Emerging Markets Insights

Aly-Khan Satchu, FSG Expert Advisor and Anna Rosenberg, Senior Analyst for Sub-Saharan Africa discuss the implications of Kenya’s imminent election and how businesses operating in the region can best prepare.

Key questions answered include:

1. Atmosphere in Kenya preceding general elections –how high is the risk of post-electoral violence?
2. What impact will the election have on companies currently operating in the region and what can companies do to prepare?

To listen to or download the podcast, click on this link to access the iTunes store.

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Aly-Khan Satchu is the CEO of the East African Financial Portal http://www.rich.co.ke.  He is a banker by training and worked several years in the City of London. He worked for Credit Suisse First Boston, was a Managing Director at Sumitomo Bank, as well as at ANZ Investment Bank and Dresdner Bank. Aly Khan is originally from Kenya and returned to his home country six years ago, and today is an advisor to a number of African Governments and Investors. For the last three years, Aly-Khan has been an active Investor at the Nairobi Stock Exchange, the USE and various other African Stock markets.

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(5) With a mandate to govern, can Nigeria’s new government implement positive and sustainable reforms?

Between its petroleum-dominated economics and mind-bending demographics, Nigeria is well-positioned for sustained growth and diversified foreign direct investment in the decade ahead: a leading economist has picked the country to be the world’s fastest growing across the four decades to 2050. With its new government now in place for the best part of four years following the 2011 elections cycle – including key individuals favored by business in seat at the both the Finance Ministry and the Central Bank – the time is overdue for a meaningful political vision to capture that opportunity and steer the country towards its eventual destiny as Africa’s regional super-power. Following the creation of a sovereign wealth fund to manage oil-related windfalls and restructuring of the country’s troubled banking sector under the previous administration, future critical reform milestones to look for in President Goodluck Jonathan’s first full term must include tangible progress on tackling entrenched official corruption at all levels of the country’s extensive bureaucracy. In terms of both their immediate creation of investment opportunities and their wider demonstration of an improvement rather than inertia culture in the country’s legislative system, meanwhile, movement will also be expected on finally enacting long-overdue measures to reform the country’s hydrocarbons industry (the delayed Petroleum Industry Bill) and to liberalize the its public healthcare provision (the National Healthcare Bill, now over six years in hiatus).

(6) Will there be a leadership challenge in South Africa?

Better the devil you know, or the devil you don’t? That’s the dilemma facing many businesses with a footprint in South Africa as they contemplate the possibility of controversial President Jacob Zuma facing a serious challenge to his leadership position and broader policy platform at the ruling African National Congress (ANC)’s elective conference in Mangaung (Bloemfontein) in December 2012. Zuma has disappointed businesses with his inability to kick South Africa’s economy into rapid growth, his apparent inertia (and, at times, alleged complicity) in the face of creeping official corruption at all levels of the country’s bureaucracy, and perhaps most damagingly his ambivalence to growing calls from the ANC’s radical youth wing (the ANCYL) for the nationalization of various sectors of the private economy. Ironically, however, it is steps in recent weeks by Zuma’s leadership team belatedly to silence the ANCYL’s outspoken leader Julius Malema – whose support was critical to Zuma’s initial ascendancy – that have upped the stakes for Mangaung and created the possibility of serious attempts throughout 2012 to displace pro-business moderates from government.

(7) Will Asian companies continue to make the running in Africa?

The story of Chinese investment, and to a slightly lesser extent companies that hail from other Asian countries, in Africa is a popular academic and media topic. The appetite for African growth from businesses that honed their model in Asia is apparently boundless. Asian vehicle manufacturers Honda, Hyundai, Toyota, Suzuki, Tata and Mahindra have all set their sights on South Africa; Samsung hopes to generate $10 billion in annual revenue in Africa by 2015 with a R&D hub in Kenya; and in recent weeks Chinese handsets manufacturer Huawei has announced a major play for the booming Nigerian telecommunications market. Part of Africa’s attractiveness as a market – beyond its raw consumer potential – is its relatively uncluttered competitive landscape. With every year that passes, that scenery becomes more congested. Western companies arguably already lag behind their Eastern counterparts in numerous markets across various verticals; the danger is that recession or slowdown in their home markets into 2012 sees Western firms revisit ever stronger conservatism and risk aversion towards the African opportunity, despite its favorable growth profile, allowing that gap to widen further – potentially beyond reach – as Asian investment continues to flow unchecked into the continent. Meanwhile, side-effects of this trend can also be expected to accelerate in 2012: diversifying trade and investment partners strengthens the hands of African governments, and lessens their dependence on, and motivation to defer to the legislative and regulatory preferences of, Western operators. Given many Asian investors’ emphasis on long-term manufacturing, research/development and supporting infrastructure components to their investments, the overall bar for all businesses entering the market can also be elevated as a result; relationships between employees and host communities and investing businesses can also be substantially altered by these Asian pioneers.

(8) Can East Africa meaningfully integrate?

The East African Community regional bloc (comprising Kenya, Tanzania, Uganda, Rwanda and Burundi) on 1 January 2010 formally launched a common market. All five countries have already adopted a common external tariff, an identical tax applied to imports from outside the bloc, and allowed duty-free regional trade with the exception of Kenya, the largest economy. Given that East Africa lacks a single economy of the scale of Nigeria in the west or South Africa in the south, material progress on implementing the common market and transitioning towards the free movement of people, capital and services across the five countries’ borders, as well as the abolition of import duties, is critical to the region’s future growth prospects. If precedent is a guide, implementation during 2012 and beyond is likely to be under-funded and therefore slow and patchy – while structural obstacles to meaningful integration from both inadequate transportation infrastructure and deficient electrical power supplies will remain significant. Nevertheless, with its booming demographics and swelling natural resource potential as well as its proximity to Middle Eastern and other Asian markets, East Africa remains an exciting growth frontier for investment. Ultimately, the aim is also to introduce a single EAC currency to further simplify regional trade.

To learn more about Frontier Strategy Group’s regular Market Intelligence on Africa’s key investment markets, contact africa@frontierstrategygroup.com to learn how we can help

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Part one

With unprecedented levels of investor interest both on merit, and because growth may well prove elusive elsewhere, 2012 promises to be an exciting year for sub-Saharan Africa. In this two-part series, I examine some of the key questions businesses looking to the continent should ask themselves as they plan ahead:

(1) Can the continent withstand continuing volatility in commodity prices?

While broadly insulated from sovereign debt and banking-related contagion from the OECD countries, Africa’s vulnerability to commodity price movements – particularly in the form of inflation – remains considerable, and will be a key theme for the region’s macro-economic outlook alongside an average 5.25-5.75% GDP growth projection into 2012, driven by strong domestic consumption. Importers of food and fuel – including Ethiopia, Kenya and Uganda – are already facing sharp inflationary pressure, a situation that could worsen in the year ahead if costs for those inputs trend upward. Producers of oil and industrial metals – Angola and Nigeria the giants in the former category, countries such as Zambia and Congo (DRC) falling in the latter – will meanwhile see their fortunes rise or fall depending on global commodity price and demand shifts, with higher prices boosting government currency earnings but also creating upward pressure on domestic prices. A renewed recession in Western markets, meanwhile, would impact African economies through lower remittances and renewed risk aversion amongst investors from those affected countries. South Africa, with its exposures on metals prices, established manufacturing exports, developed tourism sector, looks particularly vulnerable should worst-case macro-economic scenarios play out in North America, Western Europe and Japan.

(2) Will a series of major elections cause seismic shifts or entrench the status quo?

2011 has been a busy time for elections in Africa: larger countries that have been or are yet to go to the polls this year include Cameroon, Congo (DRC), Nigeria, Uganda and Zambia. Assuming Zimbabwe’s vote is delayed as expected, that country will join a similarly important list for 2012 that also includes Angola, Ghana, Kenya (whose outlook I cover in more detail elsewhere in this list), Mali and Senegal. In addition to the familiar potential for delays, disputes and protests, this wave of elections could be demonstrative of a number of wider cross-border trends. To begin with, that so many countries are organizing and holding broadly free and fair voting each year represents a dramatic and continuing important shift away from the autocratic norms of the 1980s and early 1990s. On the flip side, with accountability and transparency also comes greater policy unpredictability – as mining companies in Guinea discovered in 2010, when a change of president via the ballot box in that country catalyzed a major review of mining licences and royalty payments. Many of the elections will pit very elderly incumbents – Senegal’s Wade and Zimbabwe’s Mugabe are both over 85, while Angola’s dos Santos is entering his 70s – against younger opponents promising an agenda of change, reform and renewal. In addition to generational and policy change, how to manage and beneficially spend these countries’ growing mineral wealth will be a prominent issue in many of the elections – most especially in oil- and diamond-rich Angola and in Ghana’s first vote since it joined the ranks of petroleum producers, but also in Mali and Zimbabwe where mineral finds have yielded much-needed new government revenue streams.

(3) Will North Africa’s wave of anti-government protests shift southwards?

It hasn’t escaped the notice of many Africa watchers that the same cocktail of raw ingredients that broadly underpinned the so-called Arab Spring – long-entrenched and corrupt undemocratic regimes presiding over increasingly youthful and socially connected, technology-savvy populations struggling with unemployment – are also present in a fair number of sub-Saharan countries. It should be noted that mass uprisings leading to regime change are not unknown in the region – the toppling of Madagascar’s previous president in 2009 providing but one recent example – while military-led coups, although far rarer than in previous decades, also continue to occur sporadically in some countries. For some, the question has become why such ‘revolutions’ are not more commonplace given the potentially volatile causal factors in place. The answer to that question likely varies location, but includes – channeling de Tocqueville’s theory of what causes revolutions – a certain degree of lower expectations on the part of poorer African populations (often focused more on basic subsistence / survival or emigrating than marching on the streets) than their Arab counterparts, combined with governments that by and large have still maintained a sufficient monopoly of force and willingness to stamp out dissent fairly ruthlessly before it spreads. With public expectations rising alongside GDP – and food prices – in the months ahead, the potential for more unrest during 2012 is highly credible. Whether this manifests as more ‘manageable’ street protests of the type witnessed already in a number of countries during 2011 (such as Burkina Faso, Mauritania and Uganda) or more sustained disturbances remains to be seen. Other candidate countries for turmoil in the year ahead include Senegal, Gabon, Zimbabwe and Cameroon.

(4) Can Kenya come through a pivotal year unscathed?

It’s been a tough few weeks for Kenya, East Africa’s critical hub market: from the serious food crisis in its north, through the abduction of a female British tourist and the murder of her husband in the coastal resort of Lamu, to a major pipeline fire near the capital Nairobi. The negative impact of such developments on tourist visitor numbers and investor appetite would be negligible compared to the situation should the serious nationwide political violence that accompanied its December 2007 election resurface surrounding new polls due in August 2012. The implementation of a new constitution and wider Kenyan politics remain effectively on hold pending the long-awaited start of hearings at the International Criminal Court in The Hague, involving a number of key politicians accused of involvement in the clashes that paralyzed the country in 2007-2008. Any resurgence in political violence due to the Court’s findings or around the next poll will reverse recovery in the tourism sector, and with it any chance of growth close to the 5.7% YOY GDP figure projected for 2011. In the long-term Kenyan politics needs to move on from confrontational, ethnic-based divisions into more ideological / policy-based debates in order to achieve stabilization and much-needed reform.

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(A sign promoting the fight against corruption in Zambia - author's photograph)

From examinations of malpractice in South Africa’s police service, via investigations into grand larceny perpetrated by the recently toppled Gadhafi and Mubarak regimes in North Africa, to debates about new anti-graft bodies in Kenya and Zimbabwe, a cursory glance at media stories from the past seven days illustrate that corruption is rarely far from Africa’s headlines. Nor is it often absent from lists of investors’ most common complaints about, or reasons to delay, committing funds to the continent. With the business opportunity in the region proving increasingly difficult to ignore, and legislation governing Western companies’ ethical conduct tightening, developing holistic and effective corporate strategies to avoid entanglement in illegal activity has arguably never been more important.

Shifting sands, but still quicksand

Africa’s changing demographic and governance profile – generally younger and more democratic – is gradually changing its transparency outlook. Observing events in Tunisia and Egypt from close quarters and fearful of similar mass protests mobilized within their own increasingly connected societies and maturing civil society institutions, fewer governments south of the Sahara feel they can be seen to be tolerant of corrupt activity. However, as powerfully illustrated in a compelling recent book about the root causes and impacts of corruption in Kenya, the incentives that drive malfeasance including inter-ethnic competition and poor bureaucratic pay remain strong across most of the continent. The recent experiences of Nigeria, Senegal and Kenya amongst other countries highlight that all too often political movements that surf an anti-corruption and good governance wave to power all too often themselves succumb to temptation once entrenched in government.

Recognizing that transforming a vicious circle – where citizens, bureaucrats and businessmen all feel it is in their immediate personal interest to prolong corrupt practices – into a virtuous one is far from an overnight project, Western governments are increasingly seeking to rupture that co-dependency through extra-territorial legislation in their home countries. Until recently, the US Foreign and Corrupt Practices Act has been the trailblazer in this regard, ensnaring a who’s who of major corporations in its investigations – many of them with a footprint in Africa. A newer kid on the block, the UK Bribery Act, was only enacted on 1 July this year – it has raised eyebrows by outlawing smaller so-called ‘facilitation payments’ or small bribes made by UK entities – the grinding, every day variant of the corruption blight – as well as the large payments intended to skew business outcomes that usually attract the main focus of investigators.

(Percentage of users who report paying a bribe to at least one of nine service providers in the past year; source: Transparency International Global Corruption Barometer, 2010)

Short term pain, long term gain

The howls of protest that greeted the UK legislation – that it’s impossible to do business in places like Africa without paying bribes, that zealous enforcement of its provisions will render UK businesses uncompetitive against less scrupulous competitors – underline the sort of short-term thinking that continues to define the intractability of the problem in the region. In fact, growing numbers of corporations are finding out that taking a zero-tolerance approach even in the most murky and problematic jurisdictions does eventually pay dividends. A short-term opportunity cost – of tenders lost or delays to processes previously greased by bribes – is rapidly replaced by a reduction in demands and enhanced status as an employer and partner of choice. The contribution to overall societal transformation may be more modest, but the benefits in terms of litigation and compromising commercial entanglements avoided are generally a more than sufficient ROI.

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(Evidence of growing technology adoption, such as this mobile telephone sales booth in Swaziland, are increasingly ubiquitous in Africa)

The adoption of new forms of communication in Africa over the past decade – both mobile telephone and internet – has been nothing short of revolutionary. The continent is estimated to have produced over 316 million new mobile phone users since 2000, passing 500 million total subscriptions late in 2010, and its total internet user population is now estimated at almost 120 million. Previously, communicating over long distances was fraught with difficulty and expense; that outlook has been transformed. The significance of these trends for African economic development, transparency and democratization is profound; the opportunity for technology companies and indeed for businesses across many other sectors capable of leveraging such channels for advertising and delivery is no less significant.

An unmitigated success story

The growth and profitability of mobile telephone networks in Africa is by now a widely related success story. In addition to the staggering uptake figures recorded (and company results posted), what is equally exciting is the innovation and knock-on benefits this trend has generated throughout the continent. These include access to innovative financial services products for mobile users (trailblazed by the much-studied M-Pesa scheme in Kenya), better agricultural product pricing information for farmers, and Celtel/Zain’s unprecedented low-cost international roaming capabilities within sixteen countries that are the envy of both travelling Europeans and companies importing goods physically across borders in Africa alike. New high-speed underwater fiber-optic cables encircling the continent’s coastline are meanwhile dramatically improving access speeds. Mobile broadband internet subscriptions in African countries are expected to reach a cumulative 265m by 2015.

The attraction of capturing the African digital market and exploiting its potential for new service offerings is bringing bigger and bigger names to the table. Earlier this month, Google announced it would be training 1,000 Kenyans to act as ambassadors for its products. Its move follows those of Asian companies LG Electronics and Huawei, both of which have already established local academies to train product experts and source locally-relevant innovations and adaptations to their product portfolio in the region. Korean electronics giant Samsung has announced a particularly ambitious growth strategy for the continent, aiming to generate $10 billion in annual revenue in Africa by 2015 (a fivefold increase on current sales which would put the market on an equal footing with China). Samsung reported 31% growth in revenue to US$1.23bn for its Africa operations in 2010.

New trends, new opportunities

Recent results announced by Chinese handset manufacturer Huawei on tremendous sales of its affordable IDEOS U8150 Android smart-phone in Kenya highlight the appetite and with it the opportunity for selling technology products in Africa despite comparatively low income levels. Figures revealed in June by mobile internet browser development firm Opera meanwhile showed Nigeria as the world’s fourth most active user market, followed by South Africa in seventh place. Belying its terribly outdated labeling as the ‘dark continent’, the hunger for connectivity, and openness to new technologies and service models, are clearly as strong – if not stronger – in Africa than anywhere else in the world.

Reflecting this rapid adoption of technology, e-commerce is an increasingly influential segment of African customer retail, enabling exponential increase in product access and equally dramatic reductions in the continent’s often forbidding costs of sale at through more traditional retail outlets. Recent media coverage highlights its rapid growth in South Africa, often a weathervane for the rest of the continent: the country’s population spent more than R2bn (US$275m) online in 2010 excluding air travel and accommodation outlays. This entailed a 40% increase on 2009’s figure, with 2011 expected to see a further 30% increase. The traditional perception that African consumers abide by the “I buy what I see” principle appears to be shifting, and forward-thinking businesses will seek to move ahead of that curve in their local online offerings.

In a similar vein e-learning and e-health solutions could also offer significant acceleration capacity to combating some of the continent’s serious social service provision deficiencies. Cloud computing, virtualization and hosted services are all constitute growth segments for further expansion. As the past decade has shown, in this respect the African sky really is the only limit.

Interested in learning how your company can leverage new technology channels to sell to and grow in Africa? Contact africa@frontierstrategygroup.com to learn how we can help

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Consumers are struggling with higher food and fuel prices across the emerging markets of  Middle East and Africa as external factors such as high commodity prices and regional unrest combine with internal factors including strong domestic demand. Next month, Ramadan will heighten the upward pressure on prices in countries with large Muslim populations, which may lead governments to consider interest rate hikes to bring inflation under control

■     Algeria: A desire for stability will trump any motivation for political change in the short term

■     Angola: Moody’s and Fitch signaled that Angola’s investment climate is improving, but several threats could derail recent progress

■     Egypt: The new budget plan fails to address how Egypt will emerge from its post-revolution struggles, but cautious optimism remains for 2012

■     Ghana: Politically stable Ghana has made huge strides recently in local enterprise stimulation and resource manufacturing potential

■     Iran: The rollback of subsidies is sustaining inflation at high levels, which is hurting Iran’s economy more than sanctions

■     Iraq: Investment opportunities in Iraq are growing rapidly, but the security situation remains precarious in the medium term

■     Kenya: Economic potential is restricted by high commodity prices, which are contributing to inflation growth and a weakening currency

■     Morocco: Relative stability should hold for the short term, but fallout from the constitutional referendum should be monitored closely

■     Nigeria: The development of the healthcare sector may be a slow process, but its untapped potential is huge

■     Saudi Arabia: Pace of government transactions slows, but private consumption spike will provide opportunities for consumer-oriented companies

■     South Africa: The investment climate received a boost with the approval of Wal-Mart’s entry, but familiar challenges still threaten the economy

■     Tanzania: Massive infrastructure plan hinges on willingness of private investors to take a risk on Tanzania

■     UAE: The government is getting ready to launch a key industrial zone just as companies revisit the UAE as a long-term export base

Each month Frontier Strategy Group releases monthly market reports to its clients. These concise, executive-friendly reports highlight key developments and market trends in a particular region.

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What do disgruntled Chinese bachelors and unemployed Indian call-center workers have to do with sub-Saharan Africa? At the moment, not much: A recent UN report shows that the continent at present accounts for a meager 1% of the world’s total manufacturing output. However, the same demographic and wage inflation trends that are currently raising questions about the long-term sustainability of Asian countries’ hard-won reputation for offering manufacturing firms a plentiful and cheap supply of labor do point to an opportunity for Africa — if a number of important constraints can be overcome.

Demographic trends are in Africa’s favor

The attractiveness of China as a low-cost manufacturing destination is dimming as its demographic profile changes. Due to the single child policy, the Chinese workforce will decline by around 100 million (from 72% of total population to 61%) between 2010 and 2050, with associated upward wage pressures. India is often characterized as entering a period of ‘demographic dividend,’ with a younger workforce capitalizing on a more expensive Chinese labor force.

Likewise, in Sub-Saharan Africa, the workforce will grow to 1.1 billion people by 2040. With its own demographic dividend paying off, Africa will become an increasingly attractive destination for manufacturing.

A long road with a lot of potholes

Despite the demographic and pricing trends in its favor, Africa has a long way to go if it is to become a global manufacturing destination of choice. The continent’s reputation for rampant corruption and almost permanent political instability may be a generalization — both trends are broadly improving across most of the continent — but infrastructure constraints (in particular the reliability of electricity and water) and skills shortages are both more ubiquitous, and arguably more intractable. Red tape impeding new investment, opaque tax laws, burdensome employment regulations and vexed labor relations present further obstacles in many markets.

The more enlightened African governments are aware of these impediments, and have made adding local value to the continent’s multiple natural resource exports a key priority from a foreign exchange generation and job creation perspective. Several are among the world’s most active business environment reformers; infrastructure improvement projects are proliferating around the continent. Skills enhancement and overcoming corruption are more systemic transformations that will take longer to achieve. Meanwhile, Africa is also seeking to capitalize on its competitive advantages of labor costs, availability and proximity to key markets by creating a wave of tax-efficient industrial development zones. Over 20 countries in the region offer such incentives, including Kenya, Nigeria, Ghana and Tanzania.

A sign of things to come?

Perhaps the most telling long-term indicator of Africa’s future manufacturing potential is the growing trend of Asian and other emerging market-headquartered companies placing facilities into Africa. Emirati, Japanese, Chinese, Korean and Indian companies have all announced major manufacturing investment plans in various African countries in recent months. Western companies are currently waking up to Africa’s consumer potential, in many cases several debilitating steps behind their Eastern competitors. Frontiers Strategy Group advises them to track a parallel trend to manufacture as well as sell their goods locally.

Frontier Strategy Group launched its new AfricaVantage service, designed to give global companies the data tools, strategic insights and high-level networking opportunities they need to capitalize on the growing African opportunity. Look out for new posts on the region in the next few weeks.

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