The Sub-Saharan frontier: future generations

June 3, 2013

As growth in Sub-Saharan Africa is set to post a steady 5-6 percent per annum to 2017 according to IMF estimates,  investors will be taking notes on the region’s growth story not least with the financial sector.

Growth projections have rebounded from forecasts of around a 3 percent rise in 2009 after falling commodity prices have hit one of the region’s main revenue sources. Yet, according to the World Bank’s recent Global Development Finance report, stronger commodities will firm growth prospects in the coming years. In recent weeks, commodities have dipped, dampening the outlook for some resource-rich countries, but as 76 percent of the region’s population do not have access to a bank account, lenders are set to grow their presence in the region.

Julius Baer notes the region’s market potential:

Since 2002, resource-hungry China has swept across a by-and-large grateful African continent, taking oil and minerals in exchange for debt relief, low-interest loans, or much needed infrastructure, such as roads, ports and housing.

The continent’s existing banking sector is nascent, with many payments bypassing traditional deposit methods, instead mobile technologies such as M-Pesa and M-Kesho are the only method of making payments and transfers. On banking Baer had this to say:

The main appeal of Africa’s banking market is that it is potentially enormous – Only 3 percent of Africans have access to a credit card … 76 percent of adults do not have access to a formal bank account.

These are not the only considerations in play. Better macroeconomic management, the product of which has been substantially lower inflation rates compared with those of the 1990s, better fiscal and balance of payments positions and lower external debt levels have also led to rising stability and better growth prospects in the continent’s economy, the research found.

Baer cites the major debt issuers as South Africa, Ivory Coast, Morocco, Egypt and Angola that are followed by Gabon, Ghana, Zambia, Tunisia, Nigeria, Senegal and Namibia.

Firms active in the African region such as Standard Bank, Ecobank, Equity bank and ABSA – part owned by Barclays-  are increasing their presence in the region, providing banking services and microfinance in some cases to developing countries from Ghana to South Africa.

Mobile payment system M-Pesa signed a deal with Vodafone in India last month, providing a payment platform widely popularised in Kenya and accounting for a substantial share of Kenyan money transactions.

Rich in natural resources, a growing population base, ever increasing consumer demand and the gradual establishment of a middle class send positive signals for international consumer goods providers such as L’Oreal, Procter & Gamble, Heineken, Nestle and Unilever, according Baer’s research.

Investors who are keen on the investment case of sub-Saharan  financials firms could look to the likes of DWS Invest Africa, involved in a top-down and bottom-up approach with a tilt towards energy and financials, and Renaissance Capital for more exposure to Nigeria and Kenya.

Investing in the region is not without warning. Conflicts in Mali, Sudan/South Sudan over the Heglig oilfield and Somalia make investment decisions in some regions much more difficult.

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