No. 37 – 3AMReads: Upside in African Financial Services | Lonmin Moves Ops to Marikana | China Pledges $100B

Investor Highlights African Financial Services Opportunity Despite Headwinds

Kurt Davis surveys the financial services industry across Nigeria, Ethiopia, Kenya, Democratic Republic of Congo, and Cote d’Ivoire as ones where investors will find an upside though the current state of the industry isn’t the prettiest to look at. His projection of Cote d’Ivoire becoming the centerpiece of regional financial services action in West Africa is a really interesting that makes sense given the countries growth trajectory so far. Before that happens, I’m going to need the military to improve its operations, find money to pay soldiers, and decrease the specter of mutiny.

Lonmin Moves to Marikana

My mind immediately went to the Marikana Massacre a few years ago when I saw the news that Lonmin was moving it’s Johannesburg office to Marikana where dozens of Lonmin workers were killed by South African police during a wildcat strike. A couple years after that, the company along with the rest of South Africa’s platinum miners went through a very long strike that really put a dent in South Africa’s already struggling growth rate. Lonmin CEO Ben Magara got his start working in the mines and says that he wants to be closer to the company’s operation. Relations between the company and its employees aren’t getting any better with workers protesting last week. Hopefully this move helps improve relations.

China Pledges $100B to Finance Projects Globally

Chinese President Xi Jinping hosted several global leaders for China’s One Belt, One Road Forum. A year or so ago, China launched this effort as part of its aims to connect 60+ countries through a vast transport and logistics network to drive trade. Kenya and Ethiopia’s presidents were in attendance, and both have already seen hundreds of millions of dollars in investment as part of this effort. China’s trade with African countries is already sizeable at $39B for Q1 2017, and we can expect that number to grow significantly in the coming years if China is able to execute the projects it targets and gets paid back. If not, there could be a lot of debt floating around the world. African countries, particularly the ones that have issued large bonds in recent years, would do well to really ensure they have revenue streams to cover more debt should they pursue it.

The African Development Bank Welcomes its New President Today

The African Development Bank (AfDB) will be receiving the swagger Dr. Akinwumi Adesina brought to Nigeria’s agriculture sector, as he begins his term as president today. He takes the helm in times that are significantly different from when his predecessor, Dr. Donald Kaberuka got his start, and present their own set of challenges and opportunities, some of which I will cover here.

The Bank is Operating in a Different World

For six of the ten years President Kaberuka served as AfDB president, the US Federal Reserve was implementing its policy of quantitative easing. During QE, we saw investors’ risk appetite and willingness to place money in developing markets increase, creating an environment for several African countries to dip into the debt markets to finance infrastructure development and address deficits.

Now that QE is over, there is concern we could see a reversal depending on how aggressively the Fed hikes interest rates and to what extent emerging market growth slows. The Institute for International Finance projects that 2015 private capital inflows to Sub-Saharan Africa should still increase, though slightly.

If this proves accurate over the next several months, it would have been a cause for relief for countries like Ghana that have dipped into the debt markets, but are experiencing significant fiscal struggles and have been trying to figure out how to maintain investor confidence.

The Bank is Different 

The AfDB is a much different bank than it was 10 years ago. The AfDB was issuing about $400M in lines of credit when President Kaberuka began his first term. Now, it issues more than $3 billion. Over the course of his tenure, the AfDB has approved $28 billion in infrastructure projects, $10 billion more than the bank had approved between the bank’s creation in 1964 and 2004. 

Further, the AfDB worked on incorporating the private sector into its business model, increasing the number of public private partnerships it involved itself with, and a large reason for the growth in the bank’s lending portfolio.

These two developments, along with a concerted focus on integrating African countries at a regional level serve as significant opportunity areas for driving the continent’s growth further.

Back in 2009, the World Bank came out with data that about $93 billion annually over ten years was needed to bring Africa’s infrastructure up to a competitive level. It would be interesting to see what progress has been made against this figure. If the $93 billion need holds true, there will be plenty of room for the AfDB to engage new project development around energy, transportation, and agriculture, which will require private sector participation and often planning at a regional level. 

Developing Country Development Banks Are On The Rise

The World Bank missed an opportunity to reshape the global power structure between developing and developed countries with the election of Jim Kim to be its president in 2012, rather than candidates from developing countries like Nigeria or Mexico. The following year, Brazil, Russia, India, China, and South Africa formed the BRICS bank, now known as the New Development Bank. 

China is also setting up the Asian Infrastructure Investment Bank (AIIB), whose primary focus is Asian countries, but could expand to African countries. The more the merrier according to President Kaberuka, per his recent remarks at the Brookings Institution, suggesting that the AIIB would do well to invest in Africa. We will have to see how China’s continued economic right sizing impacts ventures like the AIIB. 

What Dr. Adesina Will Be Working On

Dr. Adesina has stated several times that he will be building on the already strong work President Kaberuka had done over the past ten years.  A lot of his focus areas echo those sentiments. For example, he has talked about developing regional centers of excellence to help support natural resource development capacity, and complement the Africa Legal Support Facility’s efforts to help African countries negotiate better deals in the extractives industry. 

Building on the scale the AfDB has reached in its infrastructure investments, Dr. Adesina campaigned on building “integrated smart infrastructure,” to ensure the bank can measure its impact. This will complement the work of the Africa50 fund, another legacy of President Kaberuka. The $3 billion fund is focused on accelerating infrastructure investments across the continent to close Africa’s aforementioned $930 billion infrastructure gap with the rest of the world. 

This focus area should also feed into other parts of his vision for the AfDB’s work, including the development of resilient cities and building the continent’s agriculture value chains.

Potential Risks on the Horizon

The continent’s two largest economies – South Africa and Nigeria – have faced challenges with energy and fiscal matters. The Nigerian government continues to deal with falling oil oil prices, among other challenges, all while President Muhammad Buhari has just begun to announce his cabinet after several months in office. South Africa is continuing to deal with the fallout of rolling blackouts, though it too should continue to see a rise in capital inflows. 

As the AfDB pushes for regional integration, the ripple effects of challenges in individual African economies will grow. The Greek debt situation has not been pretty to watch and something like that happening to an African country would be really frustrating. 

Further, it is difficult to see how the country can break from a cycle of loan repayments. The cautionary rAfrican countries will approach each step in integrating their economies with caution.

The importance of African countries communicating their growth strategies is paramount, especially now that the QE program is over. This is especially true for fragile countries as the AfDB pushes for more inclusive growth on the continent. 

Keep Your Eye on the Bow Tie

Dr. Adesina delivered impressive results in Nigeria’s agriculture sector by closing loopholes for corruption in the country’s seed market, setting up a $100 million private equity fund, and boosting rice production, as a few examples. I look forward to seeing where he takes the AfDB. 

Why Akinwumi Adesina Won the African Development Bank Presidency

Bobby Pittman, head of Kupanda Capital, did a nice interview with the Center for Global Development where he serves as a board member alongside the likes of Ngozi Okonjo-Iweala and Lawrence Summers. He highlights the reasons Dr. Adesina won the AfDB presidency, and some things on which he will have to focus. Three points that stood out are:

  1. The AfDB picked a lot of low-hanging fruit in developing the private sector on the continent. Now that the private sector has advanced significantly, a lot of thought has to go into how to most effectively catalyze the private sector. Dr. Adesina has the track record and skill set to take the development of the private sector to the next level. 
  2. The AfDB’s focus on areas like the private sector, infrastructure, and regional development, in comparison with other development banks has contributed to its success. Maintaining that focus will continue to position the AfDB for success. 
  3. There are a lot of voices that could be part of the AfDB’s conversation, but are not currently. Work has to be done to incorporate their viewpoints into the AfDB’s work. 

I am excited about Dr. Adesina taking the reins at the AfDB and look forward to seeing the bank continue to do good work on the continent. 

Bridging “Trade not Aid” 

I gave a presentation earlier this week on how investment was key to moving the needle on transforming economic engagement with African countries from development aid to infrastructure. Here is my brainstorm in preparation for that talk, with some edits.

During the IMF Spring Meetings a couple weeks ago, I heard a theme of working with the private sector to foster investment on the continent. For the past several years, the conversation around Africa’s economic engagement with the rest of the world has often circled around the phrase, “trade not aid.” President Obama’s Doing Business in Africa Advisory Council held its first meeting last month and discussed setting an ambitious goal for doubling US trade market share across Africa – 7 percent to 14 percent. The U.S. has watched China overtake market share the past several years, going from 3 percent to over 14 percent. 

The reality is that for effective trade to happen, you’ve got to have the infrastructure, systems, markets, etc for it to make sense. I worked on a project several years ago where a client wanted to import peanuts from Ghana during a drought Georgia was going through. Making that happen would have been difficult because of how long it would have taken the nuts to get from Upper East and Upper West Ghana to port in Tema. While Ghana has invested in road infrastructure, connecting northern Ghana with the rest of the country, there is still a lot of work to do. 

This is where private investment on the continent comes in, filling the gap between the “trade not aid” tag line. The developments here are exciting, especially for investments led by African investors. For example, pension funds on the continent seem to be gaining comfort in being limited partners in alternative investments likes private equity. Hopefully, the African Development Bank is close to launching the Africa50 fund it announced a couple years ago. Alike Dangote and the Blackstone Group are partnering in developing power projects. The list goes on. 

While these are exciting developments, I’m wrapping my head around the reality that bridging the gap between aid and trade is not a something that will happen quickly. This could very well be something my daughter works on (hopefully). So much of the continent’s development is interconnected when thinking about port access, broadband penetration, and transportation. It’s hard to compare to China’s rapid development or that of South Korea and Singapore. I’m excited about the continent shaking loose and carving out its own path. 

President Obama’s Business in Africa Advisory Council Held First Meeting This Week

Last year, Commerce Secretary Penny Pritzker stood up the President’s Doing Business in Africa Advisory Council, a group of small, medium and large US businesses currently engaged in business on the continent and tasked with helping shape U.S. policy for business engagement with the continent. 

The makeup of the council is very interesting. You’ve got people ranging from Dominic Barton, head of McKinsey, to Kevon Makell, head of a renewable energy consultancy based in Charlotte, to Karen Daniel, CFO at Black and Veatch. 

If you’re as slow as I am at washing dishes, that two hours will give you enough time to watch this two-part recording of the advisory council’s first meeting on April 8. 

Part 1

Part 2 

Three things caught my attention during the meeting:

  1. Mr. Barton challenged the Council to think big, specifically in positioning the US to double its share global trade with the continent in five years. In 2013, our share was down to 7 percent from 13 percent in 2001. Compare that with China which has gone from 3 percent to 14 percent in the same window. 
  2. Wal-Mart was very clear in communicating that African countries not meeting its logistical needs amongst others should not expect partnerships equal to what countries that did meet their needs would experience. 
  3. The various US agencies that have significant engagement on the continent don’t really know what tools they have respectively for engagement on the continent. This includes OPIC, USAID, the State Department, and the U.S. Ex-Im Bank. Their representatives seemed to agree on the need for better coordination. 

One of the recommendations that stood out was a US-Africa Infrastructure Center which would equip US infrastructure developers to more effectively compete for deals on the continent. This struck me as a platform that could be helpful in tracking progress in closing the gap on the World Bank’s projection of $93B per year for 10 years investment in infrastructure across the continent

Further, the platform could serve as a helpful marketing tool in showing the effectiveness of US infrastructure developers in terms of time to completion, total project cost, lifespan of finished projects before maintenance, among other metrics.  Then again, it may be a better move to invest in the work already done by the African Development Bank, World Bank, and other stakeholders in setting up a platform focused on infrastructure development. 

The council meets next in September or October. I look forward to tracking their progress. Hopefully, I would have figured out how to be helpful to their work in some way by then. 

Nigeria’s Inclusive Growth Prospects

Credit: McKinsey Global Institute
Credit: McKinsey Global Institute

Last weekend, some friends and I hopped on a Google Hangout to discuss McKinsey Global Institute’s report on Nigeria’s inclusive growth prospects and what needs to happen for the country to realize that potential. 

Here is a quick rundown of some numbers:
 
40 million Nigerians are in the consuming class, but 130 million live below the Empowerment Line – an indication of their ability to afford eight household essentials for a decent standard of living.
 
GDP could reach $1.6 trillion by 2030. Investment in infrastructure could reach $1.5 trillion to support GDP growth and address road density being 1/7th and power generation 1/5th that of India.
 
Three things that stood out from the conversation:
 
1. Nigeria is growing in spite of the serious challenges it faces. We have seen the coverage of Boko Haram’s activity in the North and the 130+ days the government has still not rescued the girls kidnapped from their school. We have also seen the largest acquisition by a Nigerian company when Oando bought ConocoPhillips’ Nigeria oil assets for $1.65B. Nassim Talib’s theory of antifragility comes to mind – the notion of shocks, disorder, volatility driving gains. 
 
2. The skills gap in the country was troubling. The report states that 1 out of 6 of the world’s out of school children between age 6 and 17 are in Nigeria – 10.5 million children. Just thinking about the world’s population, I would think there are more than 60 million children not in school within this age range. Nonetheless, think about all the latent potential in Nigeria. Furthermore, the report highlights the poor quality of education. After six years of school, one out of five Nigerians between the ages of 15 and 29 can read and write.
 
3. Urbanization in the country was another interesting part of the conversation. McKinsey’s insights on urbanization not having the same economic effects as in traditional models was quite interesting. We discussed the rise of financing tools to get more people into homes and the potential risk of tools like mortgage-backed securities. 
 
Nigeria’s growth potential is real, as are its risks. The report had a lot of information and I am interested in your insights. What are some other things that stood out for you in the McKinsey Global Institute report? Shoot me a tweet with your thoughts.

Infrastructure in Africa: Go Big

In 2009, The World Bank estimated that it would take $93B annually over the next 10 years to bring Africa’s infrastructure to a healthy level. Four years later, how much of the $372B needed has actually been invested on the continent?

Watching Eddie Obeng give this TED Talk left me pondering on how we can think big in solving Africa’s infrastructure challenges. Big thinking like the Cape to Cairo road and Bright Simons looking for ways to leapfrog infrastructure technology is what it’s going to take for African infrastructure to be globally competitive.

I will come back with numbers on where we are with African infrastructure in a later post.