Leading from the front for foreign investors in the frontier space

At times we think that there are too many indices and league tables designed to simplify country comparisons in Africa and elsewhere for the investment community. Multilateral agencies, accountancy firms, NGOs and think tanks, both independent and with a partisan agenda, all conduct the surveys and compile the data. There are measures of the ease of doing business, tax compliance, governance, competitiveness, human rights and much more. Some new measures will surely join those already available.

We feel that the launch of an index has come to be viewed as a way to raise the profile of the organization, and that they (the organisations) could be more inventive in spreading the good word about their activities. We also note that the surveys draw heavily on the thinking of Western multinationals, accountants, lawyers and other professionals.

This approach tends to overlook two large bodies of potential investors: “indigenous” business in the countries themselves and non-Western companies. The ownership of the hydrocarbons industry in Nigeria is a case in point: what was once the preserve of multinationals (in tandem with the state oil company)  now includes both Nigerian operators and emerging market players (both state and privately owned). Now that the base of investors has broadened in Nigeria and elsewhere, the surveys underpinning the indices ideally should as well.

 As with all products, the quality and usefulness of the indices vary. A US-based advisory firm has recently launched its Frontier Market Sentiment Index. The firm, commissioned by The Wall Street Journal, asked about 200 multinationals which markets were of current investment interest. It (the Frontier Strategy Group) reported that Nigeria was top of the table with a score of 29.57%, and that Kenya was second in Africa and fifth globally with 23.17%.

This latest piece of positive news about Nigeria is a statement of intent. The track record is less distinguished. Foreign direct and portfolio investment amounted to US$4.6bn and US$20.6bn respectively in 2013. These flows represented 0.9% and 4.0% of GDP per the new national accounts. They are gross figures, and so exclude the flows on the asset side of the balance of payments. On a net, adjusted basis, they become 0.4% and 2.7% of GDP. The record is not one to frighten an Asian tiger.

That said, there are several good reasons to expect a striking improvement. The first is size. It is no coincidence that Nigeria and Kenya topped the African countries in the index we have cited. Following the rebasing of the national accounts in April by the National Bureau of Statistics (NBS), Nigeria has become comfortably the largest economy in Africa with estimated GDP of US$510bn in 2013. 

Kenya is the largest economy in its sub-region and the gateway to the fast growing economies in the East African Community. Its counterpart of the NBS is working on a rebasing of the Kenyan national accounts. A few nuggets were made available by the Kenyan government for its recent Eurobond roadshow. These revealed that the economy in 2009 was 21% larger than previously indicated (with a base year of 2001). Our estimates point to a US$55bn economy last year.

 The size factor has guided Lafarge’s proposed restructuring of its operations in Nigeria and South Africa. The proposal that the operations would be merged into an entity listed on the NSE in Lagos (Lafarge Africa plc) would have been unthinkable five years ago. Of course, the parent company is looking to challenge its principal rival in sub-Saharan Africa (Dangote Cement) on the latter’s home territory. Nonetheless, this statement by a world leader in building materials says a lot about risk perceptions of Nigeria. In the short term, Lafarge Africa would become the sixth largest company on the NSE and extend a good start to 2014 in terms of new listings. 

The size factor rests upon positive demographics and rising household demand, which is defined in some investor circles as the emergence of the middle class. This story is told in countless fora so we merely note that non-oil GDP growth has averaged 8.2% in the past 12 quarters.

A second reason to expect a strong pick-up in inward investment is the size, skills and investible wealth of the Nigerian diaspora. We do not have to look far for examples of “returnees” embedded in federal government departments, public agencies and the private sector.  The diaspora also generates remittances. Net current transfers, which are overwhelmingly remittances, reached US$22.2bn in 2013, equivalent to 4.4% of GDP. 

The impact is rather less than in other familiar remittance economies such Morocco and Tunisia. We think, however, that there will be a momentum lift for remittances, as with inward investment. We also suspect that some transactions billed as remittances should be defined as investments. Equity purchases on the NSE are an example.

We have quoted this index on frontier market sentiment because it asks respondents about potential rather than track perceptions of progress (or not) for a single measure such as competitiveness. The exercise is another positive for Nigeria, and we are confident about the development of the potential it identifies.

Gregory Kronsten