Successfully navigating investment opportunities in Africa

Looking at ways to increase investment in Africa

by Chris Paizis

Chris Paizis, Head of Markets Distribution for Greater Africa at Barclays, looks at ways to increase investment in Africa. He will be part of the Barclays team attending the 4th annual Trading Africa Summit 2015 in Cape Town in March.

Africa needs foreign investment, and it’s not only up to governments to encourage this. While there is a lot that governments can do, particularly in providing policy and regulatory certainty, the private sector has an important role to play in unlocking Africa’s opportunities.

Africa has huge advantages, not least a potential return on investment higher than most other regions. The downside is that it attracts less investment than it should because countries and institutions are often nervous about the risks they see in Africa.

This is where the private sector comes in. I call it “demystifying Africa” - demystifying Africa’s economies, demystifying Africa’s markets and demystifying Africa’s risks.

Foreign investors don’t have enough visibility about what is happening in Africa. The onus is on African-based companies to deliver that knowledge and vision to the rest of the world.

This is where the private sector comes in. I call it “demystifying Africa” - demystifying Africa’s economies, demystifying Africa’s markets and demystifying Africa’s risks.

Foreign investors don’t have enough visibility about what is happening in Africa. The onus is on African-based companies to deliver that knowledge and vision to the rest of the world.

Companies operating successfully in Africa know local conditions and understand local risks. They are in the best position to explain the realities of working here. Financial institutions with international reach and strong African networks are able to bring African clients and institutions closer to international capital. This can be a big enabler of local growth.

Demystifying Africa is not so much about correcting misconceptions as it is about using a depth of local experience to bridge the knowledge gap with international clients. African companies in turn need to provide investors with accessibility and transparency on their financials, operations and risks.

The role of African governments in promoting the continent to investors is multi-faceted, but it comes down to the messages that governments send to potential investors.

Investors want to see strong and predictable local regulatory and legal frameworks. On the other hand, investors should not demand a “gold standard” of frameworks before they consider putting money into a country. The accounting and legal standards in frontier markets might not be the same as in South Africa, which has some of the highest standards in the world, but there needs to be a level of compromise.

African markets have high growth compared to the rest of the world, and there are many opportunities to invest. With this high potential return comes risk, but risks are not uniform across the continent and can be addressed through strong local expertise. And the more investment and the more transactions there are, the more the process will help develop local markets and open doors to further investment.

Infrastructure development is one of Africa’s greatest needs and one of the most important ways to create jobs and spur economic growth. Business requires comfort and support to be long-term investors - a consistent message from governments as well as international support to underwrite risks goes a long way. The private sector likes consistency, development plans that go beyond the short term and a view of execution success.

Infrastructure development leads to regional integration, which is happening in Africa but not quickly enough. More commitment is needed from governments to make regional projects work. Alignment on thought and strategy is key, as is learning from mistakes made elsewhere.

It’s not only infrastructure where investment opportunities exist. Africa’s economies have been focused on commodities, but we’re now at an inflection point where trade will shift from commodity producers to those consuming commodities. Africa has come up with a number of innovative ideas - think of M-pesa, the mobile-phone based money transfer service, or Mauritius marketing itself as a financial services hub.

There are some compelling reasons to invest in Africa. The continent is experiencing real growth, albeit of a low base. It has a vast and young population that provides new markets and the opportunity for new and innovative products. There are new markets for many established firms and investors, and pockets of well-educated and eager workforces with real drive. The continent is culturally diverse and increasingly globally connected through technology.

Africa is more accessible than it’s ever been, and that’s a message that the public and private sectors can help spread to the world.

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Barclays crude oil forecast

by Miswin Mahesh

Miswin Mahesh, oil markets analyst at Barclays in London, looks ahead to discussions at the 4th Annual Trading Africa Summit:

The current rise in the oil price to above $60 per barrel is only temporary - the Barclays oil research team expects further pressure in prices going into Q2 2015.

Our forecast is that crude oil will average just above $40 a barrel in the first half of 2015 - it may even drop to near the $30/b mark at times - and will pick up in the second half of the year, averaging around $46.

The reasons for these moves, the responses of suppliers and consumers, and the implications for Africa and its commodities, are among the issues the Barclays team will be discussing at the upcoming 4th Annual Trading Africa Summit in Cape Town in March 2015.

The fact is that the oil market has undergone a transformation which may not yet be complete. Prices halved from over $100/b in mid 2014 to under $50/b in January 2015, a surprise development which caught governments and markets unaware.

It has now begun a slow recovery, reaching $60/b in mid February. The reason we believe this recovery is not sustainable, and that prices will once again decline in 2015, is that there is a continuing oversupply, which we estimate to be about 1.1 million barrels a day. OPEC nations are not cutting back, despite the oversupply, and oil prices will weaken until increased demand lifts the market.

We now expect a long period of oversupply stretching at least into early 2016, with prices averaging $55-$60/b next year.

It’s a price war. The OPEC nations have essentially said that they are the lowest cost producers and do not believe they should shoulder the responsibility for the high-cost, inefficient producers (i.e. the US and the other North American producers). OPEC countries are prepared to let the oil price drop in order to force out the inefficient producers and bring about what they would view as a much more efficient oil market.

The huge daily oversupply of oil is not being consumed, so it has to be stored. Much of the world’s on-shore storage has already been committed, and demand is moving to floating storage - the massive oil tankers which would normally transport oil.

One facility that has additional capacity is at Saldanha Bay in South Africa. Since August last year, 19 million barrels of crude has arrived at Saldanha Bay, with 73% of it coming from West Africa. So far, only about 1 million barrels has left this storage terminal. Saldanha Bay has 45 million barrels of storage capacity and we expect more of this capacity to be filled in the first quarter of 2015.

What is also happening is a change in the swing producers - those who influence the market, not necessarily those who produce the most oil. The traditional swing supplier has been Saudi Arabia, but for the moment they no longer want this role. So it’s moving to the United States, where producers are independent, scattered and not co-ordinated.

In the event of a price shock, Saudi Arabia could open the oil taps within 30 days, whereas it would take US producers 60 to 90 days to react.

These developments have interesting implications not only for the oil industry, but for other commodities - diesel is a huge cost input for much of the mining industry - and for gas exploration in Southern Africa if these low oil prices continue.

One of the issues the Barclays team will be exploring at the Summit is the potential for producers to curb supply in order to support the oil price. There are a lot of assumptions that Saudi Arabia will continue to maintain market share rather than increase it. But there’s also a huge potential that they could boost production, and bring all of their oil onto the market rather than keep some of it under the ground.

And that would have a dramatic effect on oil price expectations.

10 factors that are influencing the increase in Africa’s trade

By Jason Barrass

Jason Barrass is head of Africa trade at Barclays Africa

Trade patterns in Africa are changing, with new products, new trading partners and new technologies all influencing the way African countries trade with each other and the world.

As a result, African trade is growing as it has never grown before. This is benefiting African companies and economies, lifting living standards and providing opportunities for trade to and from the continent and between African countries.

Africa is rich in opportunities - now while it is in the midst of transformative change, and in the future when expanding populations will increase the market size and a better educated middle class will increase consumer demand. By 2020 Africa will have a population of 2.1 billion people and a collective GDP of US$2.6 trillion.

The continent is a minerals treasure house, has 60% of the world’s uncultivated arable land when world food demand is rising, and offshore gas finds are transforming economies, particularly down Africa’s east coast.

Barclays has been involved in Africa for more than a century. Leveraging that experience, we have identified 10 factors which are influencing the rising trend of African trade in a combination that bodes well for the continent playing a larger role in world trade.

  1. Rapid and sustained economic growth. Africa’s GDP growth averaged 5% from 2002 to 2012, and is expected to climb above 5.5% from 2012 to 2017. This is higher than any region except Asia and puts Africa above Europe and America.
  2. Healthier economies. Together with economic growth has come improved governance, lower inflation, lower foreign debt, and lower budget deficits. African economies are more resilient than in the past.
  3. New trading partners. Expanding Asian economies, particularly China and India, have altered Africa’s trade patterns. For many African countries, China is now the top trading partner. In 1998, China was 21st in South Africa’s import list and only 38th as an export destination. Now China tops both lists. India was down at 32 and 59 for imports and exports, but it is now up at 5 and 6, with trade growing by 19% a year.
  4. Diversification of products. For decades, one or two products dominated the export list of most African countries. Economic growth and rapidly expanding consumer markets have resulted in the diversification of African economies. New industries and new products have in turn brought new trade opportunities.
  5. Infrastructure development. Many African countries are investing heavily in infrastructure projects. New road and rail links and expansions at airports and harbours assist trade, while the substantial capital investment, much of it internationally financed, demonstrates confidence in these economies.
  6. Governments are facilitating trade. Regulations are changing, some tariff barriers are being lowered, particularly for intra-African trade, and requirements are being harmonised. In addition African governments are supporting trade transactions by providing or facilitating finance.
  7. Development finance institutions are boosting trade. Institutions such as the International Finance Corporation, the African Development Bank and the African Export-Import Bank are increasingly providing or facilitating trade finance. This is done directly, such as through letters of credit, or indirectly by helping commercial banks provide credit or loans to exporters and importers.
  8. Local and international banks are increasingly trade-focused. Trade expertise, local knowledge and sophisticated banking systems are available to provide finance and mitigate risk. Large banks will support import and export trade payments, offer structured trade and commodity finance deals, provide trade loans in local and foreign currencies and products that mitigate risk in imports and exports, such as letters of credit and guarantees.
  9. Improved technologies and payment systems. World-class clearing and payment systems give comfort to clients concerned about engaging with new markets. These include South African, southern African and East African payment systems. In a continent which often lacks efficient postal services, many bank products and channels are also using mobile technology to authorise payment or enable clients to request loans.
  10. Perceptions of trade risk are decreasing. For decades, traders in African countries have had to pay for imports in advance, or are paid only once their export goods have been received. This perception of high risk is easing as Africa develops sophisticated trade finance mechanisms and risk mitigation products are increasingly available.

Africa is a continent where local experience and expertise is critical to concluding a deal. Banks such as Barclays Africa with extensive local and regional experience understand local requirements and practices. It is often not credit risk, or reneging on agreements that causes a trade deal to fail, but a lack of understanding of unique local customs or systems. Partnership between local and global parties will ensure the sustainable growth of African trade.

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A bird’s eye view of the Trading Africa Summit 2015

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