foreign investor perspective of africa september 2006 leon myburgh sub-saharan africa specialist
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1
Foreign Investor Perspective of Africa
September 2006
Leon Myburgh
Sub-Saharan Africa Specialist
Leon.myburgh@citigroup.com
+27 11 944 1830
2
Overview
FDIPortfolio flowsCountry ratings / rankingsConclusion
3
Foreign Direct Investment
4
Determinants of FDI
StructuralEconomicPolitical and social
Key source: FONDAD, ‘Private Capital Flows to Africa”
5
Global FDI flow
0
50
100
150
200
250
1998 1999 2000 2001 2002 2003 2004 2005
$bn
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%All developing countries
SSA ex SA
% of total
Source: World Bank
6
FDI: Structural determinants
Market size GDP per capita, domestic savings, other Focus on lost-cost goods, exports, niche
markets Regional markets
Infrastructure (particularly financial) Labour productivity
7
FDI: Economic determinants
Actual and perceived performance IMF programs nice but not critical Reform credibility and consistent and
transparent execution Foreign exchange availability Fiscal policy, particularly transparent tax
policy Privatisation Regulatory environment (less not more!)
8
FDI: Political and social determinants
Political stability very importantSocial stability very importantCorruption
High-level and inconsistent dissuades Low level and consistent does not detract
9
Portfolio Flows
10
Determinants of portfolio flows
GlobalPerceptionsCountry specific
Key source: FONDAD, ‘Private Capital Flows to Africa”
11
Gross portfolio inflows in 2004 ($mn)
-
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00T
unis
ia
Mor
occo
Nig
eria
Côt
e d'
Ivoi
re
Mad
agas
car
Gab
on
Ken
ya
Zim
babw
e
Alg
eria
Cam
eroo
n
Bot
swan
a
Sen
egal
CA
R
Gha
na
Uga
nda
Sud
an
Leso
tho
Tan
zani
a
Con
go,
Rep
. of
Zam
bia
Sw
azila
nd
Rw
anda
Source: IMF
12
Portfolio flows: Global determinants
Increasing asset baseDecline in global rates until 2004Risk diversification Low correlation between SSA exchangesProtection against global sell-off
13
Macro economic environment
0
1
2
3
4
5
6
7
2000
2001
2002
2003
2004
2005
2006
2007
SSA
Major advanced economies
Other advanced economies
0
2
4
6
8
10
12
14
16
18
20
2000
2001
2002
2003
2004
2005
2006
2007
SSA
Major advanced economies
Other advanced economies
GDP growth (% change) Inflation (% change)
Source: IMF
14
External debt as % of GDP
20
25
30
35
40
45
50
55
60
65
70
2000
2001
2002
2003
2004
2005
2006
2007
Source: IMF
15
External trade
-4
-3
-2
-1
0
1
2
3
4
5
6
2000
2001
2002
2003
2004
2005
2006
2007
SSA
Major advanced economies
Other advanced economies
-10
-8
-6
-4
-2
0
2
4
6
8
10
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
SSA
Major advanced economies
Other advanced economies
Current account(as % of GDP) Terms of trade (% change)
Source: IMF
16
Commodity prices
CRB Index
150
200
250
300
350
400
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Source: Bloomberg
17
Portfolio flows: Perceptions
African-focused funds tend to be realistic
Global fund managers Swing from euphoric to pessimistic More diversification leads to less
information by market Short-term performance benchmarks reduce
appetite for long-term illiquid assets
18
Market characteristics
Low liquidityFew market playersDominance of governmentBureaucratic regulatory environment Lack of issuers
19
Portfolio flows: Country specific
Many of FDI determinants also applyGeneral macro economic indicatorsDonor support / technical assistance
Helps identify opportunities
Ability to exit tradeDevelopment of stock exchanges
20
Information flow
Often cited as most important factorProbably matters more for FDI and bank
flowsPotential profitability more important for
portfolio flows
21
Ratings / rankings
22
Country ratings/rankings
Formal ratings (Fitch, Moody’s, S&P, etc) Important for sovereign bond issues Coverage is limited but increasing Tend to lag developments
Informal ratings (IFC, EIU, etc)
23
S&P average rating
0
2
4
6
8
10
12
14
16
Africa East Europe Latam Asia
BB/BB-
BBB+/BBB
BB-/B+
BBB+/BBB
AAAAA+AAAA-A+AA-BBB+BBBBBB-BB+BBBB-B+BB-CCC+CCCCCC-
15 18 17 13
24
S&P Country ratings
0
2
4
6
8
10
12
14
16
18
Cameroon
Burkin
a Fas
oM
ali
Mad
agasc
ar
Moz
ambiq
ue
Benin
Ghana
Kenya
Seneg
al
Niger
ia
Egypt
Mor
occo
Tunisi
a
South
Afri
ca
Botsw
ana
AA-
A
BBB+
BBB-
BB
B+
B-
CCC
25
IFC: Ease of doing business 2007
0
20
40
60
80
100
120
140
Africa East Europe Latam Asia
26
Index of Economic Freedom
2.4
2.5
2.6
2.7
2.8
2.9
3
3.1
Africa East Europe Latam Asia
27
EIU: Country risk rating Feb 2007
0
10
20
30
40
50
60
Africa East Europe Latam Asia
28
EIU: Risk components
6.30 4.47 5.67 5.568.85 7.29 8.58 7.223.00 2.41 3.00 2.332.45 2.12 2.25 2.222.60 2.06 2.58 1.334.10 2.59 4.25 3.002.30 1.59 1.92 2.002.55 2.35 2.83 2.563.00 2.82 3.25 2.003.10 3.18 3.50 1.221.95 1.24 3.42 0.782.45 2.29 2.92 2.78
10.10 9.65 10.50 7.1153.05 42.53 53.58 39.11
East Europe Latam Asia
OVERALL
Debt structureFinancial structureLiquidity
Africa
Regulatory policyGlobal climateGrowth/savingsCurrent account
Monetary policyFiscal policyFX policyTrade policy
Political stabilityPolitical efficancy
29
Conclusion
30
Recent researchFDI Portfolio flows
What attracts High investment rateMarket sizePublic finances
Economic growthPer capita GDPRatings
What hampers High interest ratesLack of political freedomCapital account restrictions
Lack of political freedom
What does not matter Economic growthExport growth
Interest ratesInflation rateExternal debtInternational reserves
Source: Cassou and Molina, “What kind of capital flows does the IMF catalyse?”
31
Disclaimer
For information regarding the Firm’s Market Commentary disclaimer please refer to the following website address at:
https://www.citigroupgcib.com/data/documents/MarketCommentaryDisclaimer.pdf
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