ARNOLD SEGAWA: The International Monetary Fund recently announced its growth projections for sub-Saharan Africa as the institution expects growth to recover to 3.1% in 2018, this coming from 2.7% in 2017. The question is how achievable is this figure amid global headwinds and policy uncertainty across much of sub-Saharan Africa. Dr Martyn Davies, the managing director of emerging markets and Africa at Deloitte, joins me now for more on this. Many thanks for making time to speak to us Dr Davies. Let’s start with this idea of restructuring much of the economic ecosystem across Africa – tell me, what does this mean for markets and businesses looking to invest across the region?
MARTYN DAVIES: Yes, undoubtedly 2019 will be an interesting year for the continent, with arguably the two bookends of sub-Saharan Africa – Nigeria and South Africa – both having general elections. We’re hoping that with the two biggest economies in the region having some new political impetus, hopefully, and definitely some certainty will provide a renewed foundation for growth. We’re looking at the region – we have to look at Nigeria, South Africa and Kenya first and foremost, and as primary contributors to growth, not just their own domestic economies of course, but each acts as almost a regional engine room for neighbouring countries.
So I think post mid-year 2019 we hopefully will have some increased tailwinds domestically to start to strive towards more rapid growth, structural reform but, most importantly, implementation going forward. You refer also to the tension in the global macro, which is somewhat disabling and undoubtedly countries are even more competitive than ever for foreign direct investment and this will certainly hit Africa negatively come 2019. There are many factors to consider here: there are commodity prices, there’s the oil price of course for West Africa, which is certainly ticking up nicely for petro states in recent months. So to conclude, Africa has been through a very tough four years, some of it self-inflicted, some of it just commodity price reduction, and I think on balance there are more tailwinds than headwinds come 2019.
ARNOLD SEGAWA: I think the thing that really strikes me is the fact that if we do look at growth projections right now as an aggregate figure for sub-Saharan Africa, including the two powerhouses that you’ve mentioned, Nigeria and South Africa, the growth projections are 3.1% – but if we are to put out Nigeria and South Africa, that growth projection will go up to 4.6%. This is according to the latest IMF Article IV [South Africa: 2018 Article IV Consultation Reports], and this leaves me wondering – is it time for investors to look at the continent away from this aggregate figure and just look at the likes of Côte d’Ivoire, Ethiopia and Kenya, like you have mentioned, some of those numbers are astronomical, Rwanda in there too.
MARTYN DAVIES: I think you are entirely correct; we need to have a lot more granular approach to what is a very wide geography and a very heterogeneous region. So what does a figure really mean when you’re including oil exporting states and oil importing states when the interests are entirely different and divergent? For example, the growth trajectory of many of these West African countries, Nigeria, Angola, among others, is entirely dependent on the oil price and predicting that is a bit of a mug’s game. So I think at best a regional, sub-regional level – certainly not a pan-African one, I think these numbers are (a) superficial and (b) perhaps a pointless exercise in trying to predict what is a very diverse region and trying to come to some sort of coherent figure.
So I think increasingly the countries you mentioned – Côte d’Ivoire, Rwanda, certainly Ethiopia – these countries should not be painted with the same brush as the region. These are countries that differentiate themselves through good reform, through good economic management and [by] becoming far more functional states. They should be rewarded by capital, rather than being part of the same regional brush of other countries perhaps that are doing far less to attract capital and interest.
Let’s not have stock-exchange nationalism
ARNOLD SEGAWA: Rewarded by capital, that’s a very interesting line. Let’s move onto private capital. Now this, in your argument, should be the key driver come at least near to the mid term, but we are seeing private capital in many of the emerging frontier countries just almost non-existent. Take for instance Tanzania – Vodacom, the IPO that happened – same as MTN; Ghana’s IPO. These were massively undersubscribed by local investors. Give me a sense of what this entails going forward?
MARTYN DAVIES: I think let’s just differentiate from the capital here. I think we have heard of resource nationalism, some countries even have – South Africa a case in point – airline nationalism. Let’s not have stock exchange nationalism.
The continent has far too many countries for every country to think they deserve or should have a stock exchange. The size of their economy, the size of the private sectors, are just too small. So I think a realisation and a consolidation of regional exchanges is stating the obvious. Even Nigeria’s stock exchange is not viable; it’s tiny in comparison to what you’ve seen in South Africa in terms of flows.
So I would rather look at private capital, which could and should be more of a real driver of private sector activity. I’m talking venture capital here, rather than private equity, rather than just looking at failed IPOs or disappointing IPOs on stock exchanges that don’t really have a right to exist in terms of a market right to exist. So I think venture capital is increasingly [about] how do we get more energetic venture capital, from global funds, from local funds, into the new economies, new emerging sectors of Africa like start-up companies or companies looking to scale domestically or across borders through venture capital. I’m more of a proponent of that than I certainly would be of politically forced local IPOs upon stock exchanges that, arguably, are non-viable to begin with.
ARNOLD SEGAWA: Going forward there is arguably the deal of the century on the continent – [which] happens to be the African Continental Free Trade area, [and] of course, the man at the African Union right now, his excellency Paul Kagame of Rwanda, [is] pushing for integration – and we’re looking at over US$ 1 trillion if this actually comes together as a free trade area.
But my biggest issue here – for me, and you might actually correct me – is ratification and making this work, as opposed to having it become another Malabo Declaration [on accelerated agricultural growth and transformation for shared prosperity and improved livelihoods, as adopted by AU members in June 2014] or a Yamoussoukro Decision [a treaty that allowed for open skies among most African countries that became binding in 2002], where some of these huge, massive bills with a lot of potential are just signed and put on top of a cupboard somewhere and just collect dust. Going forward, how massive is this and what is the potential for uplifting aggregate growth across the region?
MARTYN DAVIES: No, well, look at it firstly from Kagame’s perspective, and for Kagame this is a landlocked country, very progressive economically and really needs to integrate to build economies of scale and plug its own domestic economy into the region. So undoubtedly it’s in Rwanda’s national interest to pursue an Africa Continental Free Trade agreement. I think it makes for good marketing, it’s a good broad brush marketing initiative. I just think practically, and I have experienced this firsthand, practically at border posts, this agreement means very little; we should rather be pursuing three things, sub-regional integration through such agreements, I think that’s the first point.
Second is better cross-border infrastructure and thirdly, most importantly, is supporting that infrastructure, hard infrastructure; are border posts functioning, are [they] highly functional, efficient, time-saving and non-corrupt? Now that isn’t going to be changed by an agreement signed in Addis Ababa, that’s up to sovereign national governments to fix and they need the will and the wherewithal to make it happen.
So rather than putting the very well-intended African Continental Free Trade Agreement in place, it comes down to the law with domestic government, African governments like Rwanda, doing the right thing and getting their own border posts up to speed, functioning and allowing the flows of goods and labour across borders and truly then integrating Africa. I think it’s more about practical implementation than it is about politicians with dysfunctional states at times signing policy papers in Addis Ababa.
Lack of fiscal space across sub-Saharan Africa
ARNOLD SEGAWA: Without a doubt. Finally, Dr Davies, let’s talk about fiscal space. The IMF has also warned very massively on the lack of fiscal space across much of sub-Saharan Africa. Of course this does correlate with the global headwinds, relatively slower growth across the region, not forgetting the commodities crunch over the past two or three years. One thing that is very striking is that many countries have actually turned towards Eurobonds and debts that are foreign currency denominated, which is scary to say the least. Give me a sense of 2019 to 2020. Do you see debt-servicing costs actually biting – we’ve already seen some countries have, what, over 20% of their tax receipts going towards just servicing foreign debt – where do you stand on this one?
MARTYN DAVIES: As you correctly say, [this can be] problematic. Countries like Zambia, amongst others, Kenya, don’t have the fiscal headwind and room to manoeuvre. We have in many cases, South Africa a case in point, of low to no-growth economies with significantly high levels of debt we did 10 years ago. So it just talks about the inability. Normally a country would take on debt to create economic-enabling infrastructure and/or stimulus spend. So clearly the spend has not been stimulating growth and has not created by and large economic-enabling infrastructure.
So this talks to money that has been siphoned off at times or, more politely, has been very efficiently spent, ie the capital has not been qualitative, has not been productively allocated and spent. Why? Because ultimately private capital is a lot more qualitative and sustainable than public capital and that I think is the story here for 2019.
The concern, you mentioned the word macro again, is how able are certain African states to weather a crisis globally potentially or at the very least a rapid slowdown, which would negatively impact their own economies perhaps through reduced revenues from commodity prices, a drying up or reduction of foreign direct investment and so on. Again, what I think [is that] 2019 will be an inflection point going forward for many countries, political economies that are going to be forced because of debt to have to structurally reform once again. This is problematic and again, knocks these companies developing trajectories back again by a number of years. We thought we had gotten over this, in countries like Ghana’s case and many others perhaps that should have learnt better, but the mistakes have not been, at times, observed by neighbouring African countries.
ARNOLD SEGAWA: Dr Davies, always good to have you on the show. That was Dr Martyn Davies, he’s the managing director of emerging markets and Africa at Deloitte, just giving us a sense of what 2019 holds and the mid-term, given the fact that we are seeing some global headwinds. China is in there with that trade fight with the United States of America, this all coming on the back of a relative recovery in oil prices.