A Score-Card Approach to Investing in Sub-Saharan Africa Chief Analyst Jakob Christensen Head of International Macro and Emerging Markets Research +45 45 12 8530 jakc@danskebank.dk Assistant Analyst Nicolai Pertou Ringkøbing FX Research nrin@danskebank.dk 31 August 2017 Investment Investment Research Research Important disclosures and certifications are contained from page 51 of this report
A score-card approach to investing in Sub-Saharan Africa An increasing number of investors are starting to look to the African continent for investment opportunities for good reason. Apart from abundant natural resources, the continent is enjoying some of the highest economic growth rates in the world, boosting the purchasing power of 1bn citizens. But African countries also have a myriad of cultural, economic and political differences, making it a challenging place to do business. To guide companies, we have developed a quantitative scorecard covering all the countries of Sub-Saharan Africa (SSA), ranking them according to their market potential and riskiness. The scorecard relies on a series of macroeconomic, structural, political and socio-economic indicators. We intend to update the score-card twice a year From an operational point of view, Danske Bank has decades-long experience in helping customers manage risk and payment flows from trade and investment in the African continent. 2
Key findings Despite recent headwinds, Sub-Saharan Africa is still expected to be one of the fastest growing regions in the World in 2016-18. There are troubles among the big-three : Angola, Nigeria, and South Africa, although the two former two are making progress in tackling the oil price shock while growth in oil-importing SSA countries (excluding South Africa) is holding up surprisingly well. Better governance and increasing stability, regional integration (notably in Eastern and Southern Africa), population growth, and demand from China support growth, but large fiscal and current account deficits are a key concern. Our risk-reward score-card model favours Botswana, Gabon, Ghana, Namibia, and Mauritius. These markets have a total population of 35m and an average expected growth rate of 4.8% over the next four years. Other attractive but slightly more risky market are Cameroon, Ethiopia, Ivory Coast, Kenya, Senegal, Seychelles and Uganda, with a total population of 297m, a middle class comprising about 14% of the population and an average expected growth rate of 5.4% over the next four years. 3
Outline (1) The SSA market in a global context (2) A score-card analysis for Africa (3) Types of Danske Bank client assistance in SSA (4) Appendix: update on key African economies 4
The SSA market in a global context 5
The African market offers significant potential SSA has one of the world s biggest markets when it comes to population size furthermore, living standards have improved considerably over the past decade Source: GDP and population, IMF WEO 2016; Area, World Bank 2008 6
but still catching up to do compared to the rest of the world The advanced economies share of world GDP has declined sharply over past two decades. Asian countries (led by China) have rapidly been gaining shares, especially since the early 2000s. African countries have gained a marginally higher share (increasing from 2.4% in 2000 to 3.15% in 2015), but are still the smallest region economically. Note that other EM regions, such as Eastern Europe and South America, have lost shares. Source: IMF WEO, October 2015 7
Oil-importing SSA countries are expected to be among the fastest growing in the world in 2017-18 Despite headwinds from falling commodity prices, Sub-Saharan Africa is expected to be among of the fastest growing regions in the world in 2016-18. Troubles among the big-three (Angola, Nigeria, and South Africa) are dragging down the continent s average. Growth in oil-importing SSA countries (excluding South Africa) is holding up surprisingly well, it being the second fastest growing region in the world. Source: IMF WEO April 2017 8
Eastern and selected Western African countries are expected to see the fastest growth 10 8 6 4 2 0-2 -4-6 % y/y IMF GDP forecast* (2016-2018 avg) -8 Ethiopia Ivory Coast Senegal Tanzania Ghana Rwanda Burkina Faso Kenya Sierra Leone Benin Uganda Niger Togo Mali Guinea-Bissau Guinea CAR Madagascar Mozambique Cameroon Seychelles Malawi Mauritius Botswana Zambia Comoros Gambia DR Congo Namibia Lesotho Congo Gabon Angola South Africa Nigeria Zimbabwe Swaziland Burundi Chad Equatorial Guinea *Based on IMF WEO update from April 2017 Source: IMF WEO April 2017 9
What is driving growth in oil-importing SSA countries? Better governance and increasing political and economic stability Regional integration (notably in Eastern and Southern Africa) Continuing demand from China Population growth Risk factors Large fiscal and current account deficits, notably in commodity producing countries hit by recent terms of trade shock Possible slowdown in China in years ahead Religiously motivated terror in some countries 10
Observations (%) Sustained political and economic reforms The spread of democracy in Africa is improving sovereign governance. Over 75% of African countries are now functioning democracies, up from c.12% in the late 1980s. Nigeria is the most recent example of peaceful democratic transition and Kenya also completed elections. Governments are improving infrastructure and creating an enabling business environment. Sub-Saharan Africa: regimes by type, 1946-2011 Source: Monty G. Marshall, Benjamin R. Cole. 2009. Global Report 2009, Conflict, Governance, and State Fragility. Center for Systemic Peace, Severn, Maryland Countries that made at least one positive reform in 2008/9 (%) Growth of democracy: % of African countries Eastern Europe & Central Asia Middle East & North Africa East Asia & Pacifc Sub-Saharan Africa South Asia OECD high income Latin America & Caribbean 50 50 50 63 63 61 93 100 80 60 40 20 0 1970-74 1975-79 1980-84 1985-89 1990-95 2008* No party One party Multi-party * IAM assessment Multi-party Competitive 72% Flawed 21% 0 10 20 30 40 50 60 70 80 90 100 Source: Doing Business database, May 2009 Source: African Elections Database, Freedom House, The World Fact book, Polity IV Country Reports 2006, Investec Asset Management analysis, May 2008 11
What caused the change in African fortunes? Peace! 1970s 1980s 1990s 2011 Armed Conflict Peace Source: African Analyst, Investec Asset Management, September 2011 12
Deepening economic integration bodes well for sustained African growth, notably for land-locked countries Cross-border financial intermediation increasing sharply Trade with China has increased but so has intra-africa trade (USDbn) 450 400 350 300 EU27 China Brazil, India, Korea, Russia and Turkey United States Intra-Africa 250 200 150 100 50 0 2000 2002 2004 2006 2008 2010 2012 Source: UN comtrade 13
Business environment is increasingly important after the collapse of commodity prices Eastern and Southern African countries are most conducive to doing business. Central and many Western African countries fare worse Source: World Bank s regional Doing Business Survey for Sub-Saharan Africa 2016 14
Demography suggests labour-force growth ahead Source: UN 15
Risk factors to watch 16
Sierra Leone Equatorial Guinea Seychelles Burundi Malawi Niger Rwanda Guinea Namibia Gambia Ethiopia Togo Comoros Gabon CAR Chad Mali Lesotho Burkina Faso Benin Senegal Ghana Tanzania Uganda Kenya Zambia Swaziland Congo (DR) Angola Mauritius Cameroon South Africa Madagascar Ivory Coast Zimbabwe Nigeria Guinea-Bissau Botswana Several countries vulnerable to twin deficits Fiscal and current account imbalances rather large in some significant SSA countries (Kenya, Zambia, Namibia, Angola and Cameroon), possibly requiring macro-economic adjustments. 20 % of GDP 15 10 5 0-5 -10-15 -20-25 Source: Macrobond financials Current Account 2016 Fiscal deficit 2016 17
The Chinese connection is strong for several SSA countries China holding up well until now, but in our view, the financial risks in the Chinese economy are growing. Although it is not our base case, an outright financial crisis could happen over the next few years which would sent shock waves through the global economy, including the SSA countries. 60.00 50.00 40.00 30.00 % of country total FDI, 2013 Trade, 2014 20.00 10.00 0.00 Kazakhstan Russia Ukraine Georgia Belarus Phillipines Malaysia Thailand Vietnam Indonesia India Cambodia Bangladesh China Bulgaria Turkey Hungary Romania Poland Serbia Chile Peru Brazil Venezuela Colombia Argentina Ecuador Mexico Note: FDI is total FDI inflows from China to a particular SSA country in % of the total FDI inflows into the that country, while trade is the exports to China of the individual SSA country relative to the total export of that country Source: WTO, UNCTAD, Danske Bank estimates Iran Iraq Saudi Arabia Pakistan Egypt Angola Mozambique Zimbabwe. Ethiopia Cameroon South Africa Zambia Nigeria Kenya Cote D'ivoire Botswana 18
Religiously motivated terror is a serious risk in several SSA countries A high terror risk weighs on foreign investor sentiment and the tourist sector. Nigeria and Kenya among the most risky countries. Southern African countries are largely free of terror risks. Source: Institute for Economics and Peace and Danske Bank 19
A score-card analysis for Africa 20
Our risk-reward analysis: basic principles Approach. We link the attractiveness of markets in terms of potential demand growth with possible risk factors facing investors. Demand growth is not only a function of expected GDP growth but also the size of the economies, the size of the middle class and broader welfare indicators. Risks facing investors are a mixture of economic, political, security and business risks. The challenge is to find appropriate data and define the benchmark for defining high or low risk and demand growth. 21
Ranking attractiveness of SSA markets: a risk-reward approach Size Economic Growth Reward (Demand) Potential Business Risks Political Quality security Source: Danske Bank Market attractiveness 22
Measuring risks and market potential across countries Potential demand Potential risks Expected economic growth 2016-18 Growth Size Size of GDP (US$) Macro risks (inflation, debt, deficits) Growth volatility Commodity dependence Economic Political Democratic institutions Civil wars Quality Potential Business Security UN human development index Size of middle class (%) Corruption Doing business quality Terrorism index Source: Danske Bank 23
Benchmarks for each demand and risk criterion Category Subcategory Variable Measure Benchmark Reward Good Medium Bad Growth Expected GDP growth 2016-2020 Percent >5% 2.5-5% <2.5% Size Nominal GDP 2015 billion USD >50bn$ 10-50bn$ <10bn$ Quality UN Human development index 0-1. 0 worst, 1 best >0.6 0.4-0.6 <0.4 Potential Size of middle class Percent of total population >15% 7.5-15% <7.5% Risk Economic Inflation Percent <5% 5-10% >10% Public debt Percent of GDP <20% 20-50% >50% Budget deficit Percent of GDP >0% -3-0% <-3% Current account deficit Percent of GDP >0% -3-0% <-3% Volatility Std dev of GDP growth 2000-2016 <2 2-5 >5 Commodity dependence Commodity exports in percent of GDP <0% 0-15% >15% Political Freedom house score Free, Partly free, or Not free Free Partly free Not free Civil war register Number of incidents <100 100-1,000 >1,000 Business Transparency international corruption 0-100. 0 worst, 100 best >50 25-50 <25 Ease of doing business indicator Ranking. 189 worst, 1 best <100 100-150 >150 Security Global terrorism index 0-10. 10 worst, 0 best <2 2-6 >6 Source: Danske Bank 24
Overview of individual markets potential and risk factors Country Total market potential Growth (2016-20) Size (GDP US$bn) Quality (UN HDI) Potential (Midle class %) Total risk Economic (Indicator) Political (Indicator) Business (Indicator) Angola 0 1.2 95.8 0.53 13-2 -5-2 -2 0.2 Benin 0 5.7 8.6 0.48 11 2 0 2-1 0.0 Botswana 2 4.0 15.0 0.70 29 4 3 2 2 0.0 Burkina Faso -1 6.2 11.9 0.40 3 1 2 1 0 0.3 Burundi -3 0.0 3.1 0.41 3-2 -2-2 -2 3.3 Cameroon 1 4.5 29.3 0.51 16-1 0 0-1 6.5 Central African Republic -2 5.0 1.8 0.35 8-2 0-1 -2 6.7 Chad -2 0.6 10.1 0.39 8-1 -1-1 -2 2.1 Comoros -1 3.5 0.6 0.50 9 0 0 1-1 4.0 Congo -2 2.2 8.0 0.59 9-1 -3-1 -2 0.8 Congo (Democratic Republic) -1 3.3 41.6 0.43 5-3 -2-2 -2 6.5 Equatorial Guinea -1-5.5 11.6 0.58 10 1-2 0-1 0.0 Ethiopia 2 7.6 72.5 0.44 8-1 -2-2 -1 3.5 Gabon 2 2.9 14.3 0.69 38 1-2 0-1 0.0 Gambia 0 3.2 1.0 0.45 16 1-2 0 0 0.0 Ghana 2 6.0 43.3 0.58 20 1-3 2 0 1.4 Guinea -2 5.0 6.5 0.41 4 1 0 1-1 1.2 Guinea-Bissau 0 5.0 1.2 0.42 8 0 2 1-2 0.2 Ivory Coast 2 7.2 35.5 0.47 19 0 2 0 0 3.1 Kenya 3 5.9 68.9 0.55 17-1 -2 0 1 6.7 Lesotho -1 2.9 2.3 0.50 11 1 0 1 0 0.0 Madagascar -2 4.7 9.7 0.51 3 0 0 1-1 2.4 Malawi -2 4.6 5.5 0.47 5 1-2 1 0 0.0 Mali 0 4.9 14.0 0.44 8 0 0 0 0 5.9 Mauritius 1 4.0 12.0 0.78 10 3 1 2 2 0.0 Mozambique 0 5.2 11.3 0.41 3-1 -3 0 0 4.4 Namibia 1 3.3 10.6 0.64 9 2-2 2 1 0.0 Niger -2 5.7 7.5 0.35 5 0-1 1 0 3.5 Nigeria 0 1.0 406.0 0.53 10-1 -1-1 -1 9.2 Rwanda -1 6.7 8.4 0.49 3 1-1 -1 2 3.3 Senegal 1 6.9 14.8 0.49 12 0 1 1 0 3.5 Seychelles 0 3.7 1.4 0.78 10 1 0 1 2 4.0 Sierra Leone -1 6.1 4.0 0.43 7 0-5 -1 0 0.0 South Africa 2 1.4 294.1 0.67 20 0-1 0 1 4.2 Swaziland -2 0.3 3.8 0.54 9 1 0 0-1 0.0 Tanzania 0 6.7 47.2 0.52 3 0 1 1 0 4.0 Togo 0 5.3 4.4 0.48 9 1-1 0-1 0.0 Uganda 1 5.6 26.2 0.49 8-1 0-2 0 4.9 Zambia -1 3.8 21.3 0.58 6 0-4 1 1 0.0 Zimbabwe -1 0.4 14.2 0.51 10 0-2 1-2 1.7 Source: Danske Bank Potential demand Potential risks Security 25
Overview In between=low risk, low reward Risk 4 Attractive=low risk, high reward Botswana 3 Mauritius Swaziland Malawi Guinea Burundi Congo Chad Rwanda Lesotho Equatorial Guinea Burkina Faso Comoros Zimbabwe Sierra Leone Zambia Central African Republic 2 Togo 1-1 -2 Benin Nigeria Angola Gambia Mozambique Uganda Namibia Seychelles Cameroon Gabon Ethiopia Ghana Guinea-Bissau Mali Ivory Coast South Africa Madagascar Niger Tanzania Senegal 0 Reward -3-2 -1 0 1 2 3 Kenya Congo (Democratic Republic) -3 Unattractive=high risk, low reward Source: Danske Bank In between=high risk, high reward 26
Conclusion: most attractive markets relative to risks Most attractive and least risky markets: Botswana, Gabon, Ghana, Namibia and Mauritius These markets have a total population of 35m (19% of whom on average are from the middle class) and have an expected average GDP growth rate of 4.8% per annum for the next four years Other attractive but slightly more risky markets: Cameroon, Ethiopia, Ivory Coast, Kenya, Senegal, Seychelles, South Africa and Uganda These markets have a total population of 297m (14% of whom on average are from the middle class) and have an expected average GDP growth rate of 5.4% per annum for the next four years. 27
Types of Danske Bank client assistance in SSA 28
Types of Danske Bank support Trade finance solutions Export finance solutions Danske Bank can back clients business efforts in different ways: Introduction to a local bank Support with guarantees, bid bonds etc. Advice on which banks to work with General advice on selective countries Source: Danske Bank 29
Banking structure in Sub-Saharan Africa The SSA banking structure comprise banks with State ownership or locallyowned bank Regional focus International banks Regional banks are concentrating on growing their networks International banks are changing their focus towards a limited client base in certain markets Source: Danske Bank 30 30
Danske Bank strategy in Sub-Saharan Africa At Danske Bank we aim to have relationships with all categories of banks. However, we focus on large banks in each country. It is important to notice that SSA banks have limited balance sheets and therefore larger clients tend to work with several banks. Banks are in many cases in better shape than their host country. Danske strategy Awareness of specific countries where it is difficult to bank, e.g. Sudan and Mozambique. Increasing allocation of senior resources to SSA. Strengthening of trade finance and export finance capabilities in SSA. 31
Prospects for Sub-Saharan Africa Danske Bank remains optimistic about SSA growth and prospects. We believe SSA is an untapped opportunity for Nordic corporates in the long term. High regard in the region for Nordic countries and companies. 32
Appendix: update on key African economies 33
Individual country analysis Ghana fiscal skeletons cloud macro-outlook Kenya solid growth, but growing fiscal gaps Nigeria dealing with the oil shock; macro-challenges manageable Ivory Coast the current star of the SSA pack Senegal solid macroeconomic performance Tanzania fast growth but externally vulnerable Uganda muddling along Ethiopia public investment driving high growth Rwanda externally vulnerable, domestically strong 34
Ghana fiscal skeletons cloud macro-outlook New government found unrecorded government spending, which has increased fiscal deficits and raised the public debt trajectory, raising the need for fiscal adjustment, which could weigh on growth Source (all charts): Macrobond Financial 35
Ghana exchange rate undervalued at current levels Source: Macrobond Financial 36
Kenya solid growth, but growing fiscal gaps Source (all charts): Macrobond Financial 37
Kenya Source: Macrobond Financial 38
Nigeria dealing with the oil shock; macro-challenges manageable Source: Macrobond Financial 39
Nigerian Naira FX adjustment amid stronger external balance Source (all charts): Macrobond Financial The Nigerian authorities have adjusted the official exchange rate in steps. Meanwhile, the USD black market rate has appreciated considerably and is now very close to the official rate. The balance of payment is improving due to the recovery in the oil price, with the current account turning into a surplus in Q1 17. Foreign reserves have increased to safer levels. 40
Ivory Coast the current star of the SSA pack Source (all charts): Macrobond Financial 41
Senegal solid macroeconomic performance, but large current account deficits Source: Macrobond Financial 42
Tanzania fast growth but externally vulnerable Source (all charts): Macrobond Financial 43
Tanzania Source: Macrobond Financial 44
Uganda muddling along Source (all charts): Macrobond Financial 45
Uganda Source: Macrobond Financial 46
Ethiopia public investment driving high growth Source (all charts): Macrobond Financial 47
Ethiopia Source: Macrobond Financial 48
Rwanda externally vulnerable, domestically strong Source (all charts): Macrobond Financial 49
Rwanda Source: Macrobond Financial 50
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