Among frontier markets globally, Africa offers one of the most exciting investment stories, in our view. But we recognize that investors may need to be patient and understand some of the unique aspects of doing business in those markets, as well as the risks.
As global demand for hard and soft commodities continues to grow, we believe Africa is in an enviable position with its vast natural resources. Many African markets not only boast significant supplies of oil, gas and hard commodities, but also have the means to expand the production of soft commodities.
In the past couple of years, volatile commodity prices have presented a challenge for African countries, particularly those dependent on oil revenue. Commodity exporters faced substantial challenges after the dramatic oil price declines in 2014 and depleting fiscal buffers, which impacted growth in many countries.
However, that volatility could also be viewed as an opportunity, as these countries recognized the urgent need to reform and diversify their economies. It forced governments to become more disciplined and improve income collections. Volatility also encourages countries to find ways to expand their economy through more diverse ventures, rather than just through the sale of a single commodity.
We are seeing a number of large multinational companies establish a presence in Africa for the first time – particularly in countries with improving infrastructure and ease of doing business – to access its large, vibrant and youthful populations.
The influence of China in particular is increasingly apparent, especially in financing the building of roads, ports, airports and tunnels. The Chinese are becoming local partners with African businesses. While Africa’s commodities are of interest to China, many business owners are staying in Africa and setting up their own retail outlets there.
One market in which we’ve identified a number of opportunities is Kenya.
Over the past decade, Kenya has made significant structural reforms that have driven economic growth. Kenya’s position on the fast-growing east coast of Africa allows it to act as a hub for trade and investment flows from the east into the rest of the continent. Exports, predominantly tea and horticultural products, have recovered strongly. The tourism sector is also seeing a strong rebound in the form of incoming foreigners.
Despite slowing to 5.5 per cent GDP growth in 2017 due to subdued credit growth, a prolonged political impasse and drought conditions, Kenya’s economy is expected to accelerate in 2017 and 2018 to 5.8 per cent and 6.1 per cent, respectively, with the adoption of prudent macroeconomic policies and strengthening consumption. The pursuit of progressive monetary, fiscal and exchange rate policies has helped stabilize and safeguard the economy. A diverse economy driven largely by services also provides resilience to exogenous conditions and the potential to be one of the strongest growth stories on the continent.
Kenya’s infrastructure is also likely to benefit from China’s “One-Belt One-Road” (OBOR) initiative, which aims to transform Chinese economic and diplomatic interests. In 2014, China established a special, multibillion-dollar fund to finance a variety of infrastructure projects along the OBOR routes. In Africa, that includes the port of Nairobi in Kenya.
Kenya is also at the forefront of the mobile banking revolution that is overhauling financial services in Africa.
A success story that is touted globally is a mobile phone-based money transfer and financing service in Kenya that has a growing subscriber base and has enabled unbanked and under-banked users to have a secure means of remitting and receiving funds.
Users of the system grew dramatically to 28.6 million registered customers since its founding in 2007, with a corresponding exponential growth in the value of transactions. As a result, mobile banking has spread rapidly to many other countries in the region, substantially boosting financial inclusion.
Beyond banking services, mobile phones are connecting users to other sectors of the economy such as retail, education and healthcare, leapfrogging the need for traditional brick-and-mortar assets and linking to the burgeoning population in emerging markets.