatile revenue stream from its oil production which now stands at 2.53 million barrels per day.

The other notable case is Ethiopia, the second most populous country – it averaged GDP growth of 10.6% per annum in the seven years to 2011, but its conservative government has chosen a more tightly controlled development model rather than the neoliberal ones adopted by other African countries like South Africa and Nigeria.

Nevertheless, Ethiopian GDP has grown to a respectable US$33 billion and is moving to unlock some sectors of the economy for foreign investments in a bid to reduce its US$8 billion trade deficit.

It has embarked on an ambitious five-year public works programme that will spend 15% of its GDP on infrastructure projects like roads, roadway and dams.  It will also open up its telecom and retail sectors for foreign investments.  Major retailers like South Africa’s Shoprite, privately-owned Makro and Walmart-linked Game, are certainly eyeing such opportunities.

In Ivory Coast, the government seeks to lure back investments after months of post-election crisis in 2011 which led to violence that killed about 3,000 people.  That spooked investors and forced the country to miss payments on its international debt.

That landscape has changed rapidly – Ivory Coast’s GDP is expected to grow a strong 9% this year and the government will spend as much as US$10 billion in the next six years to expand its port at Abidjan, build a railroad between the western town of Man and San Pedro, Ivory Coast’s second largest port.  In addition, US$500 million will be spent on the construction of a 275MW hydroelectric power plant in Soubre.  These infrastructure projects are expected to fuel economic growth in the next five years as stable business conditions seep in and the growing consumer class emerges.

Another African rising star is the world’s second largest cocoa producer Ghana and I am certainly looking forward to the country’s first issuance of longer maturity bonds – it plans to offer 200 million cedis (US$97 million) in two tranches of seven-year bonds next month and again in November.  Foreign investors like me would be able to participate.

Ghana is West Africa’s second largest economy and GDP growth is expected to hit 8% this year.  Already I own some three-year and five-year Ghana bonds which are traded OTC by local banks and big regional banks like Standard Bank and First African Bank.  The bonds are also listed on the Ghana Stock Exchange for easier monitoring.

A common capital distortion in EM or Frontier markets is the huge disparity in risk premiums for long and short-term debts.  For instance, in Ghana, you can buy and sell three-month Treasury bills yielding more than 20% pa (yes, you would double your capital in four years).  Of course, for foreign investors like me, the foreign currency risk is something I watch closely – in Ghana, the cedi has depreciated by about 7% against the US$ to about 2.05, but the risk-return is definitely still on risk-on gear as the country seeks to narrow its budget deficit which currently stands at 4% to GDP.

Who says that there is no money to be made in volatile Africa?  Other than the sun-soaked beaches in Pretoria and Freetown, there are other attractions – not just nature and wildlife, but bright opportunities for the shrewd investor to cash in on the rising star.