Why real change is finally coming to Africa

MoneyWeek cover illustration issue 891 – Cyril RamaphosaCorruption, inequality and a reliance on natural resources have prevented sub-Saharan Africa from achieving its potential – but the region is gradually moving in the right direction. Matthew Partridge reports.

Last week Jacob Zuma, the former president of South Africa, appeared in court in Durban to face charges of corruption, fraud and money laundering related to a R30bn (£1.75bn) arms deal in the late 1990s. Zuma, who has always insisted that he was not involved in any wrongdoing, remained defiant when he addressed a crowd of loyal supporters outside the courtroom, labelling the prosecution a “political conspiracy”.

But regardless of the outcome of the case – which will resume in June and promises to be a protracted affair – the fact that it’s finally going ahead is an encouraging hint of the changes underway both in South Africa and in many other sub-Saharan African economies.

Zuma has been dogged by these allegations for many years. Charges were first laid against him in 2005, forcing him to resign as deputy president. These were thrown out in 2009, shortly before he was elected president by the National Assembly. Over the next few years more controversies piled up, including the revelations that he had spent R246m of public funds on improving his private estate (he was forced to repay the money) and allegations of corruption involving his relationship with the wealthy Gupta family (both Zuma and the Guptas deny wrongdoing).

In 2016, as Zuma’s grip on power was beginning to slip amid a series of increasingly incompetent decisions, the courts ruled that the charges should be reinstated – a decision confirmed by the Supreme Court last year. In December Cyril Ramaphosa, the deputy president, won a battle with Zuma’s ex-wife, Nkosazana Dlamini-Zuma, to succeed Zuma as the leader of the African National Congress, the dominant political party – and declared that stamping out corruption must be a priority.

Two months later, after much fighting, Zuma was forced to step down as president, to be replaced by Ramaphosa. Simultaneously, anti-corruption police raided the home of the Guptas, who had already left the country. Then last month, prosecutors announced that Zuma would have to face trial.

Battling corruption

On one level these events reinforce long-standing concerns about investing in Africa: that an individual with so many serious allegations against him could serve as leader of Africa’s most advanced economy for so long is of course deeply worrying. But it’s also possible to see it in a more positive light. Zuma’s downfall is evidence that “something has changed”, say Cornelis Vlooswijk of asset manager Robeco. It’s telling that his departure was a direct result of the South African public “protesting loudly against corruption” – protests that were so loud that they “forced the ANC to select a new leader… who is committed to ending corruption”.

And while South Africa – with its relatively strong political institutions – may be the most convincing example of change, there are signs of improving governance and a push back against corrupt leaders elsewhere.

The last year has also seen Robert Mugabe forced out by public pressure in Zimbabwe after he tried to hand the presidency over to his wife. And in Angola, José Eduardo dos Santos stood down after almost four decades in favour of João Lourenço, a man expected to be his puppet – only for Lourenço to begin firing dos Santos’ appointees – including the former president’s children – and embark on economic reforms and anti-corruption measures.

One can’t read too much into a few individual events, of course: all three resignations “were primarily down to events in their individual countries, rather part of a pan-continent movement”, says John Ashbourne of Capital Economics. However, the fact that those individuals are no longer in office shows that “when it comes to corruption, the direction of travel in most African countries is extremely positive”.

And while it’s important not to overgeneralise, it shows that “civic society across the continent is getting much stronger”, agrees Jonathan Leape, associate professor of economics at the London School of Economics. In turn, this should have “promising implications” for sub-Saharan Africa’s economic development in the medium term. Better political institutions don’t necessarily guarantee strong economic growth, but “they can drastically reduce the chances of an economic collapse”.

From resources to technology

Still, corruption is not Africa’s only problem – the continent’s extensive natural resources have also been more of a curse than a blessing. Even South Africa, the most diverse economy, is too dependent on them: ores and metals accounted for 24% of export earnings in 2016. Not only do natural resources tend to encourage corruption, but they also make economies vulnerable to swings in commodity prices – especially where public finances are concerned.

For example, in Nigeria oil activities only constitute around 11% of GDP, but provide around 80% of government revenue and 90% of foreign-currency receipts, says Vlooswijk. If the oil price falls, the government will have to cut spending, while, in a further blow for investors, the exchange rate is likely to weaken.

Governments are increasingly trying to address this issue: Nigeria is encouraging companies to do more refining and processing in the country, and increase incentives for industrial and agricultural investment, which should “make the trade balance a little less vulnerable”. But a gradual shift to less cyclical and higher-value sectors can be seen all across the continent.

One example is the emerging technology sector – especially evident in Kenya – based around mobile payment and money-transfer services. Paradoxically, the rapid take-up of these services has been helped by some of Africa’s shortcomings, such as poor infrastructure, “as the efficiency gain for users is much bigger than in more developed markets”.

African businesses are also getting much better at incorporating technologies and practices from elsewhere in the world. For example, firms and farmers are at the front of the pack when it comes to applying cutting-edge technology to boost agricultural yields, say Leape. Drone technology is already being used in African agriculture to target fertiliser more precisely, thus saving money and increasing output.

In places such as Rwanda, drones are also being used to deliver medicines quickly to remote parts of the country. Leape also thinks that driverless trucks, which should appear within a decade, will do a lot to help improve Africa’s transport networks – vital if goods and services are to get from one part of the continent to the other.

“There’s been a steady growth in African tech start-ups with a lot of high-potential projects, led by talented entrepreneurs tackling fundamental challenges,” says Cyril Collon, who along with Tidjane Dème runs an Africa-focused tech fund at venture capital firm Partech Ventures. The opportunities created by these start-ups are so great that venture-capital firms outside the continent are already starting to invest significant sums of money.

In 2012 African start-ups only raised $36m in equity funding. Five years later this had increased to $560m, a fourteen-fold increase, according to Partech. The continent is also attracting interest from firms such as Google and Facebook, who have opened offices in Africa and are supporting the emergence of tech hubs. As they “build good business lines, the whole ecosystem will also benefit”, adds Dème.

The demographic dividend

If sub-Saharan Africa’s economies start to move up the value chain, the region will be better placed to capitalise on its demographics. Africa is set to see a population explosion, due to decreasing infant-mortality rates and increasing life expectancies. For example, Nigeria’s population is forecast to rise from 190 million in 2017 to 230 million in 2030, according to the United Nations. Overall, Africa’s population is expected to double from 1.26 billion last year to 2.53 billion in 2050, making it the most populous continent in the world.

“These strong demographics will provide tremendous economic tailwinds, especially compared with the headwinds facing other parts of the world,” says Ross Teverson of asset manager Jupiter. A rising population – and most importantly a growing workforce – should boost economic growth, at least in terms of the total figure. However, population growth “presents challenges as well as opportunities”, says Leape.

In particular, “governments will need to get much better at ensuring that people who finish school have skills and knowledge that will make them useful and productive employees”. If they fail to do this, population growth could even end up acting as a drag on GDP per capita (GDP divided by the number of people in the country), even as headline GDP grows, warns Ashbourne.

Still, there are encouraging signs that the number of middle-class Africans is increasing, as wealth from economic growth and resource exports “are trickling through to a much wider group of people than two decades ago”, says Vlooswijk. This has to be seen in context: “middle class has a different meaning in Africa than it does in Europe” – an individual’s spending power is far lower. However, he sees “an increasing number of people living in a solid house, having a bank account and a smartphone and having money to buy” from shopping centres.

Opportunities across the continent

This spreading wealth means that there should be “huge opportunities” for investors in countries such as Nigeria and Kenya, says Teverson. While Nigeria “still needs to make big investments in infrastructure” if it is to continue growing, one positive sign is that the banking system, long noted for its instability, “managed to emerge unscathed from the recession two years ago, a big improvement from previous cycles”. This is important, as “the health of the banking sector is a good indication of the health of the overall economy”.

Meanwhile, Nairobi, Kenya’s capital, “is becoming a big financial hub” and its attractiveness to business has been further enhanced by a rail link between it and Mombassa, a fast-growing port on the coast of Kenya. This has “allowed goods to move between the two areas quickly and cheaply, transforming both cities”. Evidence of rapid economic growth comes from the fact that “there has been a big improvement in the housing stock”, with “good-quality housing being built in the suburbs”.

In the longer run, Kenya “is one of the most dynamic economies in Africa with a vast number of entrepreneurs”, agrees Vlooswijk. He has some reservations about its short-term prospects, but thinks that some sectors of the market are wildly undervalued: “some Kenyan banks trade at seven-times historical earnings”.

Further from the beaten track, he thinks the economic outlook for Ghana is “very good”, with a combination of low valuations and political changes that should push the country in a much more business-friendly direction.

Of course, South Africa, the second-largest sub-Saharan African economy after Nigeria, remains the most popular one among overseas investors, since it has the largest, most liquid and most sophisticated stockmarket – and it perhaps has the most immediate potential for gains.

“While the South African economy is at the bottom of the economic cycle, there are strong signs that things are improving,” says Oliver Bell of asset manager T. Rowe Price. Sentiment about its direction under Zuma was poor, but the recent political changes “have transformed business and consumer confidence”.

In recent years firms have held large amounts of cash on their balance sheets, amounting to an estimated 40% of GDP, and some have moved it abroad. With a more sensible, business-friendly leader now in charge, companies should feel secure enough to repatriate their overseas assets and dramatically increase their levels of investment. Releasing this pent-up demand should significantly boost productivity.

In short, if Ramaphosa delivers on his promises, we are likely to see both a cyclical upswing that could cause the country’s fortunes to “turn on a sixpence”, as Bell puts it, followed by structural changes whose effects should be felt for years to come.

Six plays on Africa’s growth

The easiest way to invest in Africa is via the iShares MSCI South Africa ETF (LSE: SRSA). South Africa’s largest companies are typically well established and relatively well run, making a tracker fund more attractive than it would be in many emerging markets. Just be aware that media company Naspers accounts for around 30% of the portfolio – and in turn, much of Naspers’ value depends on its large stake in Chinese internet firm Tencent.

The Africa Opportunity Fund (LSE: AOF) is one of the few ways to invest in markets other than South Africa. This is a small fund, with a market cap of £60m. It has a low profile, but a decent record, given that the last few years have been tough for African markets. The fund trades on a discount to net asset value of around 20%.

It’s not too hard for UK investors to buy South African stocks directly – brokers such as Saxo, AJ Bell Youinvest and Charles Stanley will trade them. Vodacom (JSE: VOD) should benefit from the rapid expansion of mobile phones. This subsidiary of Vodafone is one of the leading mobile-phone firms in Africa, with 55 million customers, and provides business services to 40 African countries, including Nigeria, Kenya and Ghana. It trades on a price/earnings ratio of 16 and has a dividend yield of nearly 5.5%.

In MoneyWeek’s tips for 2017, we suggested Tiger Brands (JSE: TBS), the country’s largest packaged-foods group. Since then an outbreak of listeriosis in which more than 180 people have died has been traced to some of the firm’s processed meat products. The details are not yet entirely clear, but it’s evident the firm has not managed the crisis well.

It may well have to pay substantial compensation. Hopefully, the outcome will be tougher food safety standards all round. But despite this tragic event, the firm should still be a sound long-term investment.

For a technology play, consider Mix Telematics (JSE: MIX, NYSE: MIXT), which provides fleet tracking and monitoring services for the trucking industry. This enables companies to manage delivery schedules and routes efficiently, but also cut costs by reducing fuel consumption. The stock trades at a pricey 31 times forecast earnings, but this has to be seen in the context of strong subscription revenue growth, up 21% year-on-year.

PZ Cussons share price chart

Finally, PZ Cussons (LSE: PZC), which owns brands such as Carex hand wash, makes more sales in Nigeria than in the UK (it also operates in other Africa countries and in Asia, principally Indonesia). The weak Nigerian economy has contributed to poor recent results, including two profit warnings this year and a big share-price fall. But if you’re optimistic about Nigeria’s long-term prospects, this might be a good time to buy.