Impressions from the World Economic Forum on Africa —- RMB Morgan Stanley

The 26th World Economic Forum on Africa was held in Kigali, Rwanda last week: We attended the gathering and provide feedback on the conference and the investable themes coming out of it. 

Connecting Africa’s Resources through Digital Transformation: The theme of this year’s forum builds on that of the World Economic Forum held in Davos this January, by honing in on how Africa sees itself participating in the so-called Fourth Industrial Revolution. Rwanda, a continental leader in the ICT sphere, has made great strides in leveraging technology to drive FDI, economic development and societal transformation. The quality of panellists, conference organisation, hospitality of its people and general infrastructural development left a lasting impression on us. 

Although the Africa Rising theme has lost some shine with the continent experiencing slower growth in an environment of low commodity prices, we would point out that the slowdown is mostly attributed to the two large economies of the continent – Nigeria and South Africa – and for reasons that are related: the terms of trade shock, comparatively slow progress on structural reform and policy uncertainty. Continental growth excluding those economies, while off its highs, is still far more upbeat. 

We gathered three investable themes from the WEF: Power provision, the integration of big data and agriculture, and the promise of East Africa. 

• The basic ingredient of growth if Africa is to participate in the Fourth Industrial Revolution is reliable power supply, and this featured in almost every session and sideline discussion we enjoyed. Electricity penetration is dreadfully low, but this low base means that even small growth in power supply has a disproportionately large impact on productivity and growth. We would encourage investors to focus on companies and themes which leverage the growing industrial capacity of the continent.  
• Climate change and a hard commodity price slump have demanded economic diversification. We attended some fascinating sessions where big data and next-generation internet services are driving commercialisation in the mostly small-scale farming sector. Agriculture, as we know, is becoming increasingly high-tech. 
• Finally, we noted general bullishness towards the Horn of Africa region. Tangible examples of structural reform have resulted in a dynamic and fast-growing services economy which is raising productivity levels across the region. The investment strategy at this stage is mainly of an FDI/private equity nature. Progress towards deepening capital markets is under way but liquidity remains a challenge.  

There is a clear drive among policy-makers towards economic diversification: Commodity extraction is simply not a recipe for sustainable growth. President Kenyatta was particularly impressive in his comments around the opportunity the commodity price shock has presented for African countries to modernise the agricultural and financial sectors of their economies. Incidentally, this is precisely what our economists have argued for the broader commodity producers (see Commodity Exporters Biggest Beneficiaries of Lower Commodity Prices, January 14, 2015). We agree fully with the view presented that African entrepreneurs need to de-emphasise government contracts as a way of creating wealth, and focus instead on raising productivity to become globally competitive. 

However, the issue of market access remains a challenge: Sub-Saharan Africa capital markets are still in a stage of development, and a lack of domestic savings pools renders the continent overly dependent on foreign capital. Global financial market volatility and ever-increasing bank regulation are serious headwinds for Africa. One central bank governor was particularly critical of international banks that have chosen risk avoidance rather than risk management. South African Finance Minister Pravin Gordhan emphasised that policy-makers need to create conditions which make local bond markets attractive to foreign investors and that politicians cannot be oblivious to the consequences of bad choices. The importance of developing domestic savings pools was echoed by a large asset manager, who felt that African reserve managers should consider more active investment in one another’s local debt as a means of liquidity pooling – rather than ploughing into USTs at record levels.  

Policy-makers were encouraged to pursue frameworks which create an enabling environment for the private sector to invest savings in their own capital markets. Ultimately what investors are looking for is policy certainty and unrestricted access to capital should investment strategies change.  

Administered exchange rate regimes were generally seen as counter-productive to growth, but may be necessary where capital markets are illiquid. Clear dissatisfaction was expressed at Nigeria and its chosen strategy of prioritising a closed capital account over a flexible exchange rate. This featured in many of our sideline discussions too. We were rather disappointed by the lack of official representation from this continental heavyweight and hence walked away from the WEF still frustrated with the policy agenda in Nigeria.  

On the whole, we are encouraged by the progress the region is making in economic development, but would stress that it is likely to be those economies who are actively pursuing their reform agendas that will be rewarded by investors. Economic diversification, capital deepening and policy accountability are what we’re looking for. 

                 “Vision without execution is hallucination” – Thomas Edison 

Investment Themes – Further Details 

Electricity is a critical building block if Africa is to participate in the Fourth Industrial Revolution: Around 620 million people in Africa have no access to electricity, accounting for about a third of those globally that live in the dark. Excluding South Africa, electricity consumption across Africa is less than that of Spain. The African Development Bank has a US$12.5 billion investment pipeline for power projects over the next five years. In addition, most of the new projects taken on by the Millennium Challenge Corporation are in the area of power provision, where assistance with developing tariff structures, IT systems and advanced financial management is being provided not only to parastatals but to independent private power producers too. Unfortunately, Africa cannot escape its dependence on coal for base load power, but encouraging progress seems to be coming through from solar, hydro, geothermal and wind sources too. For example, Kenya boasts a 400MW wind farm. 

However, the major challenge these projects face is finance. SMMEs simply do not have the capacity to raise capital for scalable power solutions, and sovereigns either do not have the fiscal room or are not prioritising power investment over other forms of expenditure. Very little was offered on how the finance challenge could be addressed. However, it was argued that if governments could ensure transparency on the investment process, costs and returns, deliver a reliable judicial system and strive for low levels of bureaucracy and corruption, financing such investment would become far less challenging. 

The role that technology and big data can play in the modernisation of agricultural systems was an area which received a lot of interest: For context, a large majority of farms in Africa are small-scale producers under two hectares. Food imports across the continent amount to US$35 billion, and by 2050 it is thought that climate change would have wiped out 20% of production capability. We found it staggering that East Africa accounts for just 3% of the global population, but receives as much as 40% of world food aid. The importation of basic staples is a tragedy.  

The issues are structural and need urgent attention: lack of electricity supply, low levels of irrigation (less than 5% compared to required levels of above 30%), and land which is still mainly in the hands of the state. Of course, climate change poses a serious threat too: by 2050, damages from coastal flooding are seen amounting to US$1 trillion.   

However, there is exciting progress being made. The use of big data is driving the commercialisation of farming operations. Weather forecasting, soil quality and yield analysis, supply chain management, farmer networks and inventory management, not to mention project appraisals and risk pricing, could significantly boost the growth path of African agriculture. For example, in Tanzania, improvements of up to 40% in maize yields (in drought years) are accredited to big data analysis. Solar electricity supply has been an important catalyst, but funding is desperately needed.  
The stand-out region on the continent is Eastern Africa: From technological investment in Tanzanian agriculture to the removal of cellular roaming fees across the region, East Africa appears to be outpacing the other regional blocs as far as structural reforms are concerned. Top-down policy planning is converging with bottom-up coordination and trade facilitation initiatives to develop the SMME sector. In Rwanda, the ‘free internet for all’ initiative has benefited a host of ancillary industries and boosted education delivery, healthcare provision and human capital development. President Kagame explained how the transformative power of technology is at the core of Rwanda’s reform agenda. In essence, East Africa is targeting a broader inter-connectivity strategy, across roads, telecoms and electricity.