From the CEO – September 2018
While most attention on emerging markets of late concerns the underperformance of the asset class and the travails of such countries as Argentina and Turkey, one region that hasn’t received much attention is Sub-Saharan Africa (SSA).
This paucity of discussion is unfortunate since, apart from some pockets of instability, the region has some favorable risk characteristics. Equally significant, SSA should see the US and American firms play a much more important role in fostering commercial development than they have over the past half-decade.
One of the reasons SSA has been under the radar of most investors is that there has been very little public or open engagement by President Trump, apart from select meetings with individual African leaders, which is slightly better than we witnessed during the first months of the presidency, where the president’s opinion of some parts of Africa was less than flattering.
Needless to say, Trump’s approach is quite different from what we saw from the White House under previous presidencies – especially Clinton, whose foreign policy of the late 1990s had Africa and African development figure prominently, and the 2nd Bush in the early 2000s, although his efforts were more connected to larger development goals that were quite popular in those days and soon dashed by the aftermath of 9-11.
The kind of engagement under Trump tends to exist at the higher and almost symbolic political level, conditioned by the relative newness of the Trump presidency, his personality, his campaign objectives (directed towards internal/nationalist matters), and a general trend towards more nationalist thinking by Americans – at least in contrast to the last 20 years.
In this context, there appears not to be much policy coherency on SSA coming from the Administration, and some of the influence that the US used to wield in the region has been lost, as many other countries have stepped in to fill the apparent void, most notably China, but also some of the Gulf States, India, and Turkey.
On this level, PRS sees a continuation of Trump’s penchant for bilateral deals with countries seen as beneficial to US interests, the most recent one being Kenya with some money being put into infrastructure.
The mid-term elections in the US – assuming the Democrats capture the House – will do little to strengthen Trump’s hand. However, often when there is a divided legislature, many political leaders do look more outwardly, since it’s easier to score some political achievements and appear more ‘statesman-like.’ Other world leaders tend to do this when a domestic issue seems politically intractable. This may (I repeat may) help Africa.
On the other hand, there is considerable movement going on to enhance America’s commercial and investment influence and involvement on the continent, to compete ostensibly with or seen alongside China’s Belt and Road Initiative.
The Better Utilization of Investments Leading to Development (BUILD) Act is instructive, as it creates the International Development Finance Corporation (IDFC), giving it new more efficient investment powers. (This new entity will subsume OPIC and USAID).
As such, more financing will be given to US firms beyond what is offered by European counterparts. The IDFC should give the US a stronger voice and financial edge against China and Russia. There will be greater efficiencies as the works of several agencies will be combined (USAID and the US Trade and Development).
Most importantly, the new body signals to US firms that strong institutional and financial backing is forthcoming.
All of this comes at an opportune time for emerging markets. While 2018 has not been a stellar year for the asset class, higher borrowing rates and a stronger US dollar has ushered capital to the US from emerging markets, where the returns on fixed notes is better. And a thoughtful study by Clark et al on emerging market capital flows and US monetary policy (https://www.federalreserve.gov/econresdata/notes/ifdp-notes/2016/emerging-market-capital-flows-and-us-monetary-policy-20161018.html) argues that the fluctuation in capital flows to emerging-market economies is also driven by commodity prices and the so-called “growth differential” between developed and emerging markets. When the gap narrows, emerging markets lose their appeal, and capital flows out. These forces account for two-thirds of the changes in capital flows.
Certainly, there are some bright spots within SSA, especially those markets that did not or could not borrow heavily during the ‘salad days’ of low-interest rates and abundant liquidity are not getting hammered as badly as some of the others.
Moreover, the region itself is showing better overall political stability levels, driven by a sustained period of economic growth, fewer coups, and an awareness by some African leaders that trade and investment is something to be pursued.
These bright spots include better relations between Ethiopia and Eritrea, as borders open, trade and investment are encouraged, and fewer state funds are being spent on the military.
Cote d’Ivoire is also an encouraging market as it is gearing up for what we expect to be a peaceful transition in 2020. The military issues there seem to have been dampened and Ouattara is out meeting with foreign leaders, smoothing the waters and building support for the government’s candidates. And momentum is gathering for Kenya’s anti-corruption efforts and foreign exchange reserves are holding on.
At a recent conference for asset managers operating in Africa (https://www.africanalternative.com/aaii-nyc/), we spoke about a range of risks affecting the region and emerging markets generally but provided commentary on the outlook on a number of select countries.
On Zimbabwe, we mentioned that the verdict was still out given the election violence and the aftermath. President Mnangagwa can only rehabilitate Zimbabwe in the eyes of the international community if he has the scope to build goodwill. The exclusion of coup leader Constantino Chiwenga from the new Cabinet was a bold step in that direction, and arguably creates an opportunity to establish some form of limited power-sharing arrangement with the MDC, which would certainly help to build international credibility.
That said, we mentioned that there are no guarantees that the president will be able to assert civilian authority over the armed forces, and a partnership with the MDC does not appear to be on the cards.
Turning to Nigeria, the forthcoming election will dominate the country’s risk profile, complicating policymaking. The primaries will be close but promise a shake-up of the internal power structures of the opposition People’s Democratic Party, leaving it prone to volatility down the line. That might work in favor of Buhari.
However, Nigeria’s problems are not new: how the election pans out, which includes whether voter turnout is higher than normal (and be seen as a challenge to the authorities to ensure that it is fair), will be important. Higher commodity prices will help, too, but if the global economic slowdown most are expecting hits about the same time, things might not be too promising.
Finally, in South Africa, dangers surrounding the land reform movement appear to be overblown at this point. The government will likely make clearer under what conditions expropriations can occur and a proposed constitutional amendment will add some certainty. Moreover, we do not see a Zimbabwe situation in South Africa; and any change will not occur until after the election next year. PRS sees the ANC prevailing with a majority in the National Assembly.
ICRG’s September risk ratings were again significant in number, as the risk profiles of some 50+ countries were adjusted (of 140), affecting over 60 individual political risk metrics.
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