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SPECIAL ISSUE
The New Silk Road: Afro-Eurasian
investment
June 2014
Global Financial Institute
Your entry to in-depth
knowledge in finance
Dr. Paul Kielstra
2 The New Silk Road: Afro-Eurasian Investment
Global Financial Institute
Introduction to “Global Capital Markets in 2030“
Deutsche Asset & Wealth Management’s Global
markets face weakening demand in many mature
Financial Institute asked the Economist Intelli-
markets.
gence Unit to produce a series of white papers,
custom articles, and info-graphics focused spe-
In short, while the world’s stock of financial assets
cifically on global capital market trends in 2030.
(e.g.
stocks,
bonds,
currency
and
commodity
futures) is growing, the pattern of that growth sugWhile overall growth has resumed, and the
gests that major shifts lie ahead in the shape of capi-
value traded on capital markets is astoundingly
tal markets.
large (the world’s financial stock grew to $212
trillion by the end of 2010, according to McKin-
This series of studies by Global Financial Institute
sey & Company) since the global financial crisis
and the Economist Intelligence Unit aims to offer
of 2008, the new growth has been driven mainly
deep insights into the long term future of capital
by
and
markets. It will employ both secondary and primary
by a $4.4 trillion increase in sovereign debt in
research, based on surveys and interviews with
2010. The trends are clear: Emerging markets,
leading institutional investors, corporate executives,
particularly in Asia, are driving capital-raising; in
bankers, academics, regulators, and others who will
many places debt markets are fragile due to the
influence the future of capital markets.
expansion
in
developing
economies,
large component of government debt; and stock
3 The New Silk Road: Afro-Eurasian Investment
Global Financial Institute
Introduction to Global Financial Institute
Global Financial Institute was launched in Novem-
institutions are hundreds of years old, the per-
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Global
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more from Deutsche Asset & Wealth Manage-
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long-term
ment’s Co-Chief Investment Officer of Asset Man-
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agement Dr. Asoka Wöhrmann, CIO Office Chief
social issues facing the world. To accomplish this
Economist
mission,
Global
in
Financial
Institute’s
independent,
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Financial
educated,
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website
Müller,
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combine the views of Deutsche Asset & Wealth
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About the Economist Intelligence Unit
The
the
a variety of pieces covering the financial services
world’s leading resource for economic and busi-
Economist
Intelligence
industry including the changing role relationship
ness research, forecasting and analysis. It provides
between the risk and finance function in banks,
accurate and impartial intelligence for companies,
preparing for the future bank customer, sanctions
government
agencies,
Unit
financial
(EIU)
is
and
compliance in the financial services industry, and
academic organisations around the globe, inspir-
institutions
the future of insurance. A published historian, Dr.
ing business leaders to act with confidence since
Kielstra has degrees in history from the Universi-
1946. EIU products include its flagship Country
ties of Toronto and Oxford, and a graduate diploma
Reports service, providing political and economic
in Economics from the London School of Econom-
analysis for 195 countries, and a portfolio of sub-
ics.
scription-based data and forecasting services. The
the charitable sector.
He has worked in business, academia, and
company also undertakes bespoke research and
analysis projects on individual markets and busi-
Brian Gardner is a Senior Editor with the EIU’s
ness sectors. The EIU is headquartered in London,
Thought Leadership Team. His work has covered a
UK, with offices in more than 40 cities and a net-
breadth of business strategy issues across indus-
work of some 650 country experts and analysts
tries ranging from energy and information tech-
worldwide. It operates independently as the busi-
nology to manufacturing and financial services. In
ness-to-business
Group,
this role, he provides analysis as well as editing,
the leading source of analysis on international
project management and the occasional speaking
business and world affairs.
role. Prior work included leading investigations
arm
of The
Economist
into energy systems, governance and regulatory
This article was written by Dr. Paul Kielstra and
regimes. Before that he consulted for the Commit-
edited by Brian Gardner.
tee on Global Thought and the Joint US-China Collaboration on Clean Energy. He holds a master’s
Dr. Paul Kielstra is a Contributing Editor at the
degree from Columbia University in New York City
Economist Intelligence Unit. He has written on
and a bachelor’s degree from American University
a wide range of topics, from the implications of
in Washington, DC. He also contributes to The
political violence for business, through the eco-
Economist Group’s management thinking portal.
nomic costs of diabetes. HIs work has included
4 The New Silk Road: Afro-Eurasian Investment
Global Financial Institute
The New Silk Road: Afro-Eurasian
Investment
Written by
A Global Financial Institute research paper written by the Economist
Intelligence Unit
June 2014
Investment in Africa’s Frontier Markets: Frothy port-
over 10% of the world’s oil, 40% of its gold, and 80% of its
folio gains and long-term opportunities
platinum. According to UN estimates, Africa’s current population of roughly 1bn, can expect to rise by about 50% by
The next big thing?
2030 and to be more than double today’s figure by 2050.
Frontier markets are currently hot news for portfolio inves-
At the same time, the proportion of those who are working
tors. The term, originally created by the World Bank’s Inter-
age will go from 54% currently to 58% in 2030 and 62% by
national Finance Corporation, has been around for two
2050. In other words, Africa is set to reap the demographic
decades. It refers to those economies which are at an ear-
dividend many emerging markets have already enjoyed.
lier stage of economic development than emerging markets but which seem capable of moving toward that status.
The continent has always had resources, though, and
Thus, frontier markets are typically riskier, less liquid, and
youth is an economic blessing only when combined
have lower market capitalisation than emerging ones but
with employment opportunities. On this front African
hold out the possibility of rapid, prolonged growth.
economies have been expanding strongly in recent years
aided by governments addressing the overarching busi-
As developed countries have struggled with stagnation
ness environment. As then World Bank vice-president for
and the BRICs have delivered less dramatic growth, the
Africa Obiageli Ezekwesili said in 2012, “In the last decade...
profile of frontier markets has risen. Funds composed of
Africa...made peace with the concept of macroeconomic
equities from these countries are delivering substantial
stability as being fundamental for growth.” Reforms have
returns, albeit after sharp losses in the aftermath of the
been widespread: according to the World Bank’s Ease
Global Financial Crisis. More specifically, Africa is the cur-
of Doing Business data for 2013, of the 15 countries that
rent darling of buyers taking a chance on such invest-
have seen the most improvement over the last five years,
ments: from the start of this year to the end of May 2013,
seven are from the continent. Governments have also been
the MSCI Africa Frontier Market Index is up by 26%, follow-
addressing debt: an Ernst & Young study of 15 sub-Saharan
ing on a 52% gain in 2012. Some individual markets are
states calculated that average foreign state indebtedness
seeing even more dramatic rises. The All Share Index of
as a proportion of gross national income fell from 120% in
the Nigerian Stock Exchange gained 34% between Janu-
1994 to just 21% in 2011. Though this is largely a result of
ary and May after a 35% rise in 2012 and the Ghana Stock
debt forgiveness, better economic management plays an
Exchange soared by over 50% in the first five months of
important role.
this year. Debt markets are also becoming more attractive:
in September 2012 a Zambian sovereign bond offering
These efforts are being rewarded: Economist Intelligence
raised $750 m and was oversubscribed by 24 times. For-
Unit figures indicate that eight of the 20 fastest growing
eign investors are taking note.
economies in the last five years are African and nine of the
20 that will see the greatest growth in the next five years are
A story of growth
also forecast to be from the continent. At a regional level,
Africa has much to spark the interest of investors, begin-
for most of the last decade, sub-Saharan Africa and North
ning with resources – both natural and demographic: it has
Africa have seen growth comfortably above the global
5 The New Silk Road: Afro-Eurasian Investment
Global Financial Institute
average. Looking ahead, the IMF predicts that economies
to create a distorted, monolithic image of a highly diverse
in sub-Saharan Africa will grow at around 6% annually over
continent. Those discussing the current positive economic
the next two years, well surpassing the global figure of 4%.
story should avoid the same mistake. To begin with, much
To 2030, CitiGroup has forecast that, the continent’s share
of the current good news – population prospects, eco-
of global GDP will go rise from 4% to 7%.
nomic reforms, and resultant growth – applies largely
south of the Sahara while political and social changes are
Michael Lalor, lead partner at Ernst & Young’s Africa Busi-
taking a toll in North Africa. South Africa, the largest econ-
ness Centre, notes two important attributes of this growth.
omy in the region, has also not kept pace with its sub-Saha-
The first, he says, is that “the progress we’ve seen has been
ran neighbours; in 2012 its 2.5% GDP growth kept down
sustained over a decade. It is not just one or two years of
the broader regional figure of 4.3%.
growth.” Second, although “natural resources remain a key
driver of growth and investment, the extent of diversifica-
In considering frontier capital markets, though, the prob-
tion is often overlooked.” Only about a third of the conti-
lems facing these parts of the continent are of only indirect
nent’s growth has been commodity-related. Manufactur-
import because South Africa and the major economies of
ing, telecoms, and local services, are all seeing marked
North Africa are already considered emerging markets. The
activity. Consumer spending, meanwhile, accounts for
difficulty is deciding just which countries are members of
over 60% of sub-Saharan Africa’s GDP and is also rising
the frontier club when looking at portfolio investment.
substantially according to the World Bank. Indeed, domes-
Growth alone is not sufficient: in the last five years Rwanda
tic growth and low levels of debt have helped to cushion
has had the fourth fastest rising GDP in Africa and recently
African states from the economic difficulties facing much
issued a $400m bond on world markets, but with an entire
of the rest of the world.
economy worth just over $6bn it lacks depth for potential
investments.
That is not to say doing business in Africa is trouble free.
Simplistic comparisons with emerging giants are problem-
In practice, frontier portfolio investment in Africa revolves
atic as the continent’s 54 countries fragment markets not
around a handful of countries and is dominated by the
only through diverse regulatory regimes but also in terms
purchase of Nigerian securities. Although no universally
of cultures, tastes and languages. Corruption remains
agreed list of frontier markets exists, most include only a
endemic in sub- Saharan countries, including Nigeria
few African states. Nigeria is inevitably one. MSCI’s Afri-
and Kenya which are tied for 139th place (out of 174) in
can Frontier Markets Fund – a frequently cited index of
Transparency International’s Corruption Perception Index.
the performance of these markets – includes equities
Moreover, although regulation is improving, progress
from there, as well as Kenya, Tunisia and Mauritius but has
according to Mr Lalor remains, “uneven and moves at what
very few holdings in the latter two. A close look at other
sometimes feels like a frustratingly slow pace.” Indeed, for
African funds usually shows that, beyond a single invest-
Weyinmi Omamuli – a sub-Saharan African economist– it
ment or two in any given country, most money goes into
is the slowness in reforming political and regulatory struc-
these countries as well as, sometimes, Ghana with the
tures that is the greatest threat. Failure to provide policies
large majority headed to Nigeria. Among all investors, the
that allow further growth and the development of neces-
bias toward that country is even more marked. The EIU
sary infrastructure will undermine the ability of Africans to
estimates that net portfolio investment into sub-Saharan
earn and spend further. “Consumer growth,” she explains,
Africa (excluding South Africa) rose from $5.1bn in 2011
although substantial “is still pretty vulnerable.”
to $10.9bn in 2012. The equivalent figures for Nigeria are
$3.5bn and $10.3bn, or 94% of the total in the latter year.
But where is the frontier?
Africans have frequently, often justifiably, complained
These are net figures. The only other frontier country seeing
about the extent to which writers generalised bad news
inward portfolio investment on the same scale as Nigeria is
6 The New Silk Road: Afro-Eurasian Investment
Global Financial Institute
Mauritius but even more money – as far as can be pieced
investor interest in the continent remains strong and a
together from different data sources – then flows out from
flood of hot money does not create a bubble. Nevertheless,
some of the 27,500 holding companies controlling $400bn
investors are likely to struggle to find such opportunities
in assets located in this tiny tax haven. African portfolio
as so many businesses remain outside of listed exchanges.
frontier investors, then, may point to the potential opportunities across the continent, but in practice most are really
Should all this worry Africa’s frontier? Probably not. First
sending hot money to Nigeria and one or two other places,
of all, frontier economies almost by definition have thin
while others use Mauritius as a base to control their hold-
capital markets. As economies grow over the long term,
ings, often in India.
so should market capitalisation. This has already been
happening. According to World Bank data, between 2002
The implications for investment
and 2012, total market capitalisation in sub-Saharan Africa
Capital markets are supposed to link those looking for bet-
(excluding South Africa) rose by a total of 4.1 times – more
ter returns with firms looking to grow. The narrowness of
than double the rate in high income OECD states (1.9
portfolio investment in African frontier markets, however,
times). If the continent follows the path of Asia’s emerging
arises because they are currently still too thin to perform
giants, this accumulation will accelerate: India and China
this function to any large degree. The total market capi-
saw total market capitalisation rise by factors of 9.6 and 8.0
talisation of firms on Nigeria’s exchange is roughly $70bn
respectively during the same period. The factors described
– about equivalent to eBay, the 45th largest American
above which bode so well for African economic growth
company. Kenya, the next most liquid, has a market capi-
should thus help with capital accumulation in the equity
talisation of only around $20bn. However, MSCI, basing its
markets, although investors should be prepared for plenty
assessment on both on the value of shares and their avail-
of bumps along the way.
ability to trade, estimates that the free-float adjusted market capitalisation of the major exchanges in Nigeria, Kenya,
To move growth along, notes Mr Lalor, “There is a strong
Tunisia, and Mauritius are collectively below $30bn. Given
case to be made for their regional consolidation: this will
the market size, resources and population of sub-Saharan
help to create critical mass and accelerate the develop-
Africa, this leaves significant potential for growth as yet
ment process”. Authorities are certainly looking at the idea.
untapped.
January 2013 saw the first meeting of the West African
Capital Markets Integration Council which has been estab-
Debt markets are also small at the moment. According to
lished by the Economic Community of West African States.
the IMF, government and corporate bond market capitali-
The body, made up of the heads of local exchanges and
sation as a proportion of GDP in sub-Saharan Africa out-
securities commissions, has been established to help cre-
side of South Africa is among the lowest in the world. The
ate common regulatory standards and a common trading
corporate figure is just 1.3%, compared to 23% in China,
platform across the region. Meanwhile, in August 2012,
46% in Europe, and 99% in the United States.
the East African Community founded the East African
Securities Regulatory Authority which has been looking
For those looking to cash in on rapid index growth in the
at joint supervision of companies cross listed in national
short term, market size clearly presents a problem. As
exchanges and mutual recognition of licenses of capital
the Economist commented in February, currently “There
market professionals. The slow progress of the Southern
are not enough listed African firms to absorb even a frac-
African Development Community’s Committee of SADC
tion of the ignorant money itching to flow south of the
Stock Exchanges (CoSSE), which has been promoting inte-
Sahara.” Overall, Mr Lalor explains, “Outside of South Africa,
gration since 1997, shows that good intentions alone will
capital markets are clearly still very immature.” Those very
not be enough. It has had some success in harmonizing
few African frontier firms that can tap into capital markets
regulation, but adoption of common technology has not
may enjoy very cheap access to capital as long as current
occurred and, as Beatrice Nkanza, CEO of CoSSE wrote last
7 The New Silk Road: Afro-Eurasian Investment
Global Financial Institute
year, “Robust cross-border trading between the region’s
portfolio investment in Nigeria will drop to between $5bn
stock exchanges is not yet the norm.” Nevertheless, if bet-
and $ 7bn annually for the next four years. This will bring
ter ties can be established between markets it should help
down the sub-Saharan figure to the same range over that
increase overall market depth and liquidity. At the same
period.)
time, common regional regulations would improve transparency, especially in smaller markets.
Instead, direct investment – be it greenfield or acquisitions
– seems the much more likely way for those with money to
The development of the region’s debt markets, on the
benefit from Africa’s growth in the short and medium term.
other hand, may not be so straightforward. Ms Omamuli
Foreign direct investment has risen substantially in recent
points out that many sub-Saharan countries, as a condi-
years: E&Y reports that since 2007 the value of greenfield
tion of their debt relief from international lenders, have
FDI projects in sub-Saharan Africa outside South Africa
accepted limits on their future level of commercial borrow-
has grown at a compound annual rate of 22%. Meanwhile,
ing under the Debt Sustainability Framework, which regu-
even as the EIU sees foreign portfolio investment drop-
larly assesses countries’ debt burdens over a 20-year hori-
ping to a lower plateau in these countries, it is projecting
zon. “You will see more countries coming onto the market
a slight increase in overall FDI in 2013. FDI is also much
but what people forget is really that the amount they can
more widespread among countries, with Angola, Nigeria,
borrow is very limited.” If those countries, as a result, do not
Ghana, Equatorial Guinea, and the Republic of Congo each
tap into debt markets at all, it can have a knock-on effect
receiving over $2bn in inward FDI in 2012 and Zambia pro-
on corporate borrowing. Without a sovereign debt rating
jected to join this group in 2013. Even Liberia is seeing a
against which to benchmark themselves, companies in a
$3bn investment in plantations spread over several years
given country rarely move onto debt markets.
by Sime Darby, a Malaysian multi-national. As Mr Lalor says,
“It is obviously important to develop capital markets with
For many countries in the region, the current size of capi-
depth and resilience. However, equity flows/investment
tal market is less of a focus than their overall investment
are arguably less important at this point in Africa’s relative
inflows. Mr Lalor notes that “While the capital is no doubt
development than investment in infrastructure and green-
welcome, the risk with portfolio investment is that it is
field projects.”
often short term in nature, and can create volatility. Clearly
developmental policies cannot be shaped around these
Asian investment
shorter term capital flows.” At this stage, the region needs
A broader look at FDI leads to another leading investment
long term capital but opportunities exist for those with a
story in African that has been attracting attention recently:
high risk tolerance and a willingness to venture in for the
the source of the investment. A recent UNCTAD report
long haul.
showed that, although France and the United States still
provided the most inward FDI in 2011 for the continent,
Nor are all Africans, entirely comfortable with the dangers
the next three countries were Asian: Malaysia, China, and
of foreign portfolio investment. Nigeria’s Central Bank, for
India. These states also have the 4th, 6th, and 7th largest
example, has highlighted the short-term nature of rapid ris-
overall African FDI stocks. Much of the Indian and Malay-
ing foreign portfolio investment – which in the last quarter
sian investment goes to Mauritius which likely sees at least
of 2012 was double the value of FDI – as a threat to external
some investments routed elsewhere. Chinese investors use
account stability. Renaissance Capital, an investment bank
the island less as a tax haven and their growing stake in
specialising in emerging markets, has even speculated
the continent may even be under-estimated. Despite such
that Nigeria might re-impose capital controls in some form
caveats, the UNCTAD data are consistent with the grow-
to prevent the rapid reversal of portfolio investment and
ing presence of Asian companies on the ground, including
the attendant disruption that could cause. (The issue may
such notable activity as the $10.7bn purchase by India’s
resolve itself. The EIU, citing lower expected oil revenues
Bhati Airtel of the African mobile phone networks of Zain.
available to drive economic growth, predicts that foreign
8 The New Silk Road: Afro-Eurasian Investment
Asian investment is often mischaracterized as no more
than an attempt to ensure access to the continent’s raw
materials. However, according to UNCTAD, the majority of
such investment, whether measured by value or deals, is
in services or manufacturing. Only about a quarter of the
money from the BRICS went toward investments related
to primary goods. One example of the broader extent of
investment is Industrial and Commercial Bank of China’s
2007 acquisition of 20% of Standard Bank for $5.5bn. This
wider focus, believes Ms Omamuli, will help make the current growth cycle more sustainable. In previous eras, commodity demand in developed countries usually drove rises
or falls GDP. Now lower cost labour and growing consumer
markets are allowing African countries and Asia’s emerging
economies “to form a different type of relationship based
on mutual interests, not just resource transfer.”
African economies have strong prospects for growth and,
alongside this, capital markets are likely to develop and
mature. However, they are too small to channel the funds
of those interested in these frontier markets into African
development. Dramatic index gains may simply reflect too
many buyers chasing too few securities. Foreign investment will nevertheless play an important part in Africa’s
future, but for the foreseeable future it will take the form
of direct investments by those with the patience to see
through the inevitable ups and downs of frontier market
development. These funds whether from the East or the
West, can also help reshape Africa’s role in the world economy, as it transforms from a purveyor of raw materials to an
economic partner and market in its own right.
Global Financial Institute
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Global Financial Institute
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