The Dangers of African Investment

Michael Orme - Mon 14 Jan, 2008

Your writer has been in Nairobi since mid-December, having visited Kenya last October to get the lowdown on the investment scene here. We had come away from that trip, like a gathering number of people in and around the investment scene, reckoning that Kenya was one of the hottest of the new 'frontier' or 'emerging emerging' markets, as what was becoming known as 'Africa 1.0' began to catch the attention of fund managers. We kept our powder dry to see the upcoming election through. Like almost everybody else we did not anticipate what has happened, although it's totally explicable.

Your writer has been in Nairobi since mid-December, having visited Kenya last October to get the lowdown on the investment scene here.

We had come away from that trip, like a gathering number of people in and around the investment scene, reckoning that Kenya was one of the hottest of the new 'frontier' or 'emerging emerging' markets, as what was becoming known as 'Africa 1.0' began to catch the attention of fund managers.

We kept our powder dry to see the upcoming election through. Like almost everybody else we did not anticipate what has happened, although it's totally explicable.

In the space of a week, Kenya was transformed itself from a 'hot' investment prospect into yet another equatorial problem zone. Mwai Kibaki cheerfully 'faked' the presidential election result, having been trounced in the parliamentary elections, and uncorked the rage of Kenya's vast underclass. They had had high hopes that an opposition victory would see their problems addressed and confront long-standing grudges against perceived Kikuyu (Kibaki's tribe) control of the country's wealth, land and top jobs.

For those bullish fund managers, and for your correspondent, it has been a sobering lesson. It has flagged up a need for the deployment of much sharper 'risk analysis' tools - not just in assessing the risk premium that should now be put on Kenya, but also on a smouldering South Africa to the south.

The mantra in Nairobi's investment quarter, as well as in the City of London, has been: 'If it can happen here, what hope is there?' The response is understandable but betrays a lack of understanding about Africa. True, it is peculiar to think of the mild-mannered Mwai Kibaki, star LSE postgraduate student and lover of P.G. Wodehouse, as the latest member of the Mugabe club. The sobering fact is that what is 'normal' and 'stable' in Africa isn't the same as what is 'normal' and 'stable' in Denmark or Sweden.

What happened in Kenya between 2005 and the end of 2007 was that governance had become 'less bad' rather than 'exemplary', and the economy had started to grow at 6% after years of contraction under the previous president Daniel arap Moi. This was taken in some circles to mean that the rule of law had become paramount and that true democracy had emerged. This was simply not so. The growth had been lopsided and simply spawned a 'first world economy' for a very small minority, less than 10% of the population, in the midst of pervasive and abject poverty for nearly 60%, with the poor having been long disregarded by an insensitive and greedy political class.

Exacerbating this imbalance, Raila Odinga's opposition made big political mistakes. First, it did nothing to allay Kikuyu fears that in the event of its taking power it would unleash a programme of 'ethnic cleansing'. Second, it said that one of its first acts would be to sack the Major General Ali, the tough and uncompromising head of Kenya's police and internal security. In realpolitik terms, it follows that Kibaki and Ali would inevitably combine to keep control of the country's police and armed forces.

It is illuminating to note that in neighbouring Uganda, where poverty levels have been reduced from 70% in 1980 to 35% and falling today, rigged elections in 2001 and 2006 passed without armed insurrection in their wake.

This leads us, with our suitably sharpened 'risk analysis' tools, to look at South Africa. 

It is not that a rigged general election at the end of the year is likely, or that President Mbeki will breach the constitution and use 'a state of emergency' to carry on when his second term expires next year (although that's not impossible). It's that South Africa is showing signs of erupting like Kenya.

Up to 40% of black South Africans (depending on your definition) are unemployed. Over 4m of them live on less than a dollar a day. Despite modest improvements in public housing, life in such townships as Soweto, Langa and Alexandra are, if anything, worse today than they were when the end of apartheid was ushered in 13 years ago. There are simmering and long-standing land allocation issues to settle as well (which partly accounts for Mbeki being soft on Mugabe).

Mandela and Mbeki got, and are getting, by on their reserve of political goodwill - in Mandela's case he had almost unlimited credit. This allowed them to ask the underclass to be patient while they build a strong economy based on foreign direct investment, and tight fiscal and monetary disciplines. In the process this had the effect of neutering the communist-dominated trade union movement. South Africa's next president (due to be sworn in next year) will not have any such reserves of political capital to deploy, whether or not it's the controversial Jacob Zuma.

The chances of a swing to the left are hardening. A new government, forged from an increasingly fractured ANC ruling party, faces surging pressure from the poorer majority to make good on the promises of 1994: a post-Apartheid reapportionment of wealth and opportunity. Meanwhile, the poorer majority in South Africa has watched the emergence in their midst of a 'first world economy', catering for the rich minority that is still heavily white-dominated. The resulting danger here is that a wave of violent crime, which now seems to be coded into the country's DNA, will cross over into the political sphere as the Mbeki boom falters.

One thing you can definitely count on is that whatever the political turmoil and dangers, while others may flee, the Chinese will continue to put down roots and make investments. They are now doing just that on a major scale in South Africa, as they have done in Angola, Zambia, the Sudan and Kenya itself. They simply must keep up the pace of their investments in Africa as they have industries to fuel, and new resource and export markets to develop to keep their economy running high.

Despite all the setbacks described here, there IS an emerging African middle class, the continent's GDP is still growing at 5%-6% a year on a $1.3trn base, and there is a host of world class growth companies operating across borders making good profits.

Africa 1.0? Very nearly - but remember, Africa will always remain Africa, with all the volatility that entails.