Tremendous Opportunity for Economic Growth in Africa

Larry Seruma chief investment officer of Nile Capital Management says more investors will begin to look outside of developed markets like the United States for growth, because those markets aren't expected to grow as fast as they have in the past. "It's only much more recently you're beginning to see these huge disparities coalesce," he says. "The U.S. is going to have very low investment opportunities going forward."
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He recently released a report, which can be seen here, that explains his investment firm's reasons for investing in the continent.

Investing in Africa involves plenty of risks. The biggest, Seruma says, is liquidity. "Liquidity is really the ability to trade frequently," he says. "When you want to get out of a position, it's not easy to get out of a position." Executing trades can be difficult because some African stock markets aren't as transparent and not as much trading takes place compared with, say, the S&P 500. There are other concerns, including the threat of government and corporate corruption. Many African countries have become functioning democracies, however, according to Seruma.


There are a number of other funds that give investors access to Africa and other "frontier" markets, which are also sometimes called pre-emerging markets. Templeton Frontier Markets and iShares MSCI South Africa Index ETF are two examples. Out of the 53 countries in Africa, Seruma's fund currently invests in 14, which together account for about 90 percent of Africa's overall market capitalization. Here are Seruma's reasons for investing in Africa.


'Ground-floor opportunity.' Seruma says many investors have already missed what he calls a "ground-floor opportunity" in Africa. For the decade ending Dec. 31, 2009, an African composite index made up of eight countries, including South Africa, Nigeria, and Egypt, returned about 14 percent annualized. South Africa alone returned an average of 13 percent per year over that period. Compare that with the MSCI Emerging Markets Index, which returned about 7 percent annualized, or the S&P 500, which lost about 3 percent over the same time period. He compares the risk versus return ratio in Africa today with emerging markets like China, India, and Brazil in the late 1900s—meaning that investors who enter a new high-growth market first reap the highest returns over time because they're willing to take on more risk.


Low correlation. Correlation is a measure of how investments perform in relation to each other. A low correlation, for example, means that two securities will frequently move in opposite directions. According to Seruma's research, from January 2002 through June 2009, an African composite index of eight countries had a correlation of 0.59 with the S&P 500, 0.66 with the MSCI EAFE Index (which measures developed markets outside of North America), and 0.60 with the MSCI Emerging Markets Index. That means that 59 percent of the time, the returns of the African index differed from those of the S&P 500. Investors can use correlation statistics to find out how to better diversify their portfolios. "The African markets have a very low correlation with domestic or other emerging markets, so [you have a] good opportunity to actually reduce risk in the overall portfolio," he says. Diversifying your portfolio among uncorrelated assets can help offset big losses.


Strong growth expected. According to projections from the World Bank, nine of the 15 countries in the world with the highest rate of five-year economic growth are in Africa. Seruma estimates that Africa is likely to grow by 4.7 percent over the next five years. Economists expect much slower growth in places like the United States and U.K. over the next few years.

Credit: Larry Seruma

IMF approve US$46.1 Million Credit Facility Arrangement for Burkina Faso?

The Executive Board of the International Monetary Fund (IMF) today completed the fourth review of Burkina Faso’s economic performance under the program supported by the Extended Credit Facility (ECF) arrangement. In completing the review, the Board also approved an augmentation of access equal to 60 percent of quota, an amount equivalent to SDR 36.12 million (about US$54.6 million). The Board’s approval of the augmentation would lead to a total access in an amount equivalent to SDR 82.274 million (about US$124.3 million; or 136.67 percent of quota), under the ECF arrangement.


The completion of the review will enable the disbursement of an amount equivalent to SDR 30.53 million (about US$46.1 million), bringing total disbursements under the arrangement to an amount equivalent to SDR 57.334 million (about US$86.6 million).


The Executive Board approved the three-year ECF Arrangement for Burkina Faso on June 14, 2010 for an original amount of total access equivalent to SDR 46.154 million (about US$69.7 million; or 76.67 percent of quota) (See Press Release No. 10/241).

Following the Executive Board’s discussion on Burkina Faso, Mr. Min Zhu, Deputy Managing Director and Acting Chair, issued the following statement:


“The Burkinabé authorities are to be commended for their strong performance under the program in the face of continuing challenges. In 2011, despite a slowdown, growth remained above regional averages, and the fiscal deficit was reduced. The authorities put public finances on a more stable footing by improving revenue collection and reducing fuel subsidies. Measures were also taken to contain the public wage bill and other current spending, while improving overall public financial management, including spending execution.
“Burkina Faso is facing two shocks: inadequate food supplies and an influx of refugees. The authorities are implementing a comprehensive and well-targeted set of measures to meet domestic food security needs. However, the refugees are facing increasingly dire living conditions, requiring redoubled efforts from the authorities and the international community.


“The immediate increase in financing under the Fund-supported program will help meet import needs arising from the crises. This is also intended to safeguard spending for Burkina Faso’s homegrown development program, the Stratégie pour une Croissance Accélérée et pour le Développement Durable (SCADD). The SCADD contains a number of welcome measures to improve resilience and make growth more sustainable and inclusive, notably through diversifying agricultural production, expanding irrigation systems, improving food distribution systems, and introducing a social protection framework for the most vulnerable households. The authorities should accelerate reforms to boost private sector led growth, in particular strengthening the judicial framework.

“New analysis by the IMF and World Bank resulted in lowering Burkina Faso’s risk of debt distress rating from “high” to “moderate.” This opens the door to new financing opportunities, other than grants, but implies that care is required when choosing projects and evaluating financing in order to maximize growth returns and to keep public debt sustainable,” Mr. Zhu added.

Credit: IMF

Electricity supply company in Malawi seeks diesel generators

 Malawi has an ambitious strategy to increase the supply of electricity from the current 282MW to 3 407MW by 2020. Consequently, the government has proposed power projects worth $2-billion for which it is seeking investors. 

Investment opportunity:Through the Electricity Supply Corporation of Malawi (ESCOM), the government is looking for companies to supply and install three diesel generators. The generators, which will have a maximum capacity of 46 MW, would act as peaking and standby plants embedded within the distribution network. The generators would be used at two peak periods in Mzuzu, Lilongwe and Blantyre.

The project is expected to cost US$40-million.

Sector: Malawi has a power supply deficit (282.5MW against a demand of 344MW), which undermines the country’s ability to attract investment. 95% of the power is generated at plants on the Shire River, and the remaining 5% is derived from a mini plant on Wovwe River. The planned development of phase II of Kapichira hydropower will help boost power supply in the medium-term. The government is currently seeking investors to build power plants on the Shire, Songwe, Bua, Dwambazi, South Rukuru and Ruo rivers. Uranium and coal reserves are other natural resources that Malawi is considering for power generation.

For further information on investment opportunities in Malawi's energy sector, contact the Malawi Investment promotion Agency (MIPA).

Noel G. Lihiku
Planning and Research Manager, MIPA
nlihiku@mipamw.org
+265 888 369 402/+265 999 288 073