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Bloomberg reports that Ghana’s Eurobonds have surged 93% since last November and may continue to rise given the country’s increasingly attractive fiscal position due in part to the production of a new oil field that is expected to put it in the world’s top 50 oil producers and to expand growth from an estimated 4.1% this year, to 6.1% in 2010 and 10.5% the year after. The yield on the 8.5% dollar-denominated bonds due 2017 fell from 9.83 to 9.73 percent during trading on Tuesday.
Ghana was the first post-HIPC (Heavily Indebted Poor Country) debt relief country to access the international capital markets, after being assigned a favorable credit rating of B+ in 2007 by the Fitch, the global rating agency. While a slew of other African nations such as Kenya, Tanzania and Nigeria lined up in response, capital markets and risk appetite shriveled during the ensuing global credit crisis, and Ghana also had to shelve a $300 million bond last September due to poor reception. And in May, another ratings firm, Standard & Poor’s, warned of more African downgrades later this year, giving a “negative outlook” to seven out of the 19 African sovereigns it rates: Ghana, Madagascar, Nigeria, Senegal, South Africa, Botswana and Seychelles.
Yet a subsequent rise in global markets–fueled by a commodity rally and narrowing spreads, may have tempered that gloom. In Ghana’s case, the oil announcement, coupled with IMF and World Bank largesse, combined to give a rosier picture of the country’s balance of payments.
According to analysts with RBS Securities Inc., the decline of Colombia’s peso in light of Venezuelan President Hugo Chavez’s threat to freeze imports because of the country’s alleged cozy ties with U.S. “imperialists” may have more room to run in fact, given that the ascendancy of the world’s best performing currency YTD had come too far and too fast for the Central Bank’s tastes. Per Bloomberg reports, Colombia’s Agriculture Minister Andres Fernandez admitted last week that exporters such as coffee growers were vigorously urging the Bank to buy dollars in order to weaken the peso. That said, while a continued sell-off will inevitably hurt asset prices across the board, analysts warned of an overshoot. “We believe these episodes tend to elicit exaggerated reactions and do not affect underlying trends in a lasting manner,” said one.
Per hospitality research firm STR Global and Deloitte & Touche Middle East, Middle East hotels in 22 cities in the region during the first half of 2009 witnessed an average 10.9% decrease in occupancies and a 17.2% drop in revenue per available room (RevPAR), an industry benchmark. Among the worst RevPAR performers were Dubai (down 35%) and Muscat (16.6%), while other cities outperformed tremendously, including Abu Dhabi (3.2% increase), Jeddah (11.5%) and Beirut (125.2%).
First Bank Nigerian shareholders will vote in August at their annual general meeting in Abuja on whether or not to raise a N500 billion ($3.4 billion) bond in support of domestic infrastructure financing under the country’s Public-Private Partnership (PPP) program designed to fund and discharge governmental responsibilities while enabling the private sector take control and manage assets which it otherwise would be excluded from. If passed, the debt would be the country’s first corporate bond in three years, an absence that Central Bank governor Sanusi Lamido Sanusi attributed to the “high cost of issuing debt,” as well as “tax concerns.”
According to Remi Babalola, Minister of State for Finance, PPPs are vital for African countries to maximize the effectiveness of their “dwindling resources”. While presenting a paper in which he stated that the government was determined to rapidly grow the economy from $200 billion to $300 billion, Babalola stressed:
“A move away from government-owned and government-run institutions remains vital. Africa must liberalize its failing institutions. Weak infrastructure is the single most important binding constraint in Nigeria’s quest for enhanced firm level competitiveness.”
Lagos State Governor, Babatunde Fashola, concurs. “From about five million in the early and mid-1970s, [Nigeria’s] population has increased to 18 million and no new roads have been built, water supply has not increased, no new markets have been built, very few hospitals have been built to take care of the people. This calls for mass investment and need for creativity in the management of public expenditure.”
Speaking in London last week, Babalola confided that $10 billion would be required over the next decade in order for Nigeria to “fully tackle infrastructure challenges and attain membership of the top twenty economies by 2020.”
According to Silk Invest, much of the reason that “institutional investors started coming back [late last week] into the [Casablanca All Share Index] after a few weeks spent on the sidelines” was due to the announcement recently made by Central Bank governor Abdellatif Jouahri, who reiterated that the country’s banking sector hasd not been affected by the financial crisis given the sector’s limited exposure to foreign markets, and moreover that the banking system’s “resilience” is a “result of an ongoing reforms process.” Moroccan credit growth increased 23% in 2008, and 17% this year to May.
Four banks lead the fray in Morocco: domestic players Attijariwafa Bank and BMCE (Banque Marocaine du Commerce Exterieur) Bank, as well as BMCI and Crédit du Maroc (subsidiaries of France’s BNP Group and Crédit Agricole, respectively). Only the first two, however, are discussed as having continent-wide aspirations; the two are actively opening branches in European capitals, as well developing a regional presence in sub-Saharan Africa, particularly in west Africa.
Phnom Penh-based private equity firm Leopard Capital completed its second and third deals last month, including a $1 million investment in a consortium group whose implementation of a transmission and distribution system 120km in length, which includes medium and low voltage networks, will provide grid power to 7,700 residential customers and 375 commercial and industrial customers (per reports, the electrification rate in Cambodia is currently one of the lowest in Asia and such there is pressing demand for more power generation and transmission). Herein linked is an interesting interview with Douglas Clayton (pictured left), Leopard’s founder who made headlines in March 2008 for launching the first-ever Cambodia-dedicated investment fund with $27 million in capital that he raised through vigorous pitching of the country’s fundamentals, a coup in and of itself given the times and particularly for a fund dedicated strictly to what Clayton admits is a “failed state that’s back on its feet.” Yet the long-term growth potential, Clayton explains, should suit forward-looking investors:
“[Cambodia] is a country that has many business opportunities. In most countries, there will be rental car agencies, there is a bus pickup to town, but there are not in Cambodia. Many other Asian cities have this, but Phnom Penh doesn’t. Secondly, we have a very young population here. The average age in Cambodia is 21, unlike many western countries, where the average age is 40, the time that you get ready for retirement. Cambodians are just ready to go to work.”
Leopard and competing funds will look to move money into banks, office buildings, luxury hotels, ports and other projects, according to analysts.
In a New York Times feature on investment in the country from last year, another fund manager, Marvin Yeo of the Cambodia Investment and Development Fund, echoes Clayton’s assessment, citing the country’s “young and inexpensive work force, rising productivity, a pro-business government, stable politics and strong GDP growth, which peaked at 13.5% in 2005 but was expected to mellow to 7-8% in coming years.” Clayton theorizes as to the presence of Cambodian stock and bond exchanges by year’s end, citing the growing array of foreign-sponsored companies, including banks and cellphone operators, as well as agribusiness. And FDI from the likes of China, South Korea and Malaysia is now in the billions. Such investment relies on the country’s oil and mineral resources and is helping to reduce the country’s dependence on clothing exports and tourism.
That said, serious questions remain. Crony capitalism, a questionable legal system and accounting standards, as well as rampant corruption (Cambodia ranks near the bottom of Transparency International’s corruption perceptions index) are all cause for concern. Yet the seeds for continued market reform are certainly in place. The ruling Cambodian People’s Party and the main opposition Sam Rainsy Party are “committed to the same pro-business, pro-growth policy platform,” according to Cambodia Investment.
Finally, some pretty big names among international finance are on board with the message as well. According to Jim Rogers (who along with Marc Faber and several others, sits on Leopard’s board), for instance, “Cambodia does have a lot of natural resources, it does have an ambitious population, and it does have some assets. Most countries that come out of something like they have are inclined to be pretty safe for a while because they’re trying to get money in.”
Per its recently published quarterly results, du, a Dubai-based integrated telecom services provider, reported an increase of 156,000 new subscribers (giving it a total of 2.9 million active mobile customers), in addition to a 12% increase in revenues on the previous quarter and a greater than doubling of profits. With an estimated 30% of the UAE’s mobile market, du is competing chiefly with Etisalat, which presently reports 7.26 million subscribers (though it just disclosed a loss of around 80,000 customers over the past three months). According to its chairman Osman Sultan, du hopes to gain an addition 5% market share over the next year, as well as grow usage of mobile broadband on its network–i.e. the BlackBerry mobile e-mail handset and also the launch of Apple’s iPhone.
Once considered the mere low-cost, low-quality network compared with Etisalat, du’s surging customer base is testament to the brand’s perceived value, as well as its growing competitiveness in a market where the cost of a new mobile line today is a third of what it was a year ago, and mobile data rates and fixed-line internet costs continue to fall as well. However, some analysts wonder whether the company’s edge will disappear once protection originally granted to it (in order to shepherd in competition) from the UAE’s Telecommunications Regulatory Authority (TRA) subsides, and/or a third operator joins the fray? For instance, reports allege that Etisalat has previously complained that it would like to lower some prices, but has not been given regulatory permission.
Abu Dhabi-based Agthia Group, a holding company with three subsidiaries operating in the distribution and bottling of mineral water; the production of flour, animal feed and frozen and canned vegetables and the distribution of baby food, tea, juices and jam, reported strong growth (group sales up 18.7%; gross profit margin up 11.4%; and net profits doubled) for the first six months of 2009. Per its Chairman, Rashid Mubarak Al Hajeri, the results are a “testament to the defensive nature of the food and beverage sector. The growth registered this quarter builds upon the strong first quarter performance and sets a positive scene for the rest of the year. Agthia’s performance for the first half of 2009 demonstrates the strength of the company’s core businesses and the effective implementation of management’s strategic and financial initiatives.” According to analysts, the increase in revenue was predominantly driven by sales volumes, with flour and feed up 7.6% (16.6% volume growth), and water and beverages up 42.8% compared to same period last year.
The following appeared in July’s Business Diary Botswana:
Speaking at a seminar in October 2006 devoted to the country’s efforts towards economic diversification, Happy Fidzani, Executive Secretary of the Botswana Institute for Development Policy Analysis (BIDPA), warned that the government’s “heavy confidence” in its mining sector–namely rough diamond extraction through Debswana, the joint-venture mining firm operated in partnership with South Africa’s De Beers and dating back to the late 1960s–had created a welfare-like, “parasitic” dependency for revenue upon which the nation’s non-mineral sector was habitually tied. Largely unaware of just how prophetic his words would soon turn out to be, Fidzani told the audience that shocks originating from the mining industry were still “easily felt” across the economy, and that the government, despite its ceaseless rhetoric and campaigning about the importance of diversity, was as reliant as ever on just one resource. Less than three years later in March 2009, and some time into a calamitous and synchronized global recession that left no market or asset unscathed, Moody’s, an international credit rating agency, downgraded its credit (bond) ratings outlook for the country as well as for the currency (pula), citing the downturn in diamond exports to which the central budget is largely tied. This came on the heels of Standard & Poor’s decision to cut its own outlook for Botswana to negative, while warning of worsening public finances. And in June, the African Development Bank announced its biggest ever loan facility–a $1.5bn loan–to Botswana, the country’s first such borrowing from the bank in seventeen years, and in the face of a budget deficit equal to 13.5% of gross domestic product (GDP) in the current financial year and an estimated growth slump this year of 2.6% (2.9% next year), down from 3.9% in 2008. The bank noted that while Botswana was still regarded as “one of the best-managed economies in Africa,” it had not escaped the financial crisis because of falling commodity prices, particularly in diamonds.
So why hasn’t Botswana’s economy yet diversified? The answer is somewhat confounding because, in a sense, it has. Studies done in the early part of this decade by both the Bank of Botswana and by BIDPA, for instance, used the Herfindahl index, which measures the size of firms in relation to a given industry as well as the amount of competition among them, to show that since the mid 1980s Botswana’s economy has markedly reduced its dependency on minerals. Among other findings, the reports showed that mining contributed only one-third to real growth since 1975, and also that the 9.1% growth rate during that same period by the overall economy was matched by the non-mining sectors as a whole, excluding agriculture. Yet their conclusions were muddled. “The foundations of this diversification are lacking in depth and remain fragile, and results in terms of providing employment opportunities have been less than hoped for,” the Central Bank remarked. To date, efforts at diversification have focused on export-oriented industries such as the manufacture of textiles, leather, glass, and jewelry, as well as the establishment of an International Financial Services Center, the promotion of Information and Communications Technology, and tourism. Additionally, the government would like to see the resurgence of agricultural activity, which, outside of livestock, largely remains languid. Increased production would help decrease the need to import from South Africa. When Botswana gained independence in 1966, the agriculture sector contributed roughly forty percent to GDP and ninety percent of total employment in the domestic economy. However, by the mid-1990s, the sector’s share of GDP and employment had fallen to four percent and sixteen percent, respectively. Yet despite all of the economic development and apparent political will to change course, many observers point out that the thrust of diversification still resides within the mining sector—namely, the exploration and extraction of copper, nickel and coal. For instance, according to Kristin Lindow, Moody’s Senior Vice President, “efforts to diversify the economy have been paying off, [although] they mainly led to the expansion of other mineral resources, the prices of which, except for gold, have [also] dropped precipitously [in recession].”
One proposed theory for the dearth of real economic diversity is that from a political standpoint, mining has represented a perpetual haven–a means whereby to grow reserves, subsidize education and health care, and generally sustain and nurture an average quality of life more or less unknown before anywhere on the continent. Oupa Tsheko, an author and professor of economics at the University of Botswana in Gaborone, commented to a UN information network in April that diamonds fund government expenditure. Therefore, he says, declining diamond revenues would have a “huge impact” on the country’s development. And politicians have all but embraced the lynchpin role that diamonds still play. “There can be no doubt that diamonds have played a major part in the transformation of our country’s fortunes and the lives of our citizens,” Botswana’s then president, Festus Mogae, told parliament in 2006. “For our people, every diamond purchase represents food on the table, better living conditions, better healthcare, portable and safe drinking water, more roads to connect our remote communities, and much more.” According to The Economist, a 2008 Growth Commission report identified Botswana as one of just 13 countries (and the only African state) to have achieved sustained economic growth over decades. In fact, the country grew 8.9% annually between 1960 and 2005, making the once third-poorest nation in the world its fastest growing one over that time period, while helping its population realize real per capita income four times that of the SADC average, per a 2002 World Bank report. During that period, diamonds at their peak became the base of over three-quarters of Botswana’s export revenue, two-thirds of the government’s tax revenue, and around forty percent of GDP. Which imprudent elected official would ever jump in front of that train? As Bert Lance, a one-time advisor to U.S. President Jimmy Carter famously said, “if it ain’t broke, don’t fix it.”
Further complicating matters is the position put forth by Chaim Even-Zohar, an analyst for Tacy Ltd., a diamond industry think tank, who opines that the gem’s long-term fundamentals are attractive, especially since global diamond jewelry retail demand is only expected to shrink 10-15% this year, and that demand for rough diamonds will again grow in the second or third quarter of 2010 (he admits concurrently, however, that it may take four years for GDP per capita to rise in the U.S.; said figure is considered a benchmark for measuring diamond jewelry retail consumption growth). Moreover, Even-Zohar argues, given the oligopoly of rough diamond’s supply structure, and the fact that of late annual rough diamond supplies into the value chain have consistently exceeded demand, the “downstream diamond pipeline” (i.e., rough and polished traders, polished manufacturers, jewelry manufacturers, jewelry distributors and retailers) currently holds some $45-50 billion worth of diamonds, or enough to assuage consumer demand for between two to three years. Because of this inefficient glut of working stock, he continues, inventories must now be reduced accordingly. Demand destruction will take its toll across all parts of the supply chain—finally culminating in a 50-60% drop in rough demand this year, per estimates. It’s this “stabilizing” period of adjustment in which stocks, prices and supply and demand find a new equilibrium, that will be the most painful for Botswana’s industry, admits Even-Zohar. “The cutting centers will take the greatest hit, but they will also experience the fastest growth in an upturn,” he concludes. Gareth Penny, Managing Director of De Beers, agrees, and like Even-Zohar, is bullish on the industry’s underlying, bounce-back prospects. “In the long term rough and polished prices will increase,” Penny says. If you look at historical data, it is clear that, immediately following a recession, the [response] in rough diamond prices has been dramatic, and we would expect to see a similar situation soon after the current recession is behind us.
News of the gem’s long-term price and demand viability are welcome news to those pundits who maintain that bona fide economic diversification in Botswana is simply not practical. As The Economist Intelligence Unit glumly noted in February, Botswana’s current economic predicament may indeed be proof that “even when governance and policies are good, it is extremely difficult for a small, landlocked African economy to diversify, especially if it has an industrial powerhouse such as South Africa (whom it is heavily reliant on for imports) on its borders.” Critics maintain that manufacturing is not feasible because of the high cost of imports and exports, and that South Africa already has a competitive advantage in service-based industries. Particularly in the short-to-mid term, observers point out, Botswana will need the revenue from a post-recession, mineral resurgence if it is to orderly pay down or refinance debt that it is assuming in the present. And if the economy is to ever be truly diverse, they maintain, an entire cultural mindset must be transformed and entrepreneurship must be taught from an early age. Such paradigm shifts must be planned, and will take time. In the interim, there is still further scope for the mining sector to provide economic benefits. Plans by De Beers to move its “sight aggregation” (where blending takes place to provide overall consistency) functions from London to Botswana (Penny says the switch is imminent), for instance, will be a further form of diversification, albeit within the same sector. Sometimes, some things are too good to let go.
Frontier investors and managers habitually stay abreast of the ins and outs of the world’s most illiquid exchanges in the hopes of either arbitraging out short-term anomalies, and/or positioning themselves for long-term growth upon currently cheap share valuations.
But what role do said exchanges play in the very societies in which they sit? A guest article in last week’s Economist by Justin Lin, the chief economist at the World Bank, argues not much of one.
“Governments and the international financial institutions that help them should resist the temptation to strive for ‘modern’ stockmarkets in the early stages of a country’s development,” he writes. “Efforts to create African stockmarkets, for example, have not yet borne much fruit. There are relatively few listed shares in the stockmarkets of sub-Saharan countries. Excluding South Africa, the annual value of traded shares relative to GDP in Africa is below 5%. In Latin America and the Caribbean the figure is less than 10%; in the former communist countries of Europe and Central Asia it is less than 15%. The comparable figure in 2007 was 79% in Denmark, 207% in Spain and 378% in Britain.”
Crucial to moving said countries along, he posits further, are not large capital markets nor the behemoth financial institutions which ultimately make them work. Rather, “microfinance companies and other non-bank financial institutions will play a more important role in financing poor households. And stockmarkets are not the best conduit for providing finance to the small-and medium-sized businesses that characterize the early stages of countries’ economic development. Instead, the banks will be much more critical when it comes to financing companies.”
Frontier investors, the implication goes, would be much better served targeting countries where small banks, and not large ones, dominate market share:
In Africa and other parts of the developing world, relatively large foreign banks that were set up in the colonial era have long played a role. But these institutions tend to serve relatively wealthy customers. Smaller domestic banks are much better suited to providing finance to the small businesses that dominate the manufacturing, farming and services sectors in developing countries,” he says.
JGW
Frontier Markets 