The recently-ratified Continental Free Trade Area (CFTA) agreement will have the near-term effect of boosting cross-border trade, in particular granting land-locked countries access to the shipping ports of neighboring while encouraging the development of domestic manufacturing sectors to promote inter-regional business. This will also reduce the need for costly imports from abroad.
This is the opinion of Paul Boynton, chief executive officer of Old Mutual Alternative Investments (OMAI), and Paul Frankish, investment director at the African Infrastructure Investment Managers (AIIM) – OMAI’s infrastructure unit.
OMAI is the largest private alternative investment manager in Africa with over $4.8 billion in assets under management across private equity, infrastructure and impact funds. AIIM is one of the largest infrastructure-focused equity investors in Africa with $2.1 billion AUM.
The CFTA is set to go into effect this summer after the agreement reached the threshold for required ratifications by the African Union’s member countries. It would create a single continental market for goods and services, encouraging cross-border investment flows, with the goal of eventually establishing a continent-wide customs Union and full economic integration.
Boynton called the CFTA a “profoundly important issue,” noting that while much of the world is being roiled by protectionist trade policies and events such as Brexit, “Africa is actively moving to reduce trade friction.” In addition, the African Union’s commitment to visa-free travel on the continent will make a huge difference to the current low levels of intra-African trade.
OMAI is the largest private alternative investment manager in Africa with over $4.8 billion in assets under management across private equity, infrastructure and impact funds.
Population growth, as well as the rapid rate of urbanization in many African countries – which Boynton described as more the twice the rate seen in China or India, should have significant, and positive, ramifications for economic growth. “So there’s a profoundly strong demographic argument to Africa over the next two decades,” he said.
He also noted that 30 percent of the world’s mineral endowment is located in Africa – commodities that are key inputs for intermediate goods, and 60 percent of uncultivated arable land that will be central to feeding the global population in the future.
From a governance point of view, the trajectory is also heading “steadily upwards” as many countries have now undergone a shift towards more democratic forms of government. Institutional-level reforms are also taking place, such as rule of law, tax collection, Boynton said.
Now, “over the next decade or thereabouts we must see a strong inflection point in terms of robust investment returns and opportunity coming out of Africa,” he added.
Nigeria, the continent’s largest economy, has yet to commit to the CFTA, which has raised some concerns about the agreement’s long-term viability. “It would be madness [for Nigeria] to stay out of it,” Boynton said, both in terms of economic activity and pressure from its neighbors. He said the recent presidential elections might have played a role in holding up the process.
A country like Nigeria – with a nascent manufacturing sector, large market, and a major city in Lagos – would benefit from a free trade agreement that allows goods to flow in and out easily from a logistics and tariffs perspective. Leveraging such connectivity is essential to becoming a key cog in the world economy, and “someone like Nigeria has got to bite on that to actually have a shot at being a global player,” Boynton said.
It would be better to have Nigeria involved, Frankish echoed, but the fact the government in Abuja is not currently onboard does not stymy the process out of the gate. While the agreement has billed as facilitating continent-wide trade, he said, the reality is the logistical issues with transporting goods across the continent means most of the enhanced trade will be within existing regional blocs such as EAC, ECOWAS, and COMESA.
And while the CFTA won’t be a panacea for the continent’s infrastructure woes, the fact that it is fermenting cooperation “is what’s critical,” Boynton added. “This is a long-term thing,” Frankish agreed – first improved regional trade, which will motivate all involved to explore how to upgrade transportation links to aid the flow of goods.
“I don’t think we are going to suddenly see in three years’ time all these pan-African, multi-country infrastructure projects,” he cautioned.
Frankish said African countries with the best economic prospects are usually those who tick the box on items such as offering public-private programs for infrastructure development or having an appetite for foreign investment. He believes there are lots of opportunities because there isn’t as much dry-powder capital available compared to the number of ventures seeking investments.
Assessing conditions up close when investing in any African country is vital, “you’ve got to be on the ground, you’ve got to know the local drivers for the local businesses, and you’ve got to look beyond the macro,” he counseled.
Asked if Western investors’ still have a perception gap when it comes to investing in Africa, Frankish noted that their concerns, and the resulting high-risk premiums, tend to revolve around currency volatility, political risk, and whether infrastructure projects will actually get built. However, Frankish said most of the deals he does are denominated in U.S. dollars, or the CFA Franc (which is pegged to the euro), reducing the currency risk and generating hard returns.
In addition, most deals have a government guarantee that is usually investment grade and backed up by political risk insurance as well as the World Bank. So any potential deals are not saddled with as many risks as investors assume, Frankish said.
This is where the perception risk does not match the reality, he said. Understanding among investors is shifting, he continued, but there remains an issue around access to cheap credit – which is driving private equity in developed markets more than it is in emerging market countries.
In developed countries, Frankish sees a huge amount of capital chasing a relatively small number of deals, so eventually, international institutional investors will need to search for other areas that yield strong returns. “At this stage we are almost in the position now of educating investors, getting them comfortable with the model, getting them comfortable with these risk perceptions. Then when you get to a point of [reaching the level of] developed market returns, then the capital will start coming through,” he said.
The key is for investors to differentiate between news headlines and the actual changes taking place on the ground. As an example, Frankish cited the 2017 presidential elections in Kenya – where the country’s Supreme Court annulled the initial results and ordered fresh elections. From a governance perspective that was a “hugely positive thing,” he argued, underlining the strength of the courts to investors, as opposed to just being another botched African election.