Coen Welsh | Nov 14, 2017 | 0
Africa is the world’s new growth narrative
A strong message came from the recent investment summit in Beijing where African companies signed deals worth billions of dollars with Chinese financing agencies, suppliers, and other development partners. These deals may be brushed off by European and American investors as a desperate catch-up effort by the Chinese since the First World economies still remain the biggest investors in Africa, but I believe there is much more to this dynamic than meets the eye.
True, China is a relatively minor investor on the continent compared to the established investment volumes but the trend is positive for Chinese investments while it is neutral for the conventional investors. Furthermore, it seems that a European financing institution is envious of the obvious successes Chinese investors have bagged over the past decade.
The reason is not hard to figure out. It is all about the desperate search for yield in the developed world.
When constitutional investors are prepared to pay the German Government for the privilege of taking up its paper, it is because it is still regarded as a so-called safe haven investment despite negative returns. In other words, the risks of losing money in 10-year Bunds are calculable and manageable while the risks in other, less conventional forms of debt, are simply too big or unknowable. Therefore the investment managers are prepared to tell their clients that they will lose money over the long term but the rate is known, and the risks are minimal.
The same situation applies to American investors. While rates in the US are nominally positive, real rates are negative, so again, investment managers have to acknowledge that while there is a small return, purchasing power is diluted upon maturity.
This does not apply to Africa where returns on low-risk, government instruments are typically in the order of 8% to 12%. For lesser ranked paper, i.e. higher risk, the returns are higher, and in selected private projects, the returns may be off the charts. The problem is, Africa is perceived as the dark continent so First World investors are mostly reluctant to put too large a chunk of their capital into any particular project or instrument.
All this is changing and changing fast but at this stage, to my mind, most of the new narrative is still only rhetoric. That is why we see such huge facilities made available to continental institutions like the African Development Bank and the former BRICS Bank, now the New Development Bank.
Even with the latter, a very significant slice of the committed capital comes from investors in the developed world despite the generous contribution from the BRICS partners. And it is this “hope” for yield by capital from the developed world that drives the growth narrative, despite it being rather thin on the specifics and the underlying dynamics.
For Africans, the new growth narrative is somewhat perplexing, if not sometimes outright hilarious.
African institutions and projects feature at every international investment summit, and the figures thrown around are usually mind-boggling, that is until one reminds oneself about the physical size of the continent and the primitive stage at which so many countries are still stuck.
In short, a relatively small amount of money makes a huge impression on African statistics for the very simple, practical reason that we are only now embarking on a continent-wide drive to attract foreign investment.
Often when I am asked to evaluate infrastructure projects, I ask myself where will all the supposed consumers come from to drive the envisaged trade which will pay for the grandiose development schemes. For a consumer to contribute to economic development, that consumer must have an income. Perhaps, that is the single most important problem facing us.
It is relatively easy to find the money to invest in infrastructure, the punted underlying economic fundamental which is painfully lacking, but it is more difficult to establish the connection between putting down huge infrastructure projects and finding the markets that will carry it.
It is in this sense that China is the developed world way ahead. China comes from a background very similar to where Africa is today, only it was not centuries ago but a mere thirty years or so.
I believe that Chinese interests will eventually garner the bigger slice of African investments, not because they started early, they did not, but because they know that to develop the continent, one has to develop the people as well.