I’d be remiss if I didn’t link to David C.L. Nellor’s piece from the September 2008 Finance & Development, a quarterly publication put out by the IMF, which explains the growing attraction of many sub-Saharan African economies to foreign investors.

Some highlights from the article:

  • “Eight sub-Saharan countries . . . are headed toward emerging market status [and] are benchmarked against the founding members of the Association of Southeast Asian Nations (ASEAN), which were among the early emerging markets identified by the IFC.”
  • “The same crucial developments that presaged the arrival of institutional financial investors in emerging markets in the 1980s are taking place in parts of sub-Saharan Africa today—growth is taking off, the private sector is the key driver of that growth, and financial markets are opening up.”
  • However, “the new generation faces a more complex, more integrated global environment than did emerging markets of a quarter century ago . . .  Investors [today] are immersed in a wide range of financial activities, including domestic bond and foreign exchange market instruments. Financial technology is more complex too.”
  • “Maintaining financial sector stability will be challenging. With most of the financial flows intermediated through domestic banking systems, Africa’s central banks have to strengthen considerably their supervisory capacity to manage the sophisticated financial activity that has emerged almost overnight. At the same time, policymakers have less scope to manage these activities.”
  • “Attitudes toward Africa’s growth prospects are influenced by Asia’s experience of export-led growth. Analysts argue that export-led growth is critical if African countries are to sustain high growth and ask whether there is scope for export-led growth, particularly in the nonresource sector.  Two tests [can] be used to determine which countries have reasonable prospects of establishing the preconditions for growth—one for resource-rich and one for resource-scarce countries.”
  • A resource-rich country that has seemingly evaded the “resource curse” is Nigeria.  “Since the current oil boom started in 2004, its economic performance has been far better than in previous booms in 1974–78, 1979–83, and 1990–94—whether measuring non-oil growth or inflation (see Chart) . . . Use of a budget oil-price rule, which allowed spending of oil revenues in line with absorptive capacity and saving oil revenues above this budget price, was effective in breaking the link between growing oil prices and budgetary outlays that led to booms and busts in the past. If this fiscal rule can be sustained, the prospects for ongoing growth are strong.”

  • As for resource-scarce countries, “growth can be looked at against terms-of-trade developments (see Chart 2). Several countries whose terms of trade turned negative—that is, the overall prices of their exports fell relative to imports—nonetheless have recorded solid growth. This is because their better policy frameworks have helped them adjust to the higher import prices. Also, because they have built significantly higher international reserves, the countries have had a cushion while this adjustment is taking place.”

  • “Institutional investors want to have confidence that policy will continue to support private sector development and that private property rights will be protected; here they share the interests of foreign direct investors. Africa generally fares poorly in measures of the attractiveness of the business environment . . . [However], Mozambique, which came out of a lengthy conflict, has restored private sector confidence by such actions as providing attractive fiscal arrangements for mega projects, including the massive Mozal aluminum operation. Having demonstrated a track record of strong economic performance and respect for private sector rights, Mozambique is establishing a balanced tax environment that, along with macroeconomic stability, makes it an increasingly attractive investment destination.
  • “Just as first-generation emerging markets welcomed institutional investors to their equity markets, African countries are doing so now. African equity market capitalization was about 20 percent of GDP in 2005, comparable to the level reached by ASEAN in the late 1980s. By 2007, Africa’s equity market capitalization had surged to over 60 percent of GDP. Africa’s domestic bond markets are attracting interest in a way not seen in first-generation emerging markets. Trading of domestic and foreign debt in the international markets has accelerated rapidly. Emerging Markets Traders Association data show that trading in Africa’s debt markets (excluding South Africa) more than tripled in 2007, reaching about $12 billion (see Chart 3).

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