When Wall Street zigs, Africa zags. That was the theory at least. But like many other newly-minted investment theories, the credit crunch has proved this one wrong. This year, as the Dow Jones index tumbled 35%, African markets have fallen even further. Kenya is down 50%, Egypt, 55% and Nigeria, one of the more popular African markets, 56%.
What’s changed? On the face of it, nothing. With the exception of obviously troubled countries, such as Eritrea and Zimbabwe, productivity is rising across the continent and GDP per head is growing rapidly. In Angola, oil has boosted incomes by 11.9%; in Botswana, they’re up by more than 5% because of the country’s robustly-managed diamond business. Meanwhile, the number of conflicts, which once paralysed the continent, has fallen from a high of 23 in 1998 to five today.
All good news, certainly. But the same forces that have helped lift Africa in recent years – globalisation and increased foreign investment – have also made it increasingly vulnerable to the impact of the global economic downturn. The correlation between developed markets and frontier ones has increased from 0.28 in late 2000 to 0.60 today, according to Standard & Poors (where 1 would mean they move in step with each other). Nigerian and Kenyan banks, for example, may not have been exposed to subprime mortgage securities. But as investors on Wall Street and in the City have suffered huge losses elsewhere, they’ve pulled money out of previously hot markets, including Africa. For example, investor withdrawals were behind the temporary suspension of New Star’s Heart of Africa fund last week; illiquid markets meant that fund manager Jamie Allsop was unable to sell sufficient shares quickly enough to raise the cash to repay investors. Allsop hopes to get the fund running again “as soon as possible”, but this demonstrates the dangers of being invested in an illiquid market at a time when investors value safety above all else. As Darius McDermott of Chelsea Financial Services says, “We have a risk scale of 1-10, and Africa would come in at 11.”
But it’s not just about risk aversion – more than 80% of African exports are “primary and semi-processed commodities”, as the Economist Intelligence Unit (EIU) tells Business Africa Select. That’s bad news when commodity prices are sliding. Tourism revenues will suffer too as Western consumers cut back. The EIU reckons that growth in sub-Saharan Africa will slow from 4.8% in 2007 to 3.6% this year, then 2% in 2009. Africa is worth watching for the long run, but for now, “it is only realistic to anticipate volatile and unpredictable markets in 2009”.