Does Africa or the Gulf burn brightest?

The Gulf Cooperation Council

Nick Wilson, Chairman, Qatar Investment Fund

Oil. We all know the Gulf Cooperation Council (GCC) states are blessed with vast reserves of the stuff. And given the oil price fall last year, you would be forgiven for being nervous about investing in economies that rely on the commodity. However, the GCC is diversifying and the economies in the region are strengthening against such volatility, making it a reliable investment proposition.

The IMF recently said the decline in oil prices will affect GCC banking systems but it remains confident in the resilience of the region thanks to generally high liquidity, high capital buffers and low non-performing loans. This is already a sophisticated market for investors and the GCC states (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) are increasingly keen to attract foreign investment and are putting measures in place to do just that.

Restrictions on foreign ownership are being lifted across the Gulf. In Saudi Arabia the opening up of the Tadawul Stock Exchange this year should boost equity investment. Elsewhere, the MSCI index upgraded Qatar and the UAE to emerging market status from ‘frontier’ last year, as liberalisation of the markets in the region gathers pace. 

The GCC is also experiencing massive infrastructure development and is home to a thriving financial services industry. With world class international airports and luxury hotels, the region is not just somewhere money is being invested, but is being readily spent too. It is therefore unsurprising that growth in the region is skyrocketing due to this and state diversification efforts.

Take Qatar. GDP growth hovers around 6-7 per cent and nowadays more of this is coming from the non-hydrocarbon sector, thanks to the efforts of the government to develop other aspects of its economy. The latest report from the Qatar National Bank shows GDP growth in the hydrocarbon sector has actually contracted slightly, reflecting this shift in focus. 

There is a clear strategy of building the infrastructure with the view that investment will follow – they are building entirely new cities and a metro system in Doha more than half the size of London’s, serving  a population only a tenth of the size.

Qatar is predicted to have the second largest GDP growth in 2015, just behind India and ahead of China. This is remarkable for a country which is a fraction of the size of these industrial powerhouses. Furthermore, the World Economic Forum’s annual Global Competitiveness Report ranks Qatar as the country with the most efficient government. 

The efficiency of a government has a significant bearing on competiveness and economic growth, which means Qatar is helping
businesses looking to expand by limiting additional costs and minimising expensive bureaucracy. This certainly looks like a much more sophisticated investment prospect than any you could find in the nascent sub-Saharan African region, where government inefficiency and chronic under-investment in infrastructure has taken its toll.

Take Saudi Arabia, the GCC’s largest economy, which along with other states in the region including UAE and Kuwait has built up large reserves of cash – up to $750bn (€675bn) during the boom period. These economies are stable and a welcome haven for investors looking to emerging markets. You would be hard-pressed to find this kind of stability in other emerging markets.

The GCC may look more expensive compared to sub-Saharan Africa but it is worth remembering that historically, it has been a more reliable prospect and of course, there is always the oil and gas. This makes it a safer bet, combining robust growth prospects with more mature economies. These economies are increasingly diverse and make investment here  an attractive option for those looking for exposure to a high growth emerging market, without the risks associated with less sophisticated markets, which still have much catching up to do.  

Jean-Charles Charki, IOTA

Africa

Jean-Charles Charki, Chairman, IOTA Group  

Find yourself on a business trip to Kinshasa, and you might have trouble getting a hotel room. The capital of the Democratic Republic of Congo (DRC), with more than 10m inhabitants, has barely 600 high-end hotel rooms to its name. In a country where the IMF has predicted 6 per cent GDP growth through to 2016, shortfalls in essential business services remind us of the continued abundance of African investment opportunities.

The bigger picture also suggests sub-Saharan Africa should be among the foremost targets for investment today. As Brics growth slows, sub-Saharan Africa is forecast to see GDP increase by 5 per cent in 2016, having already grown fourfold since 2000. Africans are enjoying higher incomes and life expectancy, and their population is growing faster than anywhere in the world. The number of ‘middle income’ sub-Saharan countries will rise from 27 to 40 by 2025, if the World Bank’s predicted growth rates are sustained. You don’t have to be especially optimistic to grasp the implications for domestic demands for goods and services; Carrefour and Coca-Cola already have.

Critics might point to the slump in global commodity prices spoiling the promise of resource-rich economies, but this can be misleading. Certainly oil, gas and mining deals – valued at $33bn (€30bn) in 2014 – have dominated around a third of total foreign direct investment in Africa for the last decade or more. Yet these sectors are not the driving forces behind the continent’s upward trajectory, on average accounting for only 20 per cent of GDP growth during 2000-11. Services, in fact, have been the continent’s key driver, accounting for 54 per cent of GDP growth during the period. 

Telecommunications has undergone a transformation over the last decade. In 2002, barely 10 per cent of Kenyans and Ghanaians owned a mobile phone; now the figure is 82 per cent, not far behind the 89 per cent penetration in the US, according to the PEW research centre. Kenya has seen the emergence of Mpesa as one of the most successful systems of mobile payments worldwide. In Cameroon, shops display exchange rates for the various phone operators, allowing customers to trade prepaid telephone minutes as if they were currency. How African markets utilise these new technologies provides an attractive theme for investors.

Africa sorely needs infrastructure investment. At the extreme end of the spectrum lies the DRC’s 420,000mw Grand Inga Dam, on the drawing board since the 1960s, but still mooted to become the world’s largest hydroelectric facility generating 50 per cent of Africa’s consumption. Although the $50bn construction cost leaves most private investors gasping, an unprecedented collaboration between US and Chinese development banks, combined with a phased construction plan, makes independent capital contributions and the completion of funding more likely. While Inga 2 was commissioned in 1982, the first concession of Inga 3 should be granted by the end of 2017 after five years of World Bank involvement. But energy projects in general promise investors dependable returns and will play an important role in boosting the competiveness of African industry.   

Africa, depending on the country, still remains a risky political and legal environment. But it is not alone in this regard. Private equity interest is rising but the market is hardly overcrowded – $4bn was raised for African investment in 2014, compared to $3.3bn the previous year. For those with the right counsel, the opportunities are not to be ignored.