Recent statistics point to the rapid economic growth in Africa. The GDP of sub-Saharan Africa is growing at a rate 5%. Over the past 10 years, 6 out of the 10 fastest growing economies in the world have come from Africa. Within the next 7 years, more than half of Africa’s population will earn enough income to start making non-essential purchases. In 30 years, Africa will have a larger working-age population than China.
All of these factors, coupled with economic troubles in developed economies, have contributed to the success of companies operating in Africa. These include both African companies as well as the local operations of multinational companies. This success has created great opportunities to invest in Africa and, as a result, equity markets in Africa have been booming. Because many African companies require capital that they are unable to get locally due to local shortages in savings, foreign investors are able to get higher returns than they would in other places.
Because Northern Africa and South Africa are already well-developed and have lower rates of growth, investors have taken particular interest in frontier markets in sub-Saharan Africa. The two biggest of these are Nigeria and Kenya, whose equity markets have risen by 50% in the past year.
Beyond these frontier markets lies a great amount of risk related to lack of liquidity. The next largest equity market after Kenya and Nigeria is that of Zimbabwe, which is characterized by low daily trading volumes. It is very difficult for traders to buy or sell their stocks in these markets on any given day, creating a shortage of liquid stocks. Although there is a lack of liquidity right now, it is likely that the demand from foreign investors will encourage more African companies to sell their stocks through IPOs, thereby boosting the supply.
In addition, other opportunities to invest in Africa could lie in private equity, which involves the purchase of entire companies by investors. Private equity in Africa would be very different from private equity in developed markets because returns would be based on revenue and efficiency gains instead of financial engineering. This type of investment helps local companies to grow and therefore have positive consequences for both local populations as well as investors.
Although there are still many challenges to investing in Africa, the growth potential of this market, coupled with the economic difficulties in many parts of the developed world, has led investors to face the risks of doing business on the continent. Hopefully this inflow of foreign capital will help companies in Africa continue to succeed and grow, creating more jobs and further contributing to improvements in development and quality of life for ordinary Africans.
– Caroline Poterio Martinez
Source: The Economist