Worldwide: Taming The Lion

Last Updated: 5 September 2012
Article by Ian Le Breton

Last month I discussed the "BRIC" countries and what makes that group of the four leading emerging economies (Brazil, Russia, India and China) so important to today's world economy. I also touched on the admission of South Africa, despite its relatively small size, to the group in 2010 to create "BRICS". Since completing that piece, I attended a dinner hosted by Barclays Wealth at which Henk Potts, the bank's global investment strategy director and one its best-known personalities, was speaking. Confidently I prepared some deeply cerebral, meaningful questions on BRICS hoping that his responses would provide the basis for this month's column. And so it did – but not in the way I had anticipated.

Henk is known for his robust views but he surprised his audience when he asked us to name regions that were likely to be exciting from an investment point of view in the next few years. "Latin America" shouted one person. "The Middle East", I spluttered. Someone even said "Singapore". But no, Henk wasn't having any of it. The area with most "upside potential", he told us, was Africa – or the "lion economies", as he terms them, as opposed to the "tiger economies" of Asia.

Currently these "lion economies" are responsible for only 2.5% of global output. This may not sound a lot, but the figures start from a very low base and should therefore go only one way – upwards. Henk's thesis got me thinking and I decided to take a more serious look at the data. What I discovered simply astounded me. It turns out that several African economies are growing at the rate of 6% or more on an annual basis.

Regular readers will know that my favourite statistic is GDP – Gross Domestic Product. According to African Economic Outlook statistics, real GDP growth rates across the entire continent of Africa are all in positive territory. Not just a few countries mind you, but every country in Africa is growing. Even Zimbabwe is reporting growth, albeit after many years of decline.

As so often with statistics, the numbers disguise some special situations. For example, Libya is set to grow again this year after a near 40% fall in output the year before. But then it did have a revolution on its hands in 2011. Just compare this situation to Europe where several EU states, not just those inside the eurozone, are suffering badly. The UK and Spain are both experiencing negative GDP growth – or to use a stronger word, recession.

Perhaps it is unfair of me to remind readers of the text message allegedly sent by the current Prime Minister of Spain Mariano Rajoy to his finance minister in June, as the latter was about to go in to a last round of EU bank bailout negotiations. "España no es Uganda" (Spain is not Uganda), he is reported to have texted. That earned a rapid and stern rebuke from the authorities in Kampala, Uganda's capital, as well it might given that African country's GDP growth record over the last ten years – around 5% year on year and in seven of the last 10 years significantly above this impressive level.

OK so time for a pretty obvious health warning here before I get carried away. There is a massive disconnect between developed European economies such as Spain and Africa's emerging economies. Growth is important as I have set out in many previous articles. But it is not the only issue and should be considered in isolation. Other factors such as political stability, the incidence of corruption, inflation, unemployment, poverty levels and so on, all play their part in assessing the real economic prospects for a country.

Nonetheless, the surprising fact remains that every single country in Africa is forecast to grow this year. Amongst other reasons, the impact on several African economies of the exponential growth of Chinese investment in the last decade cannot be overstated. The FT estimates that over US$10bn was invested by the Chinese in Africa last year alone, with the cumulative total now exceeding US$40bn. More than 2,000 Chinese companies from huge state-owned enterprises to small firms are now involved in Africa.

Granted, much of this investment is focused on the natural resources so desperately needed by China for its development that it cannot source at home, Mining has continued to be massive business in many sub-Saharan countries and with such investment comes other spin off business.

As one example, echoing China's own recent "mineral rush" in various parts of Africa, expansion of corporate aviation is expected to grow alongside other heavy infrastructure improvements. Surface travel can be difficult, making corporate aircraft often the only option. Sovereign's aviation division reports that Hawker Beechcraft has focused on Africa as a huge potential market for corporate jet and turboprop aircraft. A senior company executive was recently quoted as saying that growth in demand for mineral resources from emerging countries has transformed Africa and that it is fast becoming a preferred investment destination as African nations increasingly open their doors to foreign investors.

None of this hides the awful truth that poverty in Africa remains a desperate problem and no amount of massaging GDP figures can disguise the facts. However as prosperity increases generally across the continent, more stable economic conditions should lead to improved government, and perhaps even this centuries-old scourge may begin to be expunged.

All very interesting but how do European businesses exploit the new opportunities that are clearly there for the taking? After all corruption and fraud remain a real risk in several African countries; anyone in the finance sector will be familiar with the so called 419 Advance Fee scams that emanate with depressing regularity from Nigeria (the number comes from the Nigerian Criminal Code article dealing with fraud).

International groups often separate responsibility for managing different areas of Africa. In the case of the Sovereign Group, for instance, southern African states are dealt with by our South Africa hubs in Cape Town and Jo'burg, whilst north Africa business – broadly speaking the countries of the Maghreb and the Nile Valley – is generally managed from our offices in the Middle East.

But for us in Gibraltar, and indeed those local companies without an overseas office network, whilst it is clear there are vast swathes of Africa to consider, how on earth can we exploit these opportunities effectively and without incurring vastly inflated travel budgets?

Well of course the answer will depend on the type of business one is considering and its scope for African expansion. It may be that services can be offered directly to a new potential client base across the continent. Great care will be needed to insulate oneself as far as possible from the corruption risk or indeed the ever-present danger that one is simply going to be ripped off. But this can happen to the inexperienced when attempting market entry into any new country. Manufacturers or trading firms might be looking at Africa in quite a different light – perhaps by sourcing raw materials or partly-finished goods, or simply looking at new markets given the dire state of economy in Europe.

Those of us who live in Gibraltar look across, on all but the foggiest days, to the northern-most tip of Africa. Indeed, there are several businesses in Gibraltar that have made their fortune over generations by doing business in Morocco and further afield – but there are many others that have yet to take the plunge.

Tangier itself isn't a bad place to start in fact. After all it boasts a brand new port facility at Tanger-Med Port, directly opposite Algeciras and is also served by an international airport with adjacent free zone area. If you haven't visited the town recently, you should pop over to see the dramatic changes to the port area itself. New marina and leisure facilities are being built at breakneck speed to rival those found in southern Spain – much of this the result of foreign inward investment from the Middle East.

But that is of course only the beginning. It's all too easy to look at Tangier and, perhaps by citing negative experiences or simply by considering its rather colourful reputation, to write off the entire country – or worse still, the African continent as a whole. Further down the Atlantic coast, the commercial city that is Casablanca greets you. It's certainly not all Humphrey Bogart and Ingrid Bergman – indeed if you have no business to do in the city, there is very little to detain you. But from here you can fly to many cities around Africa, the US, Middle East and beyond. It's a great place to consider from a commercial perspective. From there, the world – or at least the African continent – is your oyster. With all that is going on in Europe maybe those of us in business here in Gibraltar could do worse than spend a little time and effort looking south – just 12 miles across the Straits – where a continent awaits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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