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AfricaJuly 1 2007

Investors hop on the Africa conveyor belt

The great Africa opportunity awaits and it could involve higher growth in output and profits than the world has ever seen before.
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Unlike Russia and China, which began economic expansion by freeing themselves from the dead hand of state control, Africa largely has a history of private enterprise, Western-style banking and financial markets.

Africa’s financial markets may be highly protected, transaction costs enormously high and the whole edifice shrouded in bureaucracy and corruption but, as reform gets under way, there is market knowledge to draw on and everyone – governments, central banks, oligarchs – agrees on the best way forward.

But it will be a while before the message reaches mainstream investors, despite all the interest now being generated by emerging markets in Asia and eastern Europe. In the short term, the emerging market specialists will be the pioneers and the problem solvers.

One challenge is the markets’ smallness. Jerome Booth, head of research at Ashmore Investment Management, has proposed multi-issuer bonds on behalf of several African countries as a way of reaching the $500m benchmark that is considered optimal for a Eurobond.

Russian investment bank Renaissance Capital is launching a big push into Africa, figuring that its capabilities in structuring financial products for Russia and the Commonwealth of Independent States, and for handling risk and volatility are appropriate for the continent (The Banker, May, p154).

Renaissance has taken a 24.99% stake in Ecobank Transnational Incorporated (ETI), west Africa’s largest pan-regional bank, and is planning other direct investments and the launch of an Africa fund. It has recruited Africa analysts, located in strategic countries such as Nigeria and Kenya, with a brief to travel to interesting markets such as Ghana, Democratic Republic of Congo, Angola, Zambia, Côte d’Ivoire and Rwanda.

“Africa has got to a stage where the reforms are irreversible and things can only accelerate,” says Stephen Jennings, CEO of Renaissance Capital. “Everyone you speak to has an understanding of what does and doesn’t work. There is sufficient momentum from the private sector to force regulators to engage in a dialogue. Change is coming from the bottom up and once the process starts, a country cannot get off the conveyor belt.”

He cites Nigerian banking reform as an example of rapid change, with a huge sector being consolidated into 25 banks in one year. Bureaucracy, corruption and high transaction costs are huge challenges but are starting to be addressed.

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