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And the winner is . . . Nigeria tops investment index
Wed, 18 Mar 2009 04:35


Katharine Pulvermacher


Nigeria recently finished on top of African Rainbow Consulting's Star of Africa index. The index provides a guide to investors wishing to compare the relative attractiveness of African countries as investment destinations. Jaco Maritz talked to Katharine Pulvermacher, CEO of African Rainbow.

Can you please elaborate on how Nigeria managed to rank on top of the index?

Nigeria offers the largest opportunities in the three sectors that are the focus of the Star of Africa Index, namely electricity, water and ITC. On the one hand, this is due to the sheer size of Nigeria's population (around 150 million) – more than the populations of the United Kingdom and Germany combined and roughly half the population of the United States of America. On the other hand, one should bear in mind that whilst the opportunity exists, it has so far remained unexploited for specific reasons – and potential investors would do well to acquaint themselves with those and assess whether the barriers to development can be relegated to the past. This is why it is important to review the opportunity set in conjunction with each country's record in governance and social capital.

Which sectors in Nigeria’s economy to you think hold the most potential for successful investment?

Our focus is on the three sectors that we believe underpin further economic growth and development: electricity and renewable energy, water, and ITC. The telecommunications sector has been enjoying strong growth in Nigeria, partly thanks to liberalisation. Beyond that, whilst each country would obviously wish to play to its strengths – i.e. exploit its comparative advantage – a diversified economy is key to avoiding exposure to downturns in specific markets, especially in the natural resources sector.

What kind of investors is your report targeting?

This report is intended to assist private sector investors who are interested in direct involvement in the three infrastructural sectors that we focus on. The report is intended to highlight the extent to which each country offers an enabling environment for economic growth, as well as the potential size of each market. Rather than seeing the lack of infrastructure as a constraint, we find it more useful to look at it as an opportunity. By implication, investors likely to be interested in our research are also more likely to be interested in long-term investment than in short-term portfolio flows. We hope that social and environmental returns would complement the expected financial outcomes of such long-term investment.

What effect is the drop in oil prices having on Nigeria’s economy?

Crude oil accounts for around 90% of exports and about a quarter of GDP between 2003 and 2007. It also accounts for a significant portion of the federal government's revenue. So the impact of a drop in oil prices means a decline in foreign exchange earnings – and lower purchasing power internationally. It also means that, all things remaining equal, the government has less money to spend on services, development and employment. Nigeria is unable to meet domestic demand for refined petroleum products, which represented 14% of imports in 2006. However, the benefit of lower international petrol prices is only likely to accrue to consumers with a time lag – as purchases and purchase prices are typically agreed in advance. Consumers in other countries are having to be equally patient! On the bright side, non-oil sectors have shown strong growth, at around 9% and, whilst the crude oil continues to dominate the economy and will do so for the foreseeable future, it looks as though the diversification trend, particularly in services, is paying off by helping to mitigate the impact of the drop in oil prices.

There has been much talk that Africa is better positioned than the rest of the world to withstand the global economic crisis. Do you agree with this?

I agree with this for two main reasons. Firstly, most African economies do not march in lock-step with those of the developed world. In part, this is because it is much harder to access investment in Africa. Those African countries that have developed capital markets, with stock exchanges, for example, that are accessible to foreign investors, are more vulnerable to short-term volatility in portfolio flows, as publicly listed shares get bought and sold. However, direct investment is far less liquid and investors' time horizons are usually much longer. So, one would expect at least part of the effect of the global economic crisis to be deferred. And who knows what will happen in the interim? The second reason is a far more positive one: the IMF forecasts that Africa will be the third fastest growing region in 2009, and the second fastest in 2010 (after developing Asia and the Middle East). With so many economies around the world sinking into recession, Africa looks more and more attractive to investors seeking exposure to its expected economic growth.

What do you think are the most common mistakes foreign investors make when investing in Africa?

Probably the same mistakes they make elsewhere! Mistakes I'd classify as a lack of due diligence. Hopefully African Rainbow will help to fill this information gap, letting them make sound investment decisions that will result in their expectations being satisfied.

Although the political climate in Africa has stabilised dramatically over the past years, it feels as if things can flare up at any minute, especially when looking at recent events in Madagascar, the DRC and Zimbabwe. Are you optimistic about Africa’s political climate? Where do you see the continent in 15 years time?

If you'd asked me the same question 15 years ago, I don't know that my answer would have been as positive as it is today. But given the enormous progress and democratisation that has swept Africa over the last fifteen years – said with feeling as someone who grew up in apartheid South Africa – I am definitely bullish in this regard. Broad-based economic growth and political stability go hand in hand.

  • African Rainbow Consulting is based in London, United Kingdom and provides economic and investment research on Africa. Visit African Rainbow's website to download the Star of Africa index