Gulf-based private and public equity fund managers have this year shifted some of their vast wealth from Asia and the Middle East/North Africa region to the world’s poorest region: sub-Saharan Africa. These portfolio flows to a half-dozen countries have been accompanied by direct investment in property and other sectors.
There has also been an increase in official aid: the Gulf’s Islamic Development Bank has pledged $10bn in African loans over the next decade, while its Opec Fund contributed $200m in 2006.
Nigeria – where the stock exchange was up 70 per cent for the year by the end of August, according to the S&P/IFC Global index – has been the main focus. This interest comes against the backdrop of a disputed presidential election in April won by Umaru Yar’Adua, a former state governor from the Muslim half of the country, and continued violence in the critical Niger delta oil production centre.
The rally began more than two years ago, with windfall petroleum earnings bringing 6 per cent gross domestic product growth and a record level of foreign exchange reserves, allowing the government to buy back its official external debt from the Paris Club at a discount and redeem outstanding Brady bonds.
The government also introduced a Fiscal Responsibility Act to curb budget excess while prudent monetary policy has helped cut inflation to single digits. In March, Fitch Ratings assigned Nigeria a sovereign credit rating of BB-, affirming the country’s previous results from 2006. Its rating peers include Indonesia, Turkey, Ukraine, Venezuela and Vietnam.
Banks have been popular debt and equity plays following industry consolidation, which reduced the number of competitors by two-thirds. Bourse heavyweight United Bank for Africa this year completed a $300m global share placement, triple the initial subscription target. Moscow-based Renaissance Capital was a lead underwriter. The firm has established a presence in Lagos and Nairobi and opened an office in Dubai to satisfy demand from Arab individuals and institutions.
While Nigeria, with its $50bn stock market capitalisation, is in the core benchmark (the S&P/IFC Global index), smaller frontier destinations that are less correlated with main emerging market indices have reputedly also attracted Gulf interest.
Botswana’s stock market had gained 54 per cent this year through to the end of August on the news that inflation had dropped to 6 per cent. It was also helped by the state pension fund reform. In spite of price/earnings ratios of about 18, big listed companies have delivered strong results.
As diversification from diamonds continues, Middle East investors have been drawn to gold, and to the cross-border financial services expansion strategy of Investec, whose net income rose 30 per cent in the past fiscal year.
Ghana’s stock market had advanced 15 per cent in dollar terms through to the end of August. It is working on regulatory and trading integration with Nigeria under the auspices of the West African Monetary Institute.
The country marked its 50th anniversary of independence and graduation from the IMF and World Bank Heavily Indebted Poor Country scheme – which has slashed debt as a portion of output by 80 per cent in the past five years – with plans for an inaugural sovereign bond, expected this year. Proceeds will go to energy infrastructure to relieve chronic power shortages that have lowered the 2007 economic growth target to 5.5 per cent. Capital markets were a main theme at the US-Africa Trade and Investment summit held in Accra in July.
Kenya’s stock exchange is up only 3 per cent through August on an overhang of partial privatisation sales and competing Treasury bond auctions. In spite of the resumption of multilateral assistance after corruption investigations cleared officials, sentiment has been depressed by the steep fall in the share price of the government electricity company after a flotation last year.
Shares of Kenya Airways fell after it reported a 15 per cent decline in earnings and lost an aircraft in Cameroon. Wildlife safaris and legal hunting are favourite pursuits of high-net-worth Gulf nationals. They have sought exposure to hospitality and travel-related companies and are also believed to be likely buyers in telecoms.
The Gulf push into the sub-Sahara reinforces pioneer efforts, notably by Saudi Arabia’s Prince Alwaleed bin Talal whose Kingdom Holdings created a $125m joint venture in 2004 with New York-based Zephyr Investment for African private equity. Its best-known success was a $20m stake in the pan-regional mobile provider Celtel, which was later acquired at a hefty premium by Kuwait owners. The prince has joined HSBC in a separate dedicated vehicle.
As petrodollars head towards these locations, western wealth advisers who have shunned them may re-examine their assumptions and consider participation a viable emerging market option.
The writer is senior partner at Kleiman International Consultants