Posts Tagged ‘Africa’

A man in Zanzibar uses his cellphone. Africa has one of the fastest growing cellphone markets in the world. (UZI Magazine)

One benefit of the global recession is that it may encourage GCC multinationals to become major investors south of the Sahara. (TRENDS magazine, April 2009)

When it comes to the African continent, Harry Broadman isn’t like most economists. Where many of his colleagues still see a basket case, he believes there lies growing potential that’s worth pursuing even in unsteady times.

“I see lots of investment opportunities in Africa that are particularly attractive in this environment,” says the former adviser for the Africa region at the World Bank. “Because the financial sectors of many of these countries have been delinked from the global economy, they’ve been relatively spared from the strongest effects of the global recession.”

The author of “Africa’s Silk Road,” a 2006 book about the continent’s growing business ties with Asia, today Broadman is the managing director of The Albright Group and the chief economist of Albright Capital Management, a global strategy firm and an investment advisory that focus on emerging markets.

Despite the persisting risks of doing business on African soil, Broadman says that economic links to the Gulf region, and to the developing giants farther east, are part of a growing trend. While the bulk of international business has historically occurred via the rich northern countries, today more big investment deals are happening directly between developing, southern regions.

“What we’re witnessing is sort of the maturation of South-South investment and trade,” Broadman says. “And Africa epitomizes this.”

A growing list of GCC multinationals seems to agree with Broadman’s optimistic view of their neighbor. In February, Dubai-based DP World opened what it calls East Africa’s largest container terminal, on a purpose-built island a kilometer off Djibouti’s coast. Then in March, Kuwait-based Zain Telecom expanded into its seventeenth African country by purchasing a 31 percent stake in Morocco’s Wana telecom for $324 million. That same month, Riyadh also received its first shipment of rice from Ethiopian farmland purchased by Saudi investors as part of the country’s emerging food security program.

The Gulf’s African ventures have traditionally clustered along the continent’s Arabic-speaking northern fringe, in countries like Egypt and Morocco. Since the millennium, however, GCC firms have been announcing more and more projects in sub-Saharan countries, from Guinea to Rwanda.

The pace of GCC investment is picking up speed, topping $15 billion from 2007 to mid-2008, according to one estimate from the Gulf Research Center (GRC), a Dubai-based think tank. Rather than buckling from the global downturn, analysts say it could actually strengthen investment between the two regions.

Case in point

DP World has arguably led the growing wave of GCC investments below the Sahara. Since signing a joint venture agreement to operate Djibouti’s main port in 2000, the Dubai-based transport giant has expanded into Senegal, Egypt and Mozambique.

“We have said for some time that Africa is a key focus for the future,” says Anil Singh, senior vice president and managing director of DP World’s Africa operations. “We see exciting potential in the region,” he adds. “The states we have invested in understand that our commitment is long term.”

It’s a smart strategy if you consider the continent’s recent economic track record. Business has actually been brisk from Morocco to Mozambique for much of the past decade. Since 2003, Africa’s economy has grown by 5 to 6 percent a year continent-wide – its largest upswing in a generation. Decades-long conflicts came to a close in some states, ushering in new prosperity. Surging prices for  commodities like energy and food helped national incomes to swell. And economic reforms drew in a little more foreign money, a growing portion of it from developing regions such as the Arabian peninsula.

Encouragingly, by the time the financial crisis struck last fall, the world’s poorest continent had been outperforming many wealthier regions for quite some time. As for 2009, the IMF and World Bank expect that Africa’s GDP will keep growing by 3 to 3.5 percent, while most OECD economies are projected to shrink.

The Gulf’s petroleum-rich states are keenly aware of such projections. “The interest is huge,” says Marie Bos, moderator of the GRC’s Gulf-Africa research program, which was established last year. “The Gulf has lost so much money and investment elsewhere, they feel Africa to be a sort of a new solution that can help both regions come out of this rough patch.”

GCC markets lost more than half their value in 2008. And the Gulf states’ overseas investments (60 percent of which are dollar-denominated) have depreciated by a whopping 30 percent since the crisis began, according to a February estimate from the Riyadh-based GCC secretariat.

Venturing into sub-Saharan Africa – as Abu Dhabi-based Mubadala and the Dubai Aluminum Company are doing through Guinea’s bauxite mines, for example – will presumably help diversify government holdings, shoring them up in case such calamities should recur.

While African states were largely spared from the initial shock of the financial crisis, many are now feeling the effects of the global recession. Indeed, the African Development Bank has set up a $1.5 billion emergency fund to deal with the recession’s growing footprint. In the Democratic Republic of Congo, for example, falling commodity prices have reportedly forced more than 60 Chinese-owned mines to close, while a further 100 mines are said to have been shuttered to the south in Zambia.

Retreating investment is clearly bad news for stricken African states. But it may also pave the way for companies that still have access to funds, to step in and expand there. From agriculture to tourism, sub-Saharan Africa is home to a host of virtually untapped markets, which cash-rich GCC firms are well positioned to try and corner. Gulf telecoms, for example, are facing growing competition and saturated markets at home. To the south, however, the industry is growing faster than anywhere in the world, making it an ideal place for them to focus on.

“Africa has the land and the primary resources, while the Gulf states have the capacity to invest in infrastructure, which will benefit the entire continent,” Bos says. “So I think they will continue to seek each other out for a while.”

The downside

The world’s second-largest continent receives only a dismal 1 percent of global foreign direct investment, and unfortunately there are legitimate reasons that many companies choose to steer clear. Corruption, political instability and lacking infrastructure can make it challenging to operate there, especially on a large scale. Deep pockets or not, GCC firms are still vulnerable to local problems.

Nigeria is one example, where Dubai World hopes to become a major player in the country’s expansive oil patch. Interfaith violence there has been a lasting problem, and trade in stolen oil continues to feed corruption.

On the East coast, Djibouti may be the best example of new sub-Saharan investments from the Gulf, with several Dubai-based companies working to transform the country into a major transport hub. But pirates in neighboring Somalia continue to hamper trade through the Red Sea, prompting some shipping firms to divert their vessels around the tip of South Africa. Last year, Djibouti also had to fend off a potential invasion from its irksome northern neighbor, Eritrea, by sending hundreds of soldiers to stand guard along their shared border.

The risks haven’t disappeared. But according to international consultancy Oxford Analytica, the Gulf’s multinationals have proven they’re willing to take chances and operate in environments that many Western firms avoid. Originating from the Middle East, they’re accustomed to working with unwieldy bureaucracies. And the state-owned variety, such as Dubai World, are better equipped to recover from potential missteps because of the large capital reserves underpinning them.

Those capital reserves aren’t as extensive as they were six months ago thanks to lower oil prices and poorly performing sovereign wealth funds. But the recession has also hobbled multinationals in Europe and North America, from which most of Africa’s foreign investment still emanates.

“Outside of China and the Gulf, and a couple of really well capitalized funds, there just isn’t the liquidity to do what are perceived as risky ventures in Africa,” says Philippe de Pontet, Africa analyst at political consulting firm Eurasia Group. “Now a lot of the Gulf-based companies are in a stronger position relative to their competitors in Africa.”

Time will tell whether GCC firms seize that advantage. But in the bigger picture, these are still fairly early days for them south of the Sahara. “Their relationship remains at the experimental level,” Bos says. “Although we see more and more important deals taking place, relatively speaking it’s still not a lot. Obstacles remain – the unstable business environment, the lack of infrastructure and logistics – which forces the Gulf to be cautious.”

www.trendsmagazine.net/out_wordpress/wordpress/2009/04/30/southern-comfort