Sub-Saharan Africa

The 2013 guide to

Published in conjunction with:

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This guide is for the use of professionals only. It states the position of the market as at the time of going to press and is not a substitute for detailed local knowledge.

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ContentsA story no one wants to miss 2

Things come together Nigeria 8

Still a great place to do business South Africa 10

Turning the corner Kenya 12

Stability with a twist Ghana 14

Cooking with gas Mozambique 15

Learning some new moves Gabon 16

Coming over the horizon Namibia 17

Capital markets gear up 18

Regional banks step up to the plate 20

A story no one wants to missInvestment is flowing into Sub-Saharan Africa and growth rates accelerating as the continent starts to realize its potential in ways that would have seemed unthinkable just a few years ago

For decades, Africa was split into two, at least in the eyes of foreign investors. Roughly speaking, there was the ‘top’ bit, notably the Maghreb and Egypt, which more or less worked, and the bit at the bottom, including Nigeria and Kenya but excluding South Africa, which more or less didn’t.

How that has changed. In a few short years, much of northern Africa has fallen prey to upheaval and chaos. Democracy and deregulated markets may follow, but for now the region’s leading economies face squeezed budgets, yawning deficits, slowing growth and rising unemployment.

By contrast, economic prospects in the southern half of the continent – Sub-Saharan Africa (SSA), covering everything from the Sahel to the Cape of Good Hope – are at their brightest for 50 years, since the early days of African independence.

Top-line economic growth has returned following the financial crisis: the International Monetary Fund (IMF) tips Nigeria’s economy to grow by 7% in 2013, with the economies of Ghana, Rwanda and Zambia expanding by between 6% and 7%. Slightly behind lie Zimbabwe and Kenya, the latter now moving again to a period of political stability following recent elections; both are set to grow by between 4% and 5% in 2013.

Across the board, financial and economic data underline the benefits of investing in a region that boasts markets with deep financial sophistication (Ghana), young-and-rising populations (Kenya, Nigeria), vast untapped energy reserves (Mozambique and Angola), institutional stability (Botswana) and a pair of superpowers in the making (South Africa and, again, Nigeria).

The big chanceThis rise has happened thanks to a cogent mix of aid forgiveness, luck and a determination among many nations not to let the region’s big chance slip way. Debt forgiveness in the 2000s played a major role in putting national finances on a surer footing, Zambia being a notable example.

But the commodity boom of the past decade, driven by a rising Chinese superpower, has also helped. Dennis Dykes, group chief economist at South African lender Nedbank, says the boom injected vast new reserves of capital into the region, some of which wound up in infrastructure, financial services, mobile communication and banking, and the retail space, and “made a huge and defining difference to the region’s growth prospects.” Indeed, he adds, it’s “possible to say that Sub-Saharan Africa wouldn’t be in the state it’s in without that boom”.

And as the region emerges from the economic shadows, many of its leading economies are in the laudable position of being able to compete to outpace one another, much as developed markets do. Many – notably Nigeria and more recently Kenya – are imposing reform measures, tackling corruption and deregulating markets, in a race to the top.

This is creating a virtuous cycle, wherein foreign institutional and portfolio investors, attracted by the binary allure of higher yields and rising economic stability, are pumping billions of dollars into the region. That, in turn, boosts already brimming regional confidence: trade and commerce is booming, both domestically and regionally, within and between SSA countries.

Rosy prospects“The overall trend across the region is one of strong and continued economic growth,” says Angus Downie, head of economic research at the Togo-headquartered pan-African lender Ecobank. “We’ll see GDP [gross domestic product] rising faster in some countries than others, and there are pockets of economic excellence in a few key markets like Botswana and South Africa.” Downie recognizes that clear threats to regional growth exist, notably China’s slowing economy and renewed problems in the US and Europe. “But that aside,” he adds, “prospects look rosy across the region.”

Adds Yvonne Mhango, chief Sub-Saharan Africa economist at Renaissance Capital: “The medium-term outlook for SSA is positive. Not only is it the second-fastest-growing region in the world behind developing Asia, but growth is projected to accelerate in 2013 and 2014 to 5.6% and 6.1% respectively, from 4.8% in 2012. Opportunities include a growing consumer market that is increasingly making it attractive for retailers and industrialists; a young and better-educated workforce; and an under-banked population.”

In April 2013, the World Bank tipped SSA economic growth to accelerate to more than 5% a year over the next three years, at a time when GDP in large parts of the developed world shows incremental growth or outright contraction. The multilateral predicted regional GDP growth to hit 4.9%, 5.1% and 5.2% respectively in 2013, 2014 and 2015.

Ieisha Montgomery, an associate economist at the country risk unit of Northern Trust in Chicago, points to a “positive” macroeconomic outlook across the board, with the region’s overall economy growing by around 5-6% in 2013. One outlier may be South Africa, an advanced economy more highly geared toward growth in the eurozone. That aside, says Montgomery, there are myriad opportunities across a region where “demand for goods and services is always outstripping supply”.

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Risk scores turn positiveEuromoney Country Risk (ECR) data also points to a steady rise in the region’s finances and fortunes. “Improved access to capital markets and bank finance had a positive bearing on country risk scores for much of Africa,” ECR noted in its latest quarterly update covering the first three months of 2013. Notable, too, were the country risk tallies across the region: Namibia, Nigeria, Kenya, Angola, Mozambique and Tanzania all saw their scores rise over the previous quarter.

Only three regional economies, South Africa, Ghana and Zambia, saw their overall rating slip in the first quarter of 2013. The rest all gained ground. Southern Africa’s leading economies – South Africa, Botswana and Namibia, topped the rankings, followed by Ghana and Nigeria, the leading sovereign powers in western Africa.

The biggest gainers in the first months of 2013 proved to be Nigeria, which saw its score jump 3.7 points to 42, and Kenya, which rose two full points to 37.2. The overall Africa score for the first quarter of the year inched up 0.6 points to 30.3. All of which, says Wale Shonibare, chief executive officer (CEO) at UBA Capital in Nigeria, proves that economic prospects across the region are “very very bright. Wherever you look, all of the fundamentals are going in the right direction.”

A rising tide appears to be lifting boats across the region. Economic, political and structural stability improved in most major economies across the region in the fourth quarter of the year, according to the latest data available from ECR.

And even states viewed until recently as troubled or chronically damaged have seen their fortunes improve. Sierra Leone’s structural and political score jumped 3.9 and 2.9 points respectively quarter on quarter in the last three months of 2012. Côte d’Ivoire, where conflict raged as recently as 2011, saw its economic, structural and political risk weightings rise by between 7 and 8 points over the same period. Even Democratic Republic of the Congo, for so long Sub-Saharan Africa’s dark and troubled heart, has seen its rankings improve.

Compelling incentivesDrilling down, every country offers its own set of compelling incentives to regional and global investors.

Nigeria’s economy, increasingly diversified away from oil, has benefited immensely from being added to JPMorgan Chase’s emerging-market bond index in October 2012 and, in the second quarter of 2013, to the Barclays emerging markets government bond index. Sulemana Mohammed, financial research specialist at Ecobank, highlights three sectors in which to invest across the region: energy, banking and consumer goods.

South Africa’s more mature economy, full of fast-growing small- and medium-sized enterprises (SMEs) as well as multinationals like MTN Group, Eskom and Vodacom Group, continues to gain in size and strength, while rapid credit growth and rising economic output bode well for Rwanda and Kenya.

Oil output has yet to peak in Ghana’s complex, consumption-driven economy, which continues to grow at a rate comparable to a frontier Southeast Asian nation. And the island of Mauritius is now home to a stock exchange that is, notes Brad Maxwell, executive head of investment banking at Nedbank Capital, “at the forefront” of technology, helping attract “a range of investment instruments to their market”.

Banking and mining remain ever-present bedrocks in reliable Namibia, while Chinese demand for copper – assuming Beijing’s economy doesn’t fizzle – will keep Zambia’s economic fires stoked. Mozambique is exploring ways to tap an estimated $350 billion offshore field that should turn it into a global natural gas superpower.

Getting noticedWherever you look, the data say the same thing: after years of under-achievement, Sub-Saharan Africa is finally reaching its potential. That success – low rates of debt to GDP, expanding economies, falling inflation and interest rates, and unexplored markets brimming with untapped human capital – is starting to get noticed. Shares on Nigeria’s stock exchange, the largest in western Africa, rose 35% in 2012, continuing their upward surge into 2013. The same is true of the

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Wale Shonibare, chief executive officer, UBA Capital

Nairobi Securities Exchange, eastern Africa’s leading bourse, which gained 20% in value in 2012 and continued that strong run into the following year.

In a February 2013 report entitled “African boom continues”, Russian investment bank Renaissance Capital, which has offices across the region, noted that “globally, we see rising interest in what Africa has to offer”. RenCap economist Mhango points to key areas of improvement across the region, from Nigeria’s concerted reform drive to rising institutional investment inflows into regional stocks and bonds.

Of course, these are broad strokes. Sub-Saharan Africa’s economic outperformance in recent years has much to do with a confluence of positive events: some planned, some accidental.

Take the ability of capital to flow more easily across the region. Thanks to world-class cellular services perfected by the likes of Safaricom in Kenya and South Africa’s Vodacom, mobile banking is starting to bring financial inclusion to millions of unbanked Africans.

Capital is both flooding into the region and being created there, as the region’s growth rates and savings rates rise. This in turn is creating two phenomena: the issue of intra-regional trade; and the rise of the regional mega-corporate.

Crossing bordersThe first is a genuine challenge for the whole region. While Europe or the US benefit from running a single, borderless trade zone, and East Asia profits from a complex and interlocking manufacturing system that helps all regional corporates and economies, Sub-Saharan Africa has neither. Borders here are often rigidly controlled and hard to cross, whether by commercial or human capital.

In a March 2013 research report titled “Africa’s intra-regional trade: a sleeping giant”, Ecobank notes that Africa’s intra-regional commerce is the “least developed in the world”, comprising just 12% of all regional trade flows, or $133 billion, in 2011, against 40% in North America and 60% in the EU. More African trade is processed each year with Europe (35%) and with China (17%) than it is with other African nations (12%), even those just the other side of a thin border.

However, there is no denying that this is changing. The region’s economies, big and small, are growing apace; ergo, intra-regional trade must be too. A broad sweep of data suggests that intra-regional SSA trade is growing by around one percentage point a year, or around $13 billion.

Moreover, much regional trade goes unrecorded: vast volumes of oil, cash crops, and agricultural and consumer goods are traded “across the region through off-the-radar informal networks”, Ecobank noted in its report. An increasing amount of trade is also paid for via mobile banking platforms: transactions tend to be tiny yet in massive

numbers. So as trade across the region normalizes and becomes more sophisticated in the years ahead, the volume of ‘official’ cross-border commerce will also gain.

Many of the institutions needed to promote intra-regional trade are indeed already in place. In fact, Sub-Saharan Africa boasts several. The East African Community, spanning five nations including Kenya, Rwanda and Tanzania, boasts a common market for goods, labour and capital, and aims for full political unity by 2015. Similar organizations cover central and western African states, notably ECOWAS, a grouping of 15 nations based in Nigeria.

And those on the ground say trade between nations is indeed on the rise. “There are fewer conflict areas around the region, and more regional economic blocks working in harmony with one another,” notes UBA Capital’s Shonibare. “For the very first time, we are doing everything we are supposed to be doing to drive economic growth.” It’s hard to argue with that notion: conflict is not suddenly absent from the region, but for the first time in a half-century it is the exception not the norm.

Home-grown multinationalsAnd it is this process – less conflict, more commerce; more jaw-jaw, less war-war – that is benefiting corporates across the region. Indeed, it’s hard to remember a time when Africa boasted so many aspiring multinational stars.

First, the banks. Here, Africa boasts genuine clout and scale. South Africa, with the likes of Nedbank and Standard Bank, leads the way, boasting the continent’s four largest lenders by assets. But others are gaining fast, notably United Bank for Africa and Zenith Bank, both based in Nigeria, and Togo’s Ecobank. Each of these banks is competing in a market that remains remarkably fluid: the region boasts many big banking names, but no one bank has yet to become a clear leader in the field. That, too, believes Ecobank’s Mohammed, will happen in time.

Then there’s Sub-Saharan Africa’s growing middle class, and the millions of people clambering on to the lower rungs of the financial services industry. All these people will need basic banking services, insurance and advice on unit trusts and pensions in the years to come. “One thing that remains clear is that there is still a huge gap in entry-level banking around the region,” notes Gary Marais, divisional executive, corporate banking at Nedbank.

The region is also home to some genuine rising corporate stars. Take Dangote Group, a cement-to-milling conglomerate based in Nigeria, with north of $2 billion in annual revenues. In April, Dangote announced it was seeking a $3.5 billion syndicated loan to fund domestic projects, including a greenfield oil refinery.

The region also boasts Eskom, the continent’s largest producer of electricity, Sasol, a South African industrial conglomerate, and a trio of technologically-advanced mobile providers: MTN Group and Vodacom, both based in South Africa; and Safaricom, in Kenya.

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Safaricom has received many plaudits for its M-Pesa (a mash-up of the words ‘mobile’ and ‘pesa’, the Swahili for ‘money’) payment transfer system which has revolutionized mobile banking and microfinance in eastern Africa: indeed, the system is now reckoned to be a conduit for around a quarter of all Kenyan commercial activity.

Then there are the companies that are helping push SSA nations up the value chain. Often, these are soft-commodity corporates processing and milling the cash crops that make Sub-Saharan Africa’s agricultural sector so richly profitable (think here of Nigerian maize, Zambian sugar, Ivorian cocoa and Tanzanian cashews).

Again, Dangote stands out, along with Nigeria based BUA group, a major processor and refiner of everything from cassava starch to vegetable oil. Then there are the corporates pushing hard into the region, such the Singaporean food-processing firm Olam International, and a brace of global fast-moving-consumer goods (FMCG) giants, Unilever and Nestlé.

Adding value All these corporates are helping add value to the region’s agricultural sector. Once a producer of primary foodstuffs, many regional countries have made a concerted effort to export more manufactured produce.

In recent years, notes Ecobank’s Downie, Olam has brought in expertise from Singapore and Malaysia, improving the quality and branding of African palm oil. In Côte d’Ivoire, traders export increasing quantities of higher-valued cocoa butter and liquor, rather than shipping out the unrefined bean. Zambia is investing heavily in new wheat strains, helping it usurp troubled Zimbabwe as southern Africa’s breadbasket. And Liberia is seeking to promote itself as a ‘name’ grower of coffee, in the same vein as Colombia and Nicaragua.

In each of these cases, trade is growing with other African nations as well as non-African states. The process is slow, in part because of the profit incentive: a Cadbury or a Nestlé is willing to pay top dollar for the best cocoa beans. But as Sub-Saharan Africa moves up the value chain, feeding a growing and upwardly mobile population, intra-African trade flows are only likely to grow, a process that will both create more capital and keep more of it within the region.

Indeed, in many cases, this rising emphasis on the agricultural sector has come about not just by accident but also by government fiat. Nigeria, oil-rich but desperate to diversify to feed a growing population of 170 million, has ploughed billions into restructuring its agricultural sector over recent years.

“What’s really positive about Nigeria is that there is a clear change of attitude in government toward the agricultural sector,” says senior Ecobank analyst Tedd George. “They are clearly backing it – for instance, by providing tax incentives to sugar growers who export it as a cash crop. Before, sugar was imported from Brazil; now, they export it, and Nigeria is well on its way to becoming a major global producer.”

Challenges remainYet ambition and achievement are two different things. Sub-Saharan Africa’s fortunes are improving, thanks to enlightened governments, rising capital flows, a willingness of people and corporates to borrow (and banks to lend), falling corruption and an ambitious and growing populace.

But many challenges remain that could still crimp regional prospects, including labour unrest in South Africa, a jihadist uprising in Nigeria and political instability in Togo and the Central African Republic. Other problems facing the region include future food spikes – a key issue in an area heavily dependent on staple crops and reliable harvests – and unpredictable external factors, such as a slowing China or renewed turmoil at the heart of the eurozone. London-based Capital Economics noted in a March 2013 report that the region would “not be immune from global headwinds”, and that export demand “may also suffer if, as we expect, [an economic] rebound in China peters out”.

Another challenge for everyone across the region is the basic economic issue of barriers of entry both into and between nations.

This problem lies at the heart of SSA’s future. Much of the success achieved across the region in recent years has involved tackling the low-hanging fruit. But getting trade to flow, unencumbered and unfettered, across multiple and often bitterly protected borders, and between distrustful states, is quite another thing.

Real GDP forecasts

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The fi rst issue involves the region’s superstructure. Africa suff ers from the world’s worst infrastructure. Whether highways, rail links, airports, ports or communications systems, meagre regional infrastructure prevent most Africans from easily transporting goods, or themselves, from one place to another.

For Sub-Saharan Africa to profi t from its potential, and for global institutional and portfolio investors fully to trust vesting capital in the region – when, say, pumping capital into a multi-decade mining project or an FMCG factory deep in the region’s hinterland – that needs to change.

To be fair, change is coming. The World Bank puts Africa’s annual infrastructure investment needs at around $93 billion over the next decade, more than half of which will be ploughed into the SSA region. About $20 billion is needed in Mozambique alone to revive its ailing railways and ports, key to getting the country’s vast reserves of coking coal to market. Africa, the World Bank reckons, can only generate $40 billion of the total needed, meaning that most infrastructure capital, assuming it comes, will be sourced from an army of foreign investors.

Yet so long as rules provide suffi cient comfort to long-haul foreign investors, that capital is likely to fl ood in over the coming years. Sub-Saharan Africa, after all, provides vast infrastructure opportunities allied to higher yields and increasingly stable regimes.

Already, the process is starting. An African Union Commission-appointed body, the Programme for Infrastructure Development in Africa (PIDA), wants to pump billions of Afro-foreign investment capital into 51 infrastructure projects by 2020 in an eff ort to unlock regional growth potential.

PIDA, whose members include regional corporates like Eskom and African Rainbow Minerals, and global multinationals including ArcelorMittal and Rio Tinto, hopes to boost the number of SSA

households with access to electricity to 70% of the total by 2040, from 40% in 2010, adding 800 million Africans to the region’s power grid. Infrastructure funds are also springing up internally to channel capital into infrastructure projects. UBA Capital is in the throes of setting up a $300 million infrastructure fund that includes internal and external seed capital, its CEO Shonibare says.

Better infrastructure should suck in more overseas investment, as well as helping African companies operate on a more equal footing on the world stage. Both issues are vital to regional prosperity. Sub-Saharan Africa boasted 3.6% of global trade in 1980, according to World Bank data, yet by 2011 that fi gure had fallen to 2.1%.

Yet recent years have seen renewed infl ows of foreign direct investment (FDI) into the region. The World Bank tips annual FDI into SSA to reach $54 billion by 2015. Infl ows hit $37.7 billion in 2012, a record high, and a 5.5% increase over the previous year – yet more reason to cheer.

Where to startBut other challenges remain. For a foreign investor or multinational seeking entry to Sub-Saharan Africa’s vast hinterland, the question is often very simple: where should you enter the market, and what should be your base camp?

This isn’t an easy question to answer. Most multinationals go for the easy and pragmatic option, basing themselves in South Africa. Nedbank CEO Mike Brown points to the lender’s increasing presence across the region, which includes a mutually benefi cial client-sharing agreement with Ecobank. Nedbank helps Ecobank gain access to South Africa; the latter in turn aids Nedbank when it comes to helping clients gain access to markets in western and eastern Africa. Nedbank is also pushing ahead with private equity deals: buying stakes in fast-growing private corporates across the region.

“If you’re going into an unknown market, you want to partner with a bank that has been there for decades,” Brown notes. “We know South Africa inside and out, and we have strong, long-standing partnerships across the region. You don’t want to parachute in [to SSA countries] and see if you can muddle through. You want to partner with people who are knowledgeable, and whom you trust.”

Nedbank’s Marais portrays the bank as a “bridge” for foreign capital looking to enter Sub-Saharan Africa as the region’s power grids, trade fl ows, transport systems and communications networks improve. He points to Nedbank’s expansion plans over the coming decade: the lender “is aiming to boost its presence in markets including Zambia, Zimbabwe, and Namibia”, while also providing a “full universal banking solution” to regional and global clients.

Yet Sub-Saharan Africa isn’t a one-nation region. South Africa’s economy may be more mature, boasting global multinationals and the region’s powerhouse stock exchange, in Johannesburg. It also remains by far the best way to access Africa’s southern half: few

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investors still dare to penetrate the region via, say, the vast coastline of struggling-but-ambitious Mozambique.

But SSA is also a regional construct, allowing single economies to become the focal point of its vast, scattered geography. Thus, Nigeria and Ghana, markets offering sophisticated institutional capability and/or demographic benefits, are increasingly the first port of call for mining firms and FMCGs looking to tap western African markets.

In eastern Africa, Kenya, which passed its most recent political test, and Rwanda, the bustling heart of the Great Lakes region, offer stability and solid infrastructure to inward investors.

Then there are the outliers, notably on the financial services side. South Africa and Nigeria may boast larger and more highly traded stock exchanges, but the Stock Exchange of Mauritius’s boundless

ambition shouldn’t be overlooked. “The exchange is well regulated, and is looking to establish itself as the financial gateway into Sub-Saharan Africa, especially for investors from Europe and [Asia],” says Nedbank’s Maxwell. He adds that investment opportunities into Mauritius should increasingly be “assessed on a much broader basis than just [the island state’s] own economic fundamentals and local listed securities”.

Scale and ambitionIndeed, there seems little reason to bet against Sub-Saharan Africa. Even five years ago, the rise of a motley collection of states once seen as chronically impaired would have seemed unthinkable. Yet here we are: a region attracting unprecedented levels of foreign institutional and portfolio capital, boasting banks and multinationals with the scale and the ambition to reach far beyond African borders.

Things might still go wrong, of course. Commodity prices may cool further if China’s economy slows. If that happens, the challenge facing the region will shift, becoming an issue of whether SSA economies can find and exploit new sources of external growth. Another option would involve the regional replacing external demand by deregulating markets, boosting cross-border capital and promoting a new era of intra-SSA trade.

Many believe that even if economies elsewhere in the world fade in the years ahead, Sub-Saharan Africa has enough nous, momentum and even institutional ability to survive and thrive. Sub-Saharan Africa, notes Nedbank economist Dykes, “suddenly seems like a very good bet. It has a massive consumer market and a young, ambitious population. Suddenly, it seems like the sort of story you don’t want to miss out on.”

Country ECR rank Rank change ECR Q1 score 2012 Q4 2012 Q1 2010 Q1 ECR Tier Fitch Moody’s S&PSouth Africa 50 0 56.2 -0.7 -0.3 0.1 3 BBB+ Baa1 BBBBotswana 52 3 56.0 0.3 1.5 10.7 3 N.R A2 A-Namibia 70 2 48.0 1.2 3.0 10.3 4 BBB- Baa3 N.RGhana 76 1 44.2 -0.6 2.6 4.9 4 B+ B1 BNigeria 83 9 42.0 3.7 4.5 6.7 4 BB- Ba3 BB-Seychelles 86 8 41.0 3.0 2.1 7.2 4 B N.R N.RAngola 88 3 40.3 1.6 2.1 -2.7 4 BB- Ba3 BB-Gabon 90 -3 39.6 0.4 3.0 4.4 4 BB- N.R BB-Tanzania 96 2 38.2 1.1 3.3 1.6 4 N.R N.R N.RKenya 103 3 37.2 2.0 1.8 -0.7 4 B+ B1 B+Burkina Faso 104 -8 37.1 0.4 4.8 12.2 4 N.R N.R BMozambique 106 -4 37.1 0.8 3.4 -3.1 4 B N.R B+Zambia 108 -9 36.7 -0.2 1.6 6.4 4 B+ B1 B+Uganda 110 -3 35.7 0.9 1.8 2.9 5 B N.R B+Liberia 111 -3 35.2 0.6 -0.1 14.8 5 N.R N.R N.RCameroon 117 2 33.7 1.6 5.2 0.2 5 B N.R BMadagascar 121 -10 33.1 -0.8 -2.4 14.8 5 N.R N.R N.RSenegal 126 -3 32.5 1.0 1.6 -1.3 5 N.R B1 B+Rwanda 130 -6 31.8 0.5 -0.2 7.5 5 B N.R B

Source: Euromoney Country Risk

Sub-Saharan Africa risk perceptions: Q1-2013

Mike Brown, chief executive officer, Nedbank

Nigeria’s economy is in a state of fascinating flux. West Africa’s leading economy, and the largest oil producer in Sub-Saharan Africa (SSA), is straddling two worlds, one leading back to a chaotic past, the other pointing forward to an uncertain but potentially illuminating future.

Foreign investors are coming here in droves, lured by an ambitious and vast young populace, and by the country’s status as a fast-growing emerging market offering frontier market-level yields.

Much in recent times has gone right for Nigeria. Despite being pummelled by the financial crisis – exports to the eurozone dwindled while politicians struggled to shore up a battered banking sector – its economy has rebounded with alacrity.

Gross domestic product (GDP) hit 7.1% in 2012, on a par with the 7.4% and 8% growth posted in 2011 and 2010 respectively. The International Monetary Fund (IMF) tips Nigeria’s economy to expand by 7.2% this year.

Everywhere one looks here, one sees compelling reasons to invest. For one thing, Nigeria is on track to become the region’s largest economy, surpassing South Africa, assuming current growth rates stay consistent, within three years. This is largely due to a long-awaited move by the statistics bureau to use 2012 as a base for annual economic data, providing a more realistic picture of the country’s trade patterns. Current economic data is based on 1990 consumption patterns, undervaluing the economy by a quarter or more.

This is also an overwhelmingly young and ambitious country. Nigeria’s population topped 170 million in 2012, and is on track to hit 390 million by 2030. One in six Africans is Nigerian, and the average Nigerian is just 20 years of age, against 28 in Brazil and 35 in China.

A young, consumption-focused populace determined to push its way up the value chain: little wonder African and foreign investors, from producers of fast-moving consumer goods (FMCGs) to institutional and portfolio investors seeking to invest in infrastructure funds and mining projects, are so keen to get a foot in the door.

Lifting up, lifting off“Everywhere you look, the fundamentals are improving,” says Wale Shonibare, chief executive officer (CEO) at UBA Capital in Nigeria. Shonibare points to a debt-to-GDP ratio of less than 20%, a current account deficit that dipped below 3% in 2012, and inflation that fell in March 2013 to a five-year low of 8.6%. “The poor are being lifted up, and the middle class is expanding in size, a process that is accelerating as the economy continues to diversify,” he adds.

Oil production remains a key pillar of the domestic economy, a situation that’s unlikely to change soon. The country still boasts vast

reserves of black gold, and global energy firms continue to plough into the country, in most cases to sink capital into an underutilized and undermanned refining sector crying out for investment. Over the past year alone, independent Houston energy firm Vulcan Energy has announced its intention to fund a new N620 billion ($4 billion) refinery; Chinese energy giant Sinopec is pumping N155 billion into new refining projects.

Nigeria is pushing up the global rankings. It posted an overall country score of 42.02 in the first quarter of 2013, according to data from Euromoney Country Risk (ECR). That marked the nation’s highest-ever ranking, and a rise of nearly four full points over the previous quarter. Nigeria also posted a strong annualized rise in its economic, political and structural risk scores in the fourth quarter 2012, according to ECR data.

But it is the process of diversification that offers perhaps the most compelling reason to invest in Nigeria. In a February 2013 report on Sub-Saharan Africa, Russian investment bank Renaissance Capital noted that “most of the strengthening in [Nigeria’s] economic activity” in the years ahead “will stem from the non-oil sector”.

This growth is unlikely to come from the manufacturing sector: Nigeria still lacks the institutional capability to become a major player in engineering or auto production quite yet.

Sea-change on agricultureFor now, the main focus of the government – and, increasingly, from foreign and local investors – has been to add value to the country’s agriculture. Tedd George, a senior commodities analyst at Ecobank in Togo, hails a recent “sea-change” in terms of the “government’s attitude to the agricultural sector. The state is clearly backing producers in the agricultural sector: slashing taxes and providing incentives wherever possible.”

And not before time. Nigeria boasts some of the world’s richest soil: the country can literally grow anything, from rice and wheat to cassava and sugar, cash crops all. Yet in 2012 it was the world’s second-largest importer of rice and a major buyer of wheat and fish, spending $11 billion on food imports.

That mismatch is now being tackled, in ways that are simultaneously boosting domestic output and attracting foreign capital. In May 2013, the country’s agriculture minister Akinwunmi Adesina said that $8 billion in foreign direct investment (FDI) would flow into the sector in 2013 this year, rising to $10 billion in 2015.

That process has already started. In early 2013, Indonesian fertilizer company Indorama said it would invest $2.5 billion to build a new fertiliser plant. Dangote Group, Nigeria’s largest non-bank company

Things come togetherNigeria is emerging from its chaotic past and starting to fulfill the hopes and ambitions of its huge population

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and the region’s leading industrial conglomerate, is investing $3.5 billion in Africa’s largest fertilizer plant. American agribusiness giant Cargill is building a cassava starch plant to make sweeteners for the likes of Coca-Cola and Heineken. Seed giants Syngenta, DuPont and Monsanto are in the throes of establishing offices in the country.

The financial services sector is also benefiting from Nigeria’s inexorable rise. Several leading Nigerian banks, including Guaranty Trust Bank, are set to become pan-regional lenders over the coming years.

Inside the indexThe country has also benefited enormously from a brace of decisions by two of the world’s largest banks. In October 2012, JPMorgan Chase added Nigeria to its emerging-market bond index; in April, Nigeria became the 21st country to be added to Barclays’ emerging-markets bond index, drawing yet more fresh institutional investor capital into the country.

Investors seeking yields of up to 12% on Naira-denominated bonds have rushed into the region. Some bonds are outright steals in valuation terms: London-based Exotix in late April wrote that six-month Nigerian Treasury bills were among the most undervalued short-term paper in the world.

Elsewhere, the Nigerian Stock Exchange All-Share Index gained 73% in the 16 months to end-April 2013, pushing through the 36,000 mark in early May. In April, the IMF noted that investors searching for yield in frontier and emerging markets meant that “even modest-sized markets in countries with solid growth prospects [had] attracted new inflows that boosted share price indices”. The multilateral highlighted Nigeria as one of the key beneficiaries of this process.

Sulemana Mohammed, a financial research specialist at Ecobank in Togo, said there were good reasons why investors were piling into widely-traded stocks like Nigerian Breweries and Unilever Nigeria, the local listing of the Anglo-Dutch consumer goods giant. “Nigeria is an exciting stock market that is set to overtake the South African exchange” as the biggest bourse in SSA in the coming years, Mohammed said. “Corporate governance and the quality of investor relations are both very high. And this is a deep and liquid market: it isn’t that hard for global institutional investors to buy and sell stock.”

Making the leapWealth is growing across the board. This is a country on the cusp, believes Brad Maxwell, executive head of investment banking at South

Africa-based Nedbank Capital, of making the leap from ‘frontier’ to full emerging-market status. Per-capita GDP hit $2,700 in 2012, up from $2,500 in 2010. And as wealth rises, boosting the purchasing power of the middle classes, it will lead to increased demand for non-bank financial services like insurance and pension funds.

Nigeria also remains surprisingly and seriously underbanked. Just one in five Nigerians has a bank account, KPMG wrote in an April 2013 report, while two-thirds of the country’s population have never banked at all. As pan-regional lenders like Nedbank and Ecobank ramp up their local operations, they will be looking to bring millions of financially excluded Nigerians into their fold.

Challenges remain of course, many that Nigeria may struggle fully to tackle or contain. This remains a tough country in which to set up shop. Nigeria ranked 131st in the World Bank’s 2013 Doing Business report, unchanged on the previous year. It rated among the worst nations in the world in terms of trading across borders, gaining permits, registering property and paying taxes, though getting access to credit has never been easier. Infrastructure also remains a serious impediment to growth – though capital is now starting to push into infrastructure funds being set up around the country.

Several other issues weigh on investor sentiment, notes Ieisha Montgomery, an associate economist at the country risk unit of Northern Trust in Chicago. These include the spread of the militant jihadist group Boko Haram, and signs of increased tensions in the Niger Delta. And while diversification continues apace, Montgomery warns that the economy will remain overly dependent on oil revenues for years to come.

Yet these are issues facing many if not most Sub-Saharan African nations. And while much of the West is stagnating, or at least struggling for growth, Nigeria is one of the few places on the planet benefiting from an outsized and rapidly expanding economy.

Not so long ago, Nigeria was the last place foreign investors wanted to be. Now, it seems, they can’t get enough of local stocks and bonds, or of a consumption-geared economy growing in leaps and bounds. “We still have a way to go, but right now, Nigeria is in the sweet spot,” says UBA Capital’s Shonibare. “A young population, a rising population, a growing population, an optimistic and ambitious population, and a people who want to start living their lives now. It’s hard to think of a good reason not to invest here.”

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3

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5

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Government finances Regulatory and policy environment

Source: Euromoney Country Risk Source: Euromoney Country Risk

South Africa is a puzzlingly contradictory country. Its economy burst like a rocket out of the apartheid era, expanding for years and fostering a dizzying array of locally based, globally scaled multinational banks and corporates.

Yet, just as the rest of Sub-Saharan Africa (SSA) started to catch up, the region’s largest economy stalled. There are reasons for South Africa’s current malaise. But for investors there are two pieces of good news. First, every one of South Africa’s problems has a clear solution. And second, this remains, despite recent impressions to the contrary, a great place in which to invest.

First things first. South Africa’s economy isn’t in freefall, but like a climber on a slippery rockface, it is struggling for purchase. The International Monetary Fund (IMF) in April 2013 slashed the country’s economic growth forecast for 2014 to 3.3%, from 4.1% previously,

though it still expects the economy to expand by 2.8% in 2013, up from 2.5% in 2012.

Inflation is likely to remain below the Reserve Bank ceiling of 6%, while the current account deficit is set to narrow to 5.9% of gross domestic product (GDP) this year, and to 5.7% in 2014.

Too global?So economic conditions are good but not great, and certainly lacking the X factor growth levels enjoyed by the likes of Nigeria and Ghana. Why is this? The first dynamic working against the Rainbow Nation is, ironically, the reason its economy grew so rapidly over the past two decades: its high level of integration with the developed world.

“South Africa’s interconnectedness with world markets [and with the] eurozone in particular, has worked against it as the global economy has faltered,” says Ieisha Montgomery, an associate economist at the country risk unit of Northern Trust in Chicago. Montgomery tips economic growth to come in at less than 3% in

2013, underperforming IMF forecasts and “well below the 7% rate required to meet the government’s goal of creating 5 million jobs in the next 10 years”.

The second, more worrying concern has been an alarmingly rapid deterioration in labour relations. A series of wildcat strikes – many of which continued as this guide went to press – have tarnished South Africa’s reputation as a bastion of regional stability. A strike at a mine in the northwest owned by London-listed Lonmin turned nasty last year; police shot dead 34 workers, the deadliest security incident in nearly 20 years.

These events dented the country’s structural, political and economic rankings, as compiled by Euromoney Country Risk (ECR). The latest ECR risk profile, for the first three months of 2013, shows the country slipping to a score of 56.22, down 0.7% from the previous quarter.

Regional leaderYet tragic as such incidents may be, positives can be found even here. First, international surprise at the events at the Marikana mine last year underlines the respect the global investor community accords the country. South Africa is viewed less as a part Sub-Saharan Africa, and more as the region’s unalloyed leader and gatekeeper.

Mike Brown, chief executive officer (CEO) at South African full-service lender Nedbank, which is ramping up its operations across the region, sums up this view best. “South Africa has the best infrastructure in the region: if you go from point A to point B by air, you often travel via a South African airport. The country’s transport network and infrastructure are highly sophisticated, usually world-class.”

Then there are the ‘softer’ benefits of setting up shop in the region’s southernmost nation. “A lot of foreign corporates are happier with their staff living in Cape Town or Johannesburg, rather than in other cities around the region,” Brown adds. “South Africa also offers a good legal and financial infrastructure, facts that make this a good place to do business.”

Still a great place to do businessSouth Africa has felt the pinch as global markets have faltered, but its other role as a gateway to vast untapped African markets means a strong future is assured

“South Africa’s interconnectedness with world markets has worked against it as the global economy has faltered”

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Gary Marais, divisional executive, corporate banking, at Nedbank, agrees. “We are based in a country that is reasonably mature, and from where we sit, we see how global clients use South Africa as an entry point to the rest of Sub-Saharan Africa.”

Nedbank helps its corporate clients, whether from Europe or North America or Asia, to tap South Africa’s mature marketplace. But it also reaches deep into the heart of Sub-Saharan Africa, thanks to a long-standing tie-up with Togo-based Ecobank, which has a deeper presence in east and west African markets.

Together, Nedbank and Ecobank provide the best financial advice to companies seeking to push on into the region. This remains, despite recent improvements, an often woolly place to do business, and Nedbank has been dodging the region’s beartraps and locating its honeypots for 125 years.

Into the heart of AfricaThis process of using South Africa as a conduit into SSA – much like global investors use London to channel investment into emerging-market equities, or Hong Kong to reach into the heart of China’s securities markets – has been going on for years. But with global institutional and portfolio investors falling in love with the region’s riskier and resource-rich markets in recent years, that process has accelerated.

Ian Carter, head of transaction banking, electronic banking and payments, Africa, at Nedbank notes that the lender continues to “build up more long-term relationships with big mining firms, big international petroleum firms, who tend to set up their regional headquarters in South Africa and expand and bank from there.”

Nor is South Africa now merely a port of call: a passing point to the heart of the continent. This is a vast commodities-driven economy, producing everything from gold and platinum to soft fruit and wines. An expanding and highly capitalized power-generation sector offers investment opportunities galore, as does the country’s deeply traded fixed income market. The JSE in Johannesburg is Africa’s largely and most heavily traded securities exchange.

South Africa is also home to a huge tourism and hospitality industry and an increasingly powerful manufacturing sector. Northern Trust’s Montgomery highlights the country’s high “level of diversification and the depth of its financial markets”, both of which are clear “positives” for international investors. It all comes together to paint a picture

of a country that’s half finance, half industry: a mix of London and Germany’s Ruhr valley.

Compelling investment caseThis is a great place, then, in which to do business, and in which to do business through, a fact that isn’t lost on local or foreign corporates. Christine Ramon, chief financial officer at Sasol, an integrated South African energy-to-chemicals conglomerate listed in Johannesburg and New York, points to a clear set of compelling reasons to invest in the country.

First, the country’s “strategic location, and its position as a gateway into the rest of Africa”. Ramon also identifies a “solid regulatory and legal framework with favourable corporate tax rates, access to capital markets, a sophisticated investor community, world-class infrastructure, and cutting-edge technology” in areas like machine tools, auto production and scientific equipment. South Africa’s economy is also globally competitive, placing 52nd of 144 nations in the World Economic Forum’s 2012 Global Competitiveness Index: the highest ranking by an African nation.

Ramon also reiterated two key reasons to be based in South Africa: its status as an entry point to the rest of the region; and its close, embedded links with the world’s wealthiest nations.

Through South Africa’s world-class ports and airports, and high-speed rail links and freeways, global investors can gain access to Mozambique coal and Zambian copper and wheat. Goods and services are also pumped north: Botswana, a major exporter of diamonds, also imports refined petroleum products and power from South Africa: the latter, indeed, is fast becoming a key source of electricity for the southern portion of the continent.

Growth may have slowed in South Africa in recent years, yet there are good reasons for this. This isn’t a frontier market any more: it’s a fully-fledged emerging market with developed-world ambitions, and a full member of the Brics grouping of emerging superpowers.

South Africa’s economy has been hit by slowing growth elsewhere, notably in Europe and the United States. Yet that may come to matter less and less. This is also the gateway to a vast, largely untapped market, and that fact alone, if the country plays its cards right, should keep South Africa’s economy purring along for decades to come.

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Soft infrastructure

Source: Euromoney Country Risk

2.7

2.8

2.9

3.0

3.1

3.2

3.3

3.4

3.5

3.6

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Employment

Source: Euromoney Country Risk

The past few years have at times been a tough slog for eastern Africa’s economic star. Kenya, the unalloyed economic hub of the region, was dealt a double blow in 2008. First came violence following the disputed general election of December 2007, which left up to 1,500 dead and 250,000 displaced. That was followed by the financial crisis, a bitter pill for an economy heavily dependent on exports to China and the West.

Yet unlike Europe or the US, Kenya has bounced back in recent years, if not to its pre-crisis growth levels, then at least to good economic health. Gross domestic product (GDP) before 2008 regularly topped 5%. In recent years, recovery has been slow and steady: GDP grew 3.7% in 2012 and is set to hit 4.4% this year and 4.5% in 2014, reckons the International Monetary Fund (IMF).

Many hope that Kenya’s political and social strife is now a thing of the past. General elections in late March 2013 saw former finance minister Uhuru Kenyatta sworn in as the country’s fourth president.

Kenyatta’s coronation remains controversial: a charge of genocide stemming from the atrocities of early 2008 remains outstanding against him. But many are simply glad to see the country turn the

corner. Ieisha Montgomery, an associate economist at the country risk unit of Northern Trust in Chicago, noted that the county’s “recent elections and the lack of pervasive violence following the contested result” was very positive news indeed.

During March, Euromoney spent some time on the campaign trail with Uhuru Kenyatta. Then a candidate for the highest office, Kenyatta vowed to fight the genocide charge, if it ever came to trial at the International Criminal Court. But he also pledged to fight a far tougher battle: to continue to grow and diversify Kenya’s economy, to draw in increased quantities of foreign direct investment (FDI), to foster burgeoning IT and financial services sectors, and to invest heavily in growing out the country’s infrastructure.

Each of those points is worth looking at in depth. First, Kenyatta himself. Many in the West see him as a greater friend to China

than his predecessor, Mwai Kibaki, and his chief opponent in the 2013 elections, former premier Raila Odinga. But as Kenyatta told Euromoney, Kenya welcomes all investment capital into the country, irrespective of its hue.

Focus on infrastructure and jobs“We want to grow the economy – it matters not one jot to Kenyans where money comes: whether from China, Britain or America,” Kenyatta said. “This is a country [whose] best years are still ahead. We want to create a thriving IT industry, a thriving banking industry. And we need to build out our infrastructure.” Kenyatta pledged that, as the country’s democratically elected leader, infrastructure and creating jobs will be his primary aim.

The incoming president is correct to focus on infrastructure. He highlighted the importance of building new road and rail links between the country’s far-flung cities, and to cut the time it takes to shuttle goods and services between the rural hinterland and ports on the Indian Ocean.

Kenya was accused of being a serial under-investor in infrastructure during the Kibaki years. Take, for example, a straight comparison

with its northern neighbour Ethiopia, which has invested heavily in transport infrastructure. A Kenyan dirt track becomes a smooth four-lane blacktop as soon as it crosses the Ethiopian border. And while Nairobi’s flag carrier, Kenya Airways, and the country’s ‘international’ airport, have seen better days, Ethiopian Airlines and Bole International Airport in Addis Ababa are clean and reliable, and a genuine pleasure to use.

It’s to be hoped that Kenyatta can come through on his infrastructure pledge. In a March report on trade entitled “Africa’s intra-regional trade: a sleeping giant”, Ecobank pointed to the World Bank’s Logistics Performance Index (LPI), which ranks Sub-Saharan Africa as the poorest region in the world in terms of customs, infrastructure, logistics and competence. Kenya scores 2.6 in its LPI ranking: the World Bank notes that the score reflects widespread incompetence and, in particular, “the weak capacity of the [country’s] road, rail

Turning the cornerKenya’s new government, under controversial president Uhuru Kenyatta, is setting out to tackle the handicaps, like inadequate infrastructure, that have been holding the economy back

“The economy is becoming increasingly diversified, and once they get their infrastructure sorted out, they will be an economic force to contend with”

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and port networks”. The country scores better when it comes to international shipping, tracking and tracing, reflecting its “well-developed commodity export operations, and the high volumes of capital goods it imports” to feed its energy sector.

Investment opportunityKenya’s infrastructure weakness is a shame, but it also provides a cracking investment opportunity for global construction firms and an army of investors keen to earn juicy yields from multi-year projects. Yvonne Mhango, chief Sub-Saharan Africa economist at Renaissance Capital in South Africa, notes that this process has already started. She says: “[T]he fact that the foreign debt Kenya is raising [through recent Eurobond issuances] is largely being used to invest in infrastructure, as opposed to recurrent spending, is positive for [the country’s] growth and [for its] productivity prospects.”

Besides, it’s easy to forget how advanced this economy is. The country’s banking and securities market is also growing in size and clout: the

Nairobi Securities Exchange is by far eastern Africa’s largest and most heavily traded bourse; its All-Share Index nearly doubled in value between the start of 2012 and the end of April 2013, thanks to rising inflows of foreign institutional capital.

Moreover, Kenya’s workforce is highly educated and English speaking, the economy home to a growing army of fast-growing smaller enterprises, a thriving business process outsourcing scene and one of the region’s most powerful agricultural bases. (Kenyan producers have in recent years pushed higher up the value chain into areas like flowers and prepared fruit).

“Kenya is one of Sub-Saharan Africa’s most exciting and youngest economies,” notes Wale Shonibare, chief executive officer (CEO) at Nigeria-based UBA Capital. “They have an technologically savvy young population that’s growing even faster than Nigeria. The economy is becoming increasingly diversified, and once they get their infrastructure sorted out, they will be an economic force to contend with.”

Core strengthsUnderlying data highlights the country’s core economic strength. Private consumption continued growing at up to 5% a year throughout the financial crisis, according to IMF and World Bank data. Gross external debt as a measure of GDP is manageable and, at less than 20%, on a par with regional peers.

A sluggish export sector could and should do better, as could FDI, where Kenya has lagged in recent years. Foreign investors deterred by the 2008 troubles are likely to return though, and the spectre of inflation appears, at least for now, to have been banished: consumer price inflation is set to finish the year at 5.3%, the IMF reckons, down from 13.6% in 2011. It’s notable that Kenya’s overall Euromoney Country Risk (ECR) score in the first quarter of 2013 rose by more than two full points, to 37.18, while its structural and political ranking rose markedly quarter on quarter in the final three months of 2012.

Leading the world And there are a few areas where Kenya is far and away an African and even a global leader. Mobile banking has been a huge hit in this country of 45 million people. Safaricom, a Nairobi-based cellular firm 40% owned by the UK’s Vodafone, has won numerous awards for its M-Pesa mobile payment system, which is believed to account for up to quarter of all processed Kenyan trade. M-Pesa, which has

now been emulated by many of Safaricom’s African rivals, is clever in two ways. First, it allows individuals to send and receive very small amounts of money at virtually no cost: vitally important for millions of small traders. And it helps people with no banking record to gain a credit history.

Working with the Commercial Bank of Africa (CBA), Safaricom has invented a way to ‘lend’ small amounts of money at the start of each month to subscribers. This microfinance-style credit system not only aids commerce, but allows users to build up a credit record that can then be used to open a bank account at CBA and other lenders. “The way that the Kenyans have jumped many steps ahead of everyone, whether in Africa or in Europe or the US, when it comes to mobile banking is truly amazing,” notes Tedd George, a senior analyst at Ecobank.

Kenya’s story appeared to have stalled for good in 2008. This remains a country that still needs upgraded roads and ports, along with new schools and hospitals. And it needs to export more: Kenya still imports too much for a frontier market.

But it is on the move again: of that there can be no doubt. And with a new president in place, the troubles of five years ago now appear to be part of the past. Northern Trust’s Montgomery is bullish about the country’s growth prospects, noting that “infrastructure and IT improvements will go a long way toward economic diversification”.

“The way that the Kenyans have jumped many steps ahead of everyone, whether in Africa or in Europe or the US, when it comes to mobile banking is truly amazing”

Ghana can rightly lay claim to being one of Sub-Saharan Africa’s most capricious markets. Unpredictable yet as stable as they come (at least for the neighbourhood), this is a mature market that continues to grow at the pace of a frontier market, and a diversified and complex economy long skewed toward financial services and retail consumption that recently fell in love with that most volatile yet blessed of resources, oil.

Take economic growth. It swung from just 4% (understandably) in 2009 to 14.4% in 2011, before settling in the mid-to-high single digits. A consensus of sources including the Bank of Ghana and the International Monetary Fund (IMF) tips growth in gross domestic product (GDP) to come in at 6.5% this year and 6.8% in 2014.

Or look at the 2012 budget deficit, which was expected to be 6.7%: high, but manageable. Yet in February 2013, the government announced that, using a new, rebased economic gauge, the nation’s deficit had soared to an eye-watering 12.1% of GDP, or 20% using the old measure. Either figure marked the highest deficit in the country’s history, a result of soaring public spending stemming from ambitious (and wrong) assumptions about current and future oil revenues.

Solid growth trajectoryYet this is no sovereign basket case: quite the opposite. “Ghana,” says Dennis Dykes, group chief economist at South African lender Nedbank, “boasts a sophisticated and a highly educated population. It has Nigeria nearby and a well-established consumer market and a growing oil sector. This a country with a lot going for it.” Ieisha Montgomery, an associate economist at the country risk unit of Northern Trust in Chicago, says the country is on a “solid growth trajectory with growth [expected to be] above 7% in 2013 and 2014”.

Ghana, moreover, is a mature, investor-friendly country with a widely traded stock market and a long and strong relationship with global fixed income investors. In May 2013, politicians in the capital Accra announced plans to issue a Eurobond worth up to $1 billion in the second half of the year – economic conditions permitting - in order, vice president Kwesi Amissah-Arthur said, to refinance debt and fund infrastructure projects.

Oil takes offForeign investment capital has flooded into the country since oil production began in earnest three years ago off the Ghanaian coast. Chinese oil major Sinopec has pledged to invest more than $3 billion in the main Jubilee field. UK based Tullow Oil pumped $670 million into the sector in 2012, while New York-listed Kosmos Energy, which owns 24.1% of the Jubilee field is set to invest $400 million to ramp up local production in 2013.

In just three years, oil has replaced cocoa as Ghana’s chief export: production is set to more than double to 250,000 barrels a day

by 2021 as new output comes on stream. To hit that output level, Ghana needs to find $20 billion in new capital investment over the next five to eight years, the government reckons, much of which will come from foreign energy majors and independents. By any measure, oil will drive foreign direct investment (FDI) into the country for at least the next decade.

In an April 2013 research note, London based Capital Economics tipped Ghana to be one of three Sub-Saharan African nations set to absorb outsized flows of FDI over the coming years, along with two other resource-rich regional economies, Mozambique and Zambia.

Stand-out marketBut Ghana is far from being a one-industry story – or a one-story investment. Western Africa’s most reliable country since independence, Ghana has long bucked the regional trend by proving to be both stable and democratic. This, notes Brad Maxwell, executive head of investment banking at Nedbank Capital, is a stand-out market: one of the few African nations growing as fast as the frontier economies of Southeast Asia.

Foreign investors can find any number of ways to direct capital into high-yielding local investments, whether through Tullow Oil or Accra- and Johannesburg-listed AngloGold Ashanti, a leading global gold producer. The Ghana Stock Exchange (GSE), notes Maxwell, is also “dominated by the manufacturing and non-cyclical consumer sectors, with strong support through the banking sector”.

Maxwell notes that Nedbank, via an alliance with Togo-headquartered Ecobank, is “well positioned to offer clients investment opportunities in this region beyond the listed equity space”, notably foreign exchange services and fixed income investments.

Ghana’s financial sector offers one of the few opportunities in Sub-Saharan Africa to invest reliably and efficiently in heavily traded local securities. Ecobank financial research specialist Sulemana Mohammed describes the GSE as “one of two west African bourses with size and scale”, along with the Nigeria Stock Exchange.

“The GSE has an excellent reputation among global investors,” Mohammed says, pointing to “high levels of governance” at most notable listed corporates. Stand-out companies on the exchange include Fan Milk, which in April 2013 announced it was doubling its full-year dividend from a year ago, Guinness Ghana Breweries, the local subsidiary of the UK drinks giant, and Nestlé Ghana.

Ghana faces challenges ahead. Northern Trust’s Montgomery warns that the government will need to be “vigilant about reducing its fiscal deficit and ensuring [that its] oil proceeds are used wisely”: political leaders in Accra have pledged to rein in spending in the years ahead. The country, more exposed to the global economy via its exports than most regional peers, must also ward against external shocks, Montgomery said.

Stability with a twistWith oil replacing cocoa as its major export, Ghana – already a mature market in the eyes of investors – is looking forward to continuing rapid growth

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Beautiful but troubled, Mozambique until two years ago was just a vast-but-underpopulated state on the Indian Ocean, a zero-story economy with a strong agricultural sector but little else to attract foreign capital.

Then the country found gas. As much as $350 billion worth could be deposited beneath the coastal shelf, an offshore field that could fulfil global demand for two years, producing 100 million tonnes of natural gas a year.

Energy majors have rushed in, keen as mustard, in large part because Mozambique needs foreign help and experience to construct offshore pipes and grids. The country cannot do this on its own: it lacks sufficient qualified labour, meaning that it tacitly needs the likes of ExxonMobil and Shell and cannot – as some countries have – easily dispense with their services.

Foreign direct investment (FDI) has already started to flow in, and more will come. Smaller enterprises with decades of experience operating off Europe’s coastal shelf – firms like Norway-based Dolphin Drilling and Britain’s Wood Group PSN – are actively exploring opportunities in the country.

Global energy giants are also pushing hard into Mozambique. State-run firms like Russia’s Gazprom and India’s Oil & Natural Gas Corporation have both stated their intentions to develop assets in the region; ONGC and Oil India are, as this guide went to press, viewed as front-runners in a dual bid to buy a $6 billion field part-owned by Texas-based Anadarko Petroleum.

Approaching the marketsYet the energy boom has allowed the government in the capital Maputo to consider financial options unthinkable just a few years ago. In the early months of 2013, politicians began sounding out foreign banks about placing the country’s first-ever Eurobond, which could be issued as soon as early 2014.

Growth isn’t the issue here. Mozambique’s economy may be small but, like most frontier nations, it’s expanding fast. Gross domestic product (GDP) grew by 7.5% in 2012, up from 7.3% in 2011 and 7.1% in 2010. In April this year, the central bank, Banco de Mocambique, said the country would grow by 7% in 2013.

Massive resourcesSo there is plenty to feel good about. Foreign capital is flooding into the region: Banco de Mocambique spokesperson Waldemar de Sousa noted in April that FDI in 2012 had doubled from the previous year to $5.2 billion. That annual figure is set to triple and even quadruple as Mozambique builds out its energy sector and diversifies its economy. “Mozambique has massive resources, from gas to coking coal,” notes Dennis Dykes, group chief economist at Nedbank. “The country has a major seaboard and a couple of good ports in Beira and Maputo.”

Indeed, look across the board and you see resources firms pushing into

the region – accompanied by the financial nous and clout of lenders like South Africa’s Nedbank and Togo-based Ecobank. Christine Ramon, chief financial officer at Sasol, an integrated South African conglomerate, says her firm, present in Mozambique since 2004, continues to ramp up local investment. “We have natural [onshore and offshore] gas exploration operations across the country,” she notes.

Sasol recently completed a $220 million upgrade of its facilities and is building a new gas-powered plant, set to be operational by 2014. Ramon points to “huge growth opportunities” across sectors like fertilizer, explosives and mining.

Avoiding the Dutch diseaseChallenges remain. A rapid build-out of infrastructure to support a nascent energy sector often decimates domestic industrial capacity, and Mozambique will have to work hard to avoid falling victim to so-called ‘Dutch disease’. But, for the time being, Capital Economics notes, the “ability to attract more FDI is a key reason why we are so upbeat on [the country’s prospects]. We expect [it] to outperform in both the near and the medium term.”

Then there is the longer-term story. Mozambique is still a predominantly poor country: per-capita GDP remains a shade above $1,000. Yet rising income from a global-scale energy sector should trickle down, creating – if this new wealth is properly handled and invested – a rising middle class. Within a decade, Mozambique’s economy could be on a par with, say, Kenya’s.

And this is where the second stream of investment comes in. Mozambique wants the commercial facilities every frontier market needs: basic banking and insurance services, fast-moving consumer goods (FMCG) firms, better infrastructure to get goods to and from market, and an educated workforce trained to benefit from the energy sector and its ancillary services.

Banks, FMCGs, agricultural processing firms, and telecoms: those are the industries likely to benefit from Mozambique’s gas-fuelled rise. Other firms, of course, should benefit too, and not just global energy giants.

Already you can see signs of change: in May, Nedbank bought a 36.4% stake in Mozambique’s sixth-largest lender, Banco Unico, for $24.4 million. Nedbank aims to convert its holding into a majority stake in the future. Notes Nedbank chief executive officer Mike Brown: “If you’re not physically on the ground in Africa, people are very wary about dealing directly with you. The region doesn’t like suitcase banking.”

This is a fast-growing frontier market at the start of what should be a long and very profitable journey. Nedbank’s Dykes notes that many factors are working in Mozambique’s favour. “There are the resources: genuine and significant,” he says. “There is an increasingly busy corridor of trade between the country and South Africa. Mozambique has real potential, make no mistake about it. This is set to be a major economic success stories for years to come.”

The discovery of vast offshore gas reserves has turned up the heat under Mozambique’s underdeveloped economy

Cooking with gas

Tiny Gabon has long been seen as a one-trick pony. Ever since discovering abundant oil reserves off its Atlantic coastline, the country, boasting barely 1.5 million people, has been heavily reliant on earnings from hydrocarbons, more than 40% of which is shipped west to the United States.

From outside, this appears to be a reasonably strong economy: stable, at least in comparison to surrounding states like Democratic Republic of the Congo, and wealthy. And key economic metrics do appear impressive enough. The economy is set to expand by just shy of 6% in 2013, after posting GDP growth of 6.1% in 2012, and 6.6% the previous year. Inflation is under control, at less than 3%, and energy exports helped the country in 2012 post the world’s eight-largest surplus, at 6.7% of GDP.

Moreover, stability appears to be improving. Euromoney Country Risk (ECR) data shows Gabon’s overall country risk score jumping to 39.56 at the end of the first quarter 2013, a three-point rise over the previous year. Banking stability is up 1.6 full points over the same period, to a credible 4.6. The country’s economic-risk rating rose 5.7 points in the year to end-2012, to 52.7, while its political risk score jumped nearly seven points, to 41.7.

Global investors clearly like what little they see. Borrowing costs on 10-year sovereign debt issued December 2007 have plummeted, falling nearly 500 basis points in the full year to end-April 2013. The country is mulling a new Eurobond placement, possibly in late 2013; such a sale would likely be snapped up, reflecting soaring global demand for high-yielding Sub-Saharan African debt.

Yet stability and growth isn’t everything. The economy is worryingly lopsided. Per-capita gross domestic product (GDP) was estimated at $17,300 in 2012 by the CIA World Factbook - yet this is a highly unequal society, with oil wealth tending to flow into the pockets of the well-connected. Unemployment runs at north of 20%, and the country has one of the highest infant mortality rates and some of the patchiest infrastructure anywhere in the world.

The question of energy and the related issue of economic diversity weigh heavily on the Gabonese republic. This is, notes Dennis Dykes,

chief group economist at South African lender Nedbank, a country that is “in a very different category” to its neighbours. It is “very reliant on oil”, he notes, production of which is believed to have peaked in the late 1990s. French oil firm Total, the country’s biggest inward investor, posted a fall in first-quarter revenues this year for the first time in a decade at its Gabonese operations.

Looking for new directions“Steps are being taken to turn [Gabon] into a more diversified economy,” Dykes says, though this will be a “tough challenge” for all concerned. “The main question,” he adds, “is whether the country can deliver a new consistent and cohesive investment message to investors.”

Others are more bullish about the future. Paul-Harry Aithnard, group head of research and chief economist at pan-African Togolese lender Ecobank, says there are “two structural positives to take into consideration. First, oil production has stabilized, and we even predict a new upward trend in the sector”, with companies like Total, despite glum first-quarter 2013 output figures, drilling new offshore wells. “Second,” he adds, “the economy is actively diversifying away from oil and into fertilizers and palm oil.” Olam International, a major Singaporean agribusiness, is pumping capital into the local palm oil sector, while South African conglomerate Sasol plans to invest heavily in the growing fertilizer sector.

Then there is the leisure sector. Billions of dollars of private and state money is being directed into building new hotels, in the hope of turning the republic into a major player in the ‘green tourism’ market.

So things are improving, slowly but surely. Gabon may not have an active domestic stock market or an influential banking sector. This isn’t a great consumption-related story, nor is it a nation that boasts huge reserves of non-oil natural resources.

But since the accession of Ali Bongo Ondimba to the presidency in late 2009, things have improved. Corruption is down; transparency is up; and foreign capital is flowing into an increasingly diversified economy. A country long seen as a one-trick pony is finally finding a new life away from hydrocarbons.

Learning some new movesHeavily reliant on oil, Gabon is exploring ways to diversify its economy

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Source: Euromoney Country Risk Source: Euromoney Country Risk

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Namibia is one of the world’s forgotten countries: a way-station on the road to somewhere else. That may be about to change.

There is economic activity here to be sure, but it’s limited to a few key sectors. Namibia remains a key miner and exporter of diamonds and copper, two commodities that make up the bulk of an economy that ranks a solid 78th in the World Economic Forum’s 2012 Global Competitiveness Index, which rates 144 nations against each other.

The economy held up well through the financial crisis. Gross domestic product (GDP) increased by an average annual rate of 4% in the five years to end-2011. According to forecasts from London based consultancy Capital Economics, it’s set to grow by 5% in both 2013 and 2014. Inflation is under control and on track to hit 6% in 2014 after rising 5.5% in 2013.

Stable and small: this is the order of the day for a wind-battered nation squeezed between oil-rich Angola and mature, diversified South Africa.

Namibia’s population, at just 2.3 million, is set to grow by just 1.5% a year over the next decade, making it one of Sub-Saharan Africa’s (SSA’s) emptiest nations.

Yet there are investment opportunities here, if you look hard enough. The country issued its debut $500 million Eurobond in October 2011, securing a generous yield of 5.75%, and a generous welcome from European and US investors, who helped oversubscribe the placement five-and-a-half times. Yields for benchmark dollar-denominated Namibian debt declined in early 2013, in line with the rest of the region, raising hopes that the country would seek to tap the Eurobond market anew later in the year, to fund its future economic aspirations.

Huge potentialAnd Namibia does have ambitions. This, notes Ieisha Montgomery, an associate economist at the country risk unit of Northern Trust in Chicago, is a “well-governed sovereign with positive growth prospects”. Dennis Dykes, group chief economist at South African lender Nedbank, describes a “sophisticated economy, with a sophisticated banking sector”. The relatively small population means that the country will “never enjoy that big consumer momentum” story enjoyed by other rising regional giants. But this remains, for all that, a country with “huge potential. All you need is one or two big projects” to get signed off, Dykes notes, to have an outsize impact on the broader economy.

In a quarterly report on Africa issued in March 2013, Capital Economics noted that Namibia’s economy was set to pick up sharply in 2013, thanks in part to rising inflows of foreign investment and increased government spending.

The big undiscovered and uncertain story here is oil. Many of Namibia’s regional peers, including Angola and Mozambique, have discovered major reserves of hydrocarbons in recent years. Namibia has not – though not for want of trying. The big question in recent times has become: does anything, other than a few dessicated shipwrecks, lie off its long Atlantic coastline?

Many oil independents have tried. Most have come up short. Brazil’s HRT Participacoes em Petrole drilled in two separate locations in 2012, but continues to seek first oil in the Wingat-1 well. Other oil firms with stakes in offshore Namibian blocks include BP, Spain’s Repsol and London-listed independent Chariot Oil & Gas, which has interests in three coastal African states.

All these firms are taking big but calculated risks, betting that Namibia will come up trumps sooner or later. The odds on this are good, and the potential rewards considerable. Texas-based Anadarko Petroleum will make billions of dollars from its far-sighted early investments in Mozambique’s offshore gas fields.

Key to the futureMuch of the country’s economic future will depend on whether it strikes oil. If it does, economic growth will accelerate. This will help balance the budget and support a long-standing government plan of creating 100,000 jobs: a key aim for a country with dangerously high levels of inequality. It will also lead to a rising inflow of foreign direct investment, notably from oil majors and ancillary energy-industry players, supported by credit facilities provided by the likes of Nedbank.

If it doesn’t, Namibia could face a more uncertain future. Overly reliant, notes Northern Trust’s Montgomery, on commodity exports to China and the troubled eurozone, the country has already tentatively priced future oil revenues into its annual budget. If offshore wells turn out to be dry, earnings will need to be found elsewhere.

Namibia will probably be fine: its sizeable if unequal economy retains solid and “broadly positive” growth prospects, owing to a “stable political structure and good levels of governance in comparison to the rest of the region,” Capital Economics noted in its March report. And it will always have its diamonds. But striking oil would be awfully nice.

Namibia’s small population and limited economic activity have kept it off most investors’ radar. But there are opportunities to be found, especially if the search of offshore oil proves successful

Coming over the horizon

“The big question in recent times has become: does anything, other than a few dessicated shipwrecks, lie off its long Atlantic coastline?”

The rise of Sub-Saharan Africa (SSA) isn’t a single-themed story. Economic data all point in the right direction: up. But the region’s capital markets, until recently limited to a tiny universe of stocks listed in a few key markets, are also shifting into gear.

No longer are SSA corporates, notably those in the mining space, forced to venture overseas to secure institutional backing and global credentials. Local firms are opting to complete flotations in one or more of the region’s rising stock markets.

A raft of more complex investment options, from infrastructure funds to exchange-traded funds (ETFs), are being rolled out, while private equity is expanding in popularity, albeit from a low base. Paul-Harry Aithnard, group head of research and chief economist at pan-African Togolese lender Ecobank, reckons that between 2009 and 2012 inclusive, regional private equity players managed to raise, on average, “around $2 billion a year for new investments”.

Wherever one looks, there are increasing signs of capital flows being directed where they are most needed: to fund the region’s best-run, most ambitious and fastest-growing governments, corporates and financial institutions.

Bond issues make the newsTake the Eurobond market. This has garnered serious global attention in recent times. South Africa, Nigeria and, to a lesser extent, Kenya, have long been major players, issuing regular parcels of sovereign bonds to mop up existing debt and anchor major economic projects. Nigeria wants to sell $1 billion in Eurobonds in the second half of the year while a new Kenyan government expects to place $1 billion worth of Eurobonds by September 2013.

But it’s not just the large nations at play here. With Western economic torpor suppressing yields, global demand for emerging-market sovereign debt has risen to unheralded levels. Oil-rich Angola plans to sell $2 billion in Eurobonds later this year, while Ghana, which recently posted a record-high budget deficit, wants to issue long-term paper worth $1 billion before the year is out.

Tiny Rwanda, whose economic boom recently gave Renaissance Capital global chief economist Charles Robertson “the greatest positive shock” of his career, issued its first-ever international bond in April 2013, sucking in $3 billion in orders for a 10-year placement bearing a yield of 6.875%.

Other countries are also eyeing future debt sales, notably Tanzania and Mozambique. The number of international debt placements by Sub-Saharan African nations jumped to 43 in 2012 from 28 the previous year, with total volumes rising 9% to $12.4 billion, according to data provider Dealogic.

That healthy flow of new deals continued unto 2013, with SSA nations placing 15 sovereign bonds in the first three months worth $3.62 billion, an annualized increase of 25% and 2% respectively. Brad Maxwell, executive head of investment banking at Nedbank Capital, reckons that “up to 12” SSA sovereigns and state-linked institutions may seek to access the market by end-2013, raising around $8.5 billion.

Corporates go to marketNor is this dash for cash the sole preserve of governments. Companies across the region are increasingly aggressive issuers of corporate debt. Most of these bonds are placed by South African and Nigerian firms, but a few high-yield sales from Ghanaian and Kenyan companies have hit the markets.

Many of the region’s leading privately run firms have also rushed to raise capital while conditions allow. A brace of Nigerian corporates, energy support service specialist Sea Trucks Group and Fidelity Bank, raised $575 million and $300 million from corporate debt sales in March and May 2013 respectively. Other major recent issuers include a pair of diversified South African corporates, Eskom and Sasol. Several Nigerian banks have also expressed their intention to issue debt Eurobonds in 2013.

This flurry of activity wouldn’t be possible, of course, without demand. Global investors, attracted as much by regional growth as by the lack of credible investment options elsewhere, have been piling into the region like never before.

Institutional investor demand across the region, notes Nedbank Capital’s Maxwell, “continues to be heavily driven by sustained demand for both yield and diversification. The interest rate environment in the US and Europe continues to drive institutional investors to seek out higher yielding assets, and Sub-Saharan African issuers are key beneficiaries of this.”

Ecobank’s Aithnard notes that the lender’s Middle Africa Bond Index, which tracks the performance of seven SSA domestic bond markets, handed investors a 12.5% return in the first four months of 2013; over the same period, the JPMorgan Emerging Markets Bond Index yielded a return of 10.4%, another sign of the faith many investors now place in the region.

Global and regional lenders aim to benefit from this new gold rush. Nedbank, which has built a mutually profitable relationship with Togo-headquartered Ecobank (the former is strong in South Africa; the latter better positioned in inland SSA), has also established full-service international debt capital markets teams in London and Johannesburg. “[We] are viewed by many international institutional investors as a key resource for sales, trading and research, for South African Eurobonds and for local currencies issuances,” Maxwell notes.

Capital markets gear upGlobal investors seeking yield and diversification are listening to the African story, as the region’s capital markets grow in scope and sophistication

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Capital seeks a homeDebt market securities have been very much the flavour of the past 18 months. But as wealth rises across the region, global institutional capital will also start to push further into emerging and frontier markets, in search of widely traded and undervalued equities. That seems already to be happening: SSA corporates raised $6.7 billion from locally-completed initial public offerings in 2012, a year-on-year increase of 125%, according to Dealogic. The vast majority of these shares were issued in South Africa.

Indeed, the JSE, previously known as the Johannesburg Stock Exchange, is the only bourse in the region that boasts both global credentials and an array of deeply traded securities. A trio of other exchanges, in Ghana, Nigeria and Kenya, also provide options for the more adventurous institutional investor, while the BRVM bourse in Côte d’Ivoire remains the trading heart of francophone western Africa.

Yet, contrary to immediate impressions, the region’s stock markets are also in a state of flux. Over the coming decade there will, many believe, be a shakeout. Some bourses will rise, others will fall or wane in terms of their relative clout, while a few will start to offer institutional investors niche services currently unavailable elsewhere.

Sub-Saharan Africa hosts and boasts more than 30 bourses, yet within that universe only 13, Nedbank Capital’s Maxwell believes, can “seriously be considered for direct investments by foreign investors”. Top of this list, again, is South Africa, followed by Nigeria. Of the region’s 500 listed stocks, just 70 offer monthly volumes in excess of $1 million. The majority of these are traded in Johannesburg and Lagos.

Nigeria on the riseExperts however reckon this pecking order may soon be reversed. Sulemana Mohammed, financial research specialist at Ecobank in Togo, reckons the Nigerian Stock Exchange (NSE) is on track to become the most heavily traded regional bourse within a few years, aided by record inflows of global institutional capital, and a slew of private-sector flotations.

Kenya also offers a natural home for anglophone institutional investors seeking access to the ripest of eastern African fruits. Ecobank’s Mohammed sees the Nairobi Stock Exchange becoming one of the region’s leading bourses. “There are key positive factors that benefit Kenya and also Nigeria,” Mohammed notes. “Both have strong domestic banking sectors, and a broad selection of large, listed consumer goods firms. And listed firms in both countries also tend to have very high levels of corporate governance and investor relations.”

A few other substantive stock markets exist around the region, some of which could yet rise to become first- or second-tier regional powers. One is the Ghana Stock Exchange in Accra, which hosts widely traded, well-run listed consumer vehicles like Fan Milk and Guinness Ghana Breweries.

The Botswana Stock Exchange in Gaborone has also become a regional financial leader in recent times. Falling corruption and rising wealth – Botswana’s gross national income as measured by purchasing power parity puts the country on an equal footing with Turkey and Mexico –

have helped suck in regular flows of global capital. And technology has helped, too: an automatic trading system introduced toward the end of 2012 has boosted both liquidity and valuations.

Small but swiftThen there’s the Stock Exchange of Mauritius (SEM). The island nation is, notes Nedbank Capital’s Maxwell, at the “forefront of exciting technological developments” in the region, and has proven “pro-active in attracting a range of investment instruments to their market”. Mauritius, indeed, is rapidly setting itself up as the most efficient way for institutional investors in Europe, Asia and the Americas to tap regionally listed stocks.

Nedbank is working with the SEM to offer ETFs to global investors. The South African lender, working alone or with its regional ally in east and west Africa, Ecobank, is the obvious and logical accomplice for global institutions looking to gain access to Sub-Saharan African stock markets. Thanks to its full-service operations in London, Nedbank also advises African corporates seeking to raise capital on Western bourses. It also helps African pension funds, insurers and high-net-worth individuals gain access to global financial instruments and capital markets.

Challenges remain. Private-sector financing could do with a boost. The region’s savings rate is worryingly low, at 17% of gross domestic product (GDP), against 20% in the 1970s. Over the same period, emerging Asia’s savings rate has jumped to 45% of GDP from 30%. And though stock markets in Nigeria and Kenya have seen valuations soar, trading activity has actually waned. Daily turnover on the NSE now hovers around $30 million a day, a quarter of the activity enjoyed six years ago.

Yet positive stories abound across the region, for the first time in half a century. Even in the recent past, when the subject of Sub-Saharan Africa was raised, minds turned instinctively to chaos or hunger. In recent years, those preconceptions have shifted, with growth replacing notions of conflict.

And now comes the coup de grace, the sign of a rapidly evolving and emerging regional marketplace: the rise of often complex financial markets. Debt and equity capital markets, increasingly sophisticated M&A deals, and a growing universe of complex investment instruments, from private equity to ETFs. It’s all here in Sub-Saharan Africa.

Total international sovereign debt issued by Sub-Saharan Africa countries

Year Total issuance ($ million)2007 6,5262008 1,4462009 10,5582010 7,1812011 11,3922012 12,371

Source: Dealogic

Sub-Saharan Africa (SSA) has long been under-resourced and under-served. For decades, this was the last stop on the line, an investment destination for only the most risk-hungry and adventurous miners, drillers and banks.

Yet fast-rising growth rates are turning heads. Foreign investors are piling into the region in search of yield and profits. Energy and commodity giants have long been here, but agrigiants, consumer goods firms and construction specialists are pushing hard into countries viewed as investment friendly (Kenya, Ghana, South Africa) and woolier nations offering vast, untapped reserves of resources and human capital (Mozambique, Zambia, Angola).

And as investment flows across the region, lenders are fighting to be the bankers of choice to a thousand ambitious enterprises, from the biggest global multinational to the fast-rising local firm. These banks increasingly provide the type of services demanded by corporates elsewhere in the developed and emerging worlds: cash management, trade finance, foreign exchange, and a battery of related treasury services. Finally, it seems, Sub-Saharan Africa is growing up, and not a moment too soon.

For banks and corporates operating across the region, this is a seminal moment. Banks, says Patrick Gutmann, group head, transaction services, at Ecobank, a pan-African headquartered in Togo, are striving to offer more and better services to clients operating inside the region, along with regional clients, from corporates to sovereigns, seeking to cap global capital markets.

Exploding demand“Demand within the region for the whole gamut of financial services has exploded,” Gutmann says. “And while there are some limitations in some [regional] markets, clients increasingly demand the level of service they’d expect in other jurisdictions around the world.”

And it is to those clients - corporates with tentacles that spread across the region - that we look when making sense of SSA’s rising financial sophistication.

Take Eskom, the region’s leading electricity provider, based in the Johannesburg suburb of Sunninghill. Eskom operates in five SSA countries, including Senegal, Uganda and South Africa.

Brian Dames, the company’s chief executive officer (CEO), is pushing hard in two directions: outward, tapping Asian, European and North American capital markets to fund regional projects; and inward, to

profit from the burgeoning need for power in the region’s deeper recesses. To that end, he needs full-service banking partners that link the African and non-African worlds. Dames uses South African lenders like Nedbank when working on deals in southern Africa and London, as well as an array of non-African merchant banks, including lenders from Europe and North America.

“Within [SSA] markets, there are increasing requirements around cash management and foreign exchange work,” Dames says. “We need banks to provide forex and hedging and trade finance [and] to be able to help out in raising equity and debt capital.”

Getting in on the growth storyThis demand for sophisticated financial services is reflected in two further phenomena. First, rising regional growth and solidity. Not since the independence movement half a century ago has Sub-Saharan Africa been able successfully to marry rising gross domestic product (GDP) with such high levels of political and economic stability. Euromoney Country Risk rankings underline how fast stability is rising, even in the region’s wobblier frontier states.

Second, growth has attracted demand from the world’s leading corporates, banks and investors. Everyone suddenly wants to be here. Banks want to package and sell in-demand SSA sovereign debt to institutional investors; the latter are keen to lend capital to expansion-minded corporates.

Again, Eskom is a classic example of the region’s expansionary shift. Growth has boosted power demand to unprecedented levels. The utility is in the right place to meet that demand: it is looking to expand into Mozambique, Namibia, Zambia and, in time, Democratic Republic of the Congo (DRC), providing a mix of renewable energy, natural gas and hydro power. But it needs working capital to build out its regional operations, and trade finance again goes hand-in-hand with cash management, foreign exchange and a full suite of treasury services.

Eskom’s ambitions across the region reflect those at a host of leading global multinationals, from fast-moving consumer goods (FMCG) giants like Nestlé and Unilever, to agrigiants like Cargill and Olam International, to regional conglomerates such as Nigeria’s sprawling Dangote Group.

Fortunately, the region’s best lenders are keeping pace with rising demand. Ian Carter, head of transaction banking, electronic banking and payments, Africa, at South African lender Nedbank,

Regional banks step up to the plateAs investment flows in, the region’s lenders are fighting to be the bankers of choice for thousands of ambitious enterprises, increasingly providing the sophisticated services demanded by corporates elsewhere

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points to the “increasing sophistication” of both the bank and its leading clients.

Improving on the cash economyTake the basic issue of money. Cash remains king across much of the region. A 2012 Gallup survey found that just 9% of SSA traders settled all commercial transactions electronically, while 13% mixed cash and electronic payments. A far higher number, 37%, still use only cash.

Yet that is already changing. “There’s rising demand across [the region] for electronic banking and cash management services,” Nedbank’s Carter says. “We introduced a new cash management system around [autumn 2012] that optimizes how clients manage their cash needs.”

Other recently introduced products from Nedbank including electronic invoicing services, allowing clients to issue bills more efficiently to customers and, given the fragility of the postal system across the region, speed up the collection process.

This last point is key to regional commerce: thanks to electronic and mobile banking, traders of all sizes can ensure that bills are settled, even across borders, in hours or days, rather than weeks or months. “Nedbank has over the last few [years] invested heavily in our transaction banking capabilities,” adds Carter.

Indeed, it’s hard to overstate how the roll-out of new banking services in recent years has transformed the region. A service launched this year by Nedbank allows corporates to issue clients with multiple electronic bills, simultaneously.

Adds Gary Marais, divisional executive, corporate banking, at Nedbank: “We have also introduced a truly wholesale electronic banking application that allows corporates to process electronic payments in a secure environment. We’ve done a lot of feedback with clients, and we found that security is their main priority, so we invested heavily in building out a two-tier e-banking security system.”

Indeed, notes Marais, over the past five years, Nedbank has “invested massively into electronic capabilities as a whole”. A major project with North Carolina lender Wachovia upgraded the South African bank’s suite of services, helping it offer a full range of trade finance services in North America and Singapore.

Joint venture bears fruitMore recently, the bank’s reach, Marais notes, “has been further addressed” thanks to a joint venture between Nedbank and Ecobank. Few alliances between two lenders can have proved so immediately fruitful. The venture, formed in 2008, now encompasses the largest banking network in Africa, with more than 1,700 branches in 36 countries.

Each partner covers different regions: Nedbank specializes in South Africa, though the bank is pushing hard, says CEO Mike Brown, into new

markets, notably Zambia, Mozambique and Zimbabwe. In May 2013, Nedbank bought a 36.4% stake in Mozambique’s sixth-largest lender, Banco Unico, for $24.4 million.

Ecobank is a different kettle of fish. It now operates across 34 African markets - more than any other lender – with plans to open offices in South Sudan in June 2013, and in Mozambique before the year is out. The bank’s “twin aims”, notes group CEO Thierry Tanoh, is to build a world-class pan-African bank. In so doing, Ecobank can “significantly improve returns for shareholders in the longer term.”

Ecobank’s ambitions are just as considerable as Nedbank’s. Not only does it seek to operate as a single bank across the continent, it also aims to provide the same level of world-class wholesale, investment and transaction banking services to clients across multiple sectors. Having largely built out its own footprint, the aim, says Tanoh, is to maximize “the potential of this unique platform”.

Breaking down barriersIndeed, it’s worth looking at Ecobank in greater depth. Africa, particularly the continent’s southern half, has long been a notoriously difficult place to do business. Borders are often heavily protected, by either guards or suspicious financial regulators, crimping intra-regional trade. Governments, suspicious of ‘new’ competition, often legislate against non-local corporates seeking to expand into their territory. And infrastructure is patchy if it exists at all, making it hard to transfer goods, services or people from one place to another.

Into this crucible came Ecobank, seeking to offer a single suite of banking services to all clients, whether Ivorian or Angolan, Zambian or Kenyan. And to its great credit, Ecobank has succeeded. Paul-Harry Aithnard, head, securities and asset management, and group head of research, points to the “increasingly important role” played across the region by cash management, trade finance and foreign exchange.

In pure cash management terms, one need only look at current rates of cross-border trade. A March 2013 report by Ecobank, titled “Africa’s intra-regional trade: a sleeping giant”, found that just 12% of trade flows

Thierry Tanoh, chief executive officer, Ecobank

were completed regionally, between SSA nations. That compares with the European Union, where 60% of all business is completed regionally. SSA nations do more business with Europe and China than they do with their neighbours.

But official data is misleading, and for two reasons. First, vast informal trade flows between SSA states exist, off the radar. “Official data only tell half the story, as it fails to capture the scale of informal intra-regional trade flows,” Ecobank found in its March report: much of this trade is routed through the West African microstates of Togo and Benin.

Second, thanks to this informal commerce, and to the rising use of mobile banking service as a commercial trading tool, intra-African business is rising faster than many realize. “On the ground, we can see clearly how quickly trade is growing between African countries, and between Africa and the outside world,” notes Ecobank’s Aithnard. “In the coming years, trade into and within Sub-Saharan Africa is going to soar, as is demand for processing and payments and cash management solutions.”

That, he adds, is why Ecobank has established a one-stop shop in Paris: a single financial platform through which all treasury, cash management and payments solutions are processed, by companies and institutions based in 34 African nations. “Volumes through this platform have doubled over the past two years,” notes Aithnard. “There a very clear rationale for us to continue to improve our cash-management offerings across the continent.”

Levelling the playing fieldFinancial activity isn’t a level playing field across the region. Markets such as Kenya, Uganda and Tanzania, which as members of the East Africa Community (EAC) boast their own common market for goods, labour and capital, are more advanced. Aithnard isn’t alone in pointing to the region’s “more sophisticated financial services, information technology, and infrastructure” and its “greater economic and financial momentum”.

But other regions are also rising fast. Another highly promising sector is the African Great Lakes region covering Malawi, Mozambique and southern Tanzania, where cash management is “a critical part of those countries’ futures” and where “demand for more sophisticated financial services is also growing very quickly”,

Aithnard notes. By contrast, cash management isn’t high on the to-do list of corporates in much of western Africa, even in wealthier states like Cameroon and Gabon.

Demand for cash management services also varies between sectors. In broad terms, the greatest need for sophisticated cash management services – processed by the likes of Nedbank in South Africa and London, or by Ecobank in Togo and Paris - exists within industries that either need to channel capital quickly and efficiently into the region (notably the mining and energy sectors), or those needing to transfer capital securely and efficiently around the region (notably the consumer goods, agriculture and mobile telecoms sectors).

“Within Nedbank, the aim isn’t to target a specific industry per se,” says head of transaction banking Carter. “It’s more a case that there are some industries where the demand for complex financial services like cash management is rising fastest.”

Trade finance is another rapidly expanding area of growth for all lenders operating across the region, and for companies seeking to push further into Sub-Saharan Africa, and to benefit from rising intra-African trade. It often goes hand in hand with cash management in Sub-Saharan Africa, and it is here that a fundamental shift has occurred in recent years.

Prior to 2008, French banks and other ‘Western’ lenders were major providers of trade finance to the region. Then came the financial crisis, and the money disappeared. Yet when one door closes another opens. The retreat by Western banks created immediate and clear opportunities for African lenders. Ecobank asset management head Aithnard saw the shift happen, and saw his company – and other lenders like Nedbank – profit from the changing environment.

“Our trade finance capabilities since 2008 have significantly increased,” he says. “We have focused on channelling trade finance into areas of the continent where demand is highest, notably into the big economies of Africa – Nigeria, Ghana, Côte d’Ivoire – where intra-regional trade is highest.”

Corridors to drive growthYet for commerce into and within Sub-Saharan Africa truly to take off, infrastructure needs to be improved, and trade corridors need to be promoted. In its March 2013 report on SSA business, Ecobank

Region Score Infrastructure Customs Logistics competence Timeliness International shipmentsEurope & Central Asia 2.74 2.41 2.35 2.6 3.33 2.92Latin America 2.74 2.46 2.38 2.62 3.41 2.7East Asia 2.73 2.46 2.41 2.58 3.33 2.79Middle East/North Africa 2.6 2.36 2.33 2.53 3.22 2.65South Asia 2.49 2.13 2.22 2.33 3.04 2.61Sub-Saharan Africa 2.42 2.05 2.18 2.28 2.94 2.51

Logistics performance index, 2012

Source: World Bank

2013

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pointed to the “many constraints” facing intra-regional trade, and noted that trade corridors were “key to driving” growth.

Natural corridors, assuming they are properly promoted, exist everywhere: between South Africa and Mozambique; Côte d’Ivoire and Senegal; Cameroon and the Central African Republic; Zambia and the DRC; and from Kenya through Uganda and the high states of Rwanda and Burundi. “Once completed,” Ecobank states, “this network of trade corridors will become the arteries of regional trade.”

And these arteries can only be lubricated by capital flowing into trade finance. “The world’s trade finance community will need to adapt quickly to meet the rising demand for trade finance,” notes Ecobank. “Financing trade in Africa is a complex and risky business, and the trade financiers who will profit from the boom in intra-regional trade will be those who understand the market and have the right products to offer their clients.”

It adds that “only those banks” – and Nedbank and Ecobank are clearly at the top of this list – with a “clear understanding of risk and the best processes for quantifying it ... will prosper”. Aithnard reckons that $5 billion worth of annual trade is completed just between leading EAC countries like Kenya and Uganda and it is in these countries, he believes, that the “brightest outlook for trade finance” exists.

Back to basicsThat provides a broad view of activity across the region. But drill down to a more granular level and you can see more clearly how basic financial services like trade finance, when properly assessed and administered, are vital to ongoing regional growth. A classic example is the DRC, where trade finance, to all intents and purposes, does not exist, though not for want of trying.

The DRC is the world’s 11th largest country, boasting the world’s second largest rainforest, vast reserves of commodities and one of the world’s best and largely untapped reserves of hydropower. It’s also a natural bridge (and currently a frustrating barrier) to trade and capital flows across the region.

Eskom CEO Dames is not alone in saying that it is “crucially important” to the whole of Sub-Saharan Africa to get the DRC working again. “Doing that would bring vast reserves of affordable energy to the entire region,” he notes. The point is well made. If the DRC was fully operational, boasting infrastructure, political stability and permeable borders, trade across the region would explode, boosting demand for cash management, treasury services and trade finance.

Sometimes, of course, trade can leapfrog physical boundaries. Take the staggering success of mobile banking, which brings together cash management, trade finance, and a host of other financial services, including foreign exchange.

Mobile banking in Africa has its roots in Kenya, where Nairobi-based cellular firm Safaricom developed and promoted its ‘M-Pesa’ platform, a wonderfully simple electronic banking service that allows individuals to send and receive very small amounts of money at virtually no cost: vitally important for millions of small African traders.

Transactions routed via Safaricom’s network now account for up to a quarter of all Kenyan trade: the system is now widely used across eastern Africa and has led to surging demand among regional traders for electronic payment and settlement services. Safaricom recently joined forces with Lagos-based United Bank for Africa to roll out its M-Pesa services across the region. Nedbank is also building out its own regional mobile banking platform, in alliance with South African regional carrier Vodacom Group.

Indeed, it’s not stretching a point to say that mobile banking may well be the financial making of Sub-Saharan Africa. So long as central banks and financial regulators, natural wary of uncontrolled capital flows, don’t aggressively clamp down on the phenomenon, electronic mobile banking should be here to stay.

But, for that to happen, it needs to be rolled out in wider and more linear fashion. Mobile banking has taken off exponentially in South Africa and Kenya, where 18% and 15% of all corporates and small

Documents to Time to Cost to export Documents to Time to Cost to import Region export (number) export (days) ($/container) import (number) import (days) ($/container)SADC (southern Africa) 7.3 31.2 1,856 8.4 38 2,273COMESA(eastern/southern Africa) 7.2 32.4 1,915 8.2 38.3 2,457ECOWAS (western Africa) 7.6 27.6 1,528 8.1 31.6 1,890CEMAC (central Africa) 9 35.2 2,808 10.8 44 3,721Middle East/North Africa 6.4 20.4 1,048 7.5 24.2 1,229East Asia & Pacific 6.4 22.7 889 6.9 24.1 934South Asia 8.5 32.3 1,511 9 32.5 1,744Latin America 7.1 19 1,310 7.5 22 1,441Eastern Europe & Central Asia 6.4 26.7 1,651 7.6 28.1 2,457European Union 4.5 11.5 1,025 5.3 12.1 1,086OECD 4.4 10.9 1,058 4.9 11.4 1,106

Cross-border trade indicators, 2011

Source: World Bank

traders respectively now opt to process all commercial transactions electronically. Yet these are outperforming outliers: in Rwanda and Sierra Leone, traders rely solely on electronic banking for just 2% of transactions, according to Gallup.

Ecobank tips total trade processed electronically via mobile phones to expand from $600 million in 2012 to $2.7 billion by 2017. “We are expecting to see a significant increase in terms of the volumes of mobile payments in the coming years,” says Aithnard. “Within a few years, it will become ‘normal’ for people to pay their utilities, transfer money point-to-point, and bill and collect payments of all sizes.” He adds that “transfers, payments and cash collection” are the three key services set to “really explode in size” in the years ahead.

Regulators get on boardAnd, slowly but surely, the regulatory environment is also catching up with the region’s entrepreneurial spirit. Regulators may still be (at times rightfully) chary of uncontrolled cross-border capital flows, but the aim of institutions like the Southern African Development Community (SADC), based in Botswana, is clear: to boost economic and political integration and cooperation between 15 southern African states.

Take the SADC’s new payment system, set to be rolled out as a pilot programme by the region’s central banks in the third quarter of 2013. This project is both ambitious and laudable, aiming to provide a single integrated payment zone across both the SADC and Sub-Saharan Africa. It will focus at first on promoting immediate credit transfers and high-value payments.

“The SADC initiative,” says Nedbank’s Carter, “has been progressive and is driving the decommissioning” of outdated payment methods such as cheques and drafts. The next stage will be the introduction of a state-of-the-art regional balance of payments system, with the first phase of that project rolled out by the South African Reserve Bank, also in the third quarter of 2013.

Carter adds that the aim is all about promoting electronic payment processes across and within the region. “Sub-Saharan Africa isn’t an integrated trading block like the eurozone,” he says. “So it’s all about facilitating payments across networks and borders, and ensuring the liquidity is controlled and managed by central banks.”

Demand for cash management and trade finance is growing in “leaps and bounds” across the region, says Ecobank’s Gutmann. “In terms of both areas, the appetite for sophisticated and comprehensive services is growing exponentially among customers. These are two areas in which we continue to invest aggressively; areas of vital importance for us strategically as regional financial services leader.”

Foreign exchange demand is also rising fast, as a direct consequence of increasingly regional demand for a full suite of

financial services. Ecobank’s Aithnard notes that the “appetite for foreign exchange transactions between African companies, and between African companies and the outside world has increased markedly” in recent years.

Again, Ecobank was the first not only to identify this phenomenon but also to act on it. Its electronic platform Paris acts as a one-stop foreign exchange service for corporates and institutions operating in 17 countries across Sub-Saharan Africa.

“We set up that platform four years ago, and every year we see an exponential increase in demand for sophisticated forex products,” says Aithnard. “Flows have increased, demand for those services has increased and we will clearly be providing increasingly sophisticated services to companies across the region. The next step will be to roll out hedging solutions and derivatives.”

Work in progressTo be sure, challenges remain wherever one looks. SSA remains a work in progress, a region where risk and reward levels run high, and where high costs and poor infrastructure and logistics are major constraints to regional trade. Further ahead, regional regulators need to cut red tape, reduce cross-border capital controls, streamline documentation and delegate more control from local institutions to the hands of regional bodies.

But things are finally moving in the right direction. “It’s all coming together in Sub-Saharan Africa,” says Aithnard who points to the “amazing” breakthroughs in areas like mobile banking, and the roll-out of sophisticated cash management and trade finance services across the region.

And as foreign multinationals push further into the market, competing tooth-and-nail with regional corporates for control over markets from consumer goods and banking to telecoms and infrastructure construction and management, lenders are being forced to up their game, to remain the banking provider of choice.

Many are. “There is clearly a growing demand by the largest multinationals, and even by the largest [SSA] companies, to limit the number of [bank] accounts they hold,” says Gutmann. “And therefore, finding banking partners who effectively and efficiently cover a large part of the region is vital. And it will be the banks who are able to do this most effectively, who will profit the most.”

Again, it’s easy to point to the likely winners here: Nedbank, with its vast experience in southern SSA states, notably in its homeland of South Africa; and Ecobank, with its roots in west Africa and its tentacles across the region. The deal they struck with each other – to work together harmoniously to cover the whole region – was enormously far-sighted.