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Wednesday, January 4, 2012

Best Ideas of 2011: Invest in Africa

By Rebecca Regan-Sachs

The almighty U.S. dollar is in the doldrums. Asia's growth has slowed. Europe's embroiled in economic disaster. So what's a global investor to do?

A recent cover story in The Economist spotlighted a potential answer. In Africa today, years of small changes are now adding up to potentially big payoffs for the savvy investor. This past year alone saw important gains in good governance and economic growth on the continent, while economic woes continued apace overseas. One of the best ideas of 2011 to accrue serious currency can be summarized simply: invest in Africa.

Certainly, major drawbacks exist. Infrastructure and electricity are still unreliable in much of the region, and pervasive corruption limits growth and innovation. But the key to investing is to catch undervalued assets before they take off - and if economic forecasts are correct, Africa will experience the largest growth of any other continent in the next decade.

Take the latest World Bank "Doing Business" (DB) findings. In the past survey year, a record number of sub-Saharan African (SSA) countries - 78 percent - improved their business regulatory environment. Eighteen countries improved enough to climb in the DB rankings from the previous year.

In key areas of concern to investors, such as creditor rights, contract enforcement, and electricity supply, SSA economies also made impressive gains. Since the last DB survey, SSA nations enacted more reforms protecting borrower and lender rights than any other region of the world. Sixteen countries improved their rankings on "Getting Electricity," and 15 moved up the charts for "Enforcing Contracts."

All these reforms underscore a larger phenomenon in which the economies of roughly least a dozen SSA countries have increased by at least 6 percent per year for six or more years. And, remarkably, only about a third of such growth is due to commodities like oil. The services sector, for instance, is growing strongly in regions like East Africa, fueled by relative political stability and an enterprising workforce.

The innovative capacity of the African people is receiving increasing attention and support. This past year marked the third annual "Maker Faire Africa" event, where entrepreneurs across the continent showcased innovations created by Africans, and in many cases, for Africans: seed-planting devices, solar-powered computer kiosks, phone-charging bicycles, and many more.

But these "lion economies" are like any other investment: the payoff drops as the market gets crowded. In the past few decades, China has made stunning inroads in the African market, investing $9.3 billion in 2009 - an almost 200-fold increase in just six years. Much of Africa's economic boom, in fact, can be traced to this symbiotic relationship: China importing large quantities of the continent's commodities to fuel its own growth, while furnishing infrastructure like roads, railroads, and ports in the nations supplying these resources.

China is guarding this arrangement like any good investor would. The country has signed bilateral trade agreements with 45 African nations, made investments in 49, and created special economic zones in countries containing particularly important resources. It also created a China-Africa Development Fund to invest directly in African equities, funneling $1 billion so far into dozens of projects in the energy, infrastructure, agriculture and manufacturing sectors (with about $4 billion available for future investments).

However, many argue that it is more difficult for Western investors to do business in Africa, and to some extent, this is true. The Chinese government provides enormous support to businesses engaging with the continent, and does so without pesky regulations like the Foreign Corrupt Practices Act to curtail back-room deals with shady officials.

But non-Chinese investors who make the effort to understand local culture, develop relationships, and take other steps to mitigate risk, may enjoy enormous payoffs. "Africa could be on the brink of an economic take-off, much like China was 30 years ago and India 20 years ago," trumpeted the usually-sober World Bank in a report earlier this year. The consumer market is also growing, in the form of a nascent middle class. By 2015, experts predict the number of Africans earning over $3,000 a year will jump to 100 million, roughly the same as in India today.

Yet along with this economic growth will come population growth. In 40 years, the continent's population will double, and its disproportionately large number of young people will reach their prime productive years. This groundswell in the workforce could be a "huge opportunity," in the words of The Economist. But without expanded employment, it could also be a tremendous burden -- and a potentially dangerous one, as many countries with large sectors of unemployed, disaffected youth have discovered.

That is why 2011 finds Africa at an important crossroads. And with so many once-mighty economies in shambles across the globe, it is also an important time for other countries - and their businesses - to reassess their investment strategies. Many factors are now converging to support the cover claim of The Economist: Africa is rising. And we all know what they say about a rising tide.

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