Nwakego Eyisi's Blog

EGYPT….. WHAT NOW?

Posted: February 14, 2011 in Africa History, Africa Policy, Africa Trade, Global

Last week saw the overthrow of Hosni Mubarak of Egypt, one of the longest-serving presidents in the Arab world, ushering in a new era. This article will analyze possible political scenarios for Egypt and economic implications.

Before I continue writing I would like to say that celebrations following Mubarak’s departure could be premature this was in actuality a military coup!

EGYPT BEFORE MUBARAK LEFT

Egypt’s real growth rates accelerated from below 5% in 2003 to 7% from 2006 till 2008, but for this crises IMF estimates that growth was expected to be at least 6% this year. Egypt’s budget deficit has hovered around 7% since 2008 and inflation is expected to fall to 11% this year, it was 16% two years ago due to commodity inflation following the global credit crunch. Egypt’s debt is about 13% of GDP down from 38% of GDP in 2004. Egypt GDP per capita is almost $7,000 this year up from$4,000 eight years ago. The economy is also fairly diversified with Industries, services, government and agriculture being the top four sectors. In the World Bank 2010 “ease of doing business report” Egypt was ranked 109 out of 183 up ten places from its 2009 rankings. Egypt’s ranking also rose eleven places to 70 out of 133 countries in the 2009/10 “global competitiveness report”. The reasons for improvements in rankings were progress and sophistication in financial services , a reduction in customs tariff and improvement in infrastructure especially electricity and telecommunications. All in all IMF data strongly suggests that Egypt was a top performer and reformer globally.

Unfortunately economic progress is not automatic and although the economy grew by 5% on average and jobs were created in the last decade, it takes a while for significant improvements to begin to show for a large country (80 million people) like Egypt. Egypt is still in a growth phase, reforms must continue for at least three decades for two-thirds of Egypt’s society to be happy.

PROLONGED MILITARY RULE

Right now the military is in charge, they have dissolved parliament and suspended the constitution, this shouldn’t come as a surprise because military governments do not function with elected bodies. If stability is not quickly brought back to Egypt and the military prolongs (not impossible) its rule we can expect to see capital flight and a smaller economy. Already GDP projected (IMF) to be at least 6% this year could easily drop to 5% or 4% due to this crisis. A military government no matter the circumstances does not inspire confidence in today’s business world. This could increase poverty and poverty increases conflict.

A NEW GOVERNMENT

If a new government that does not believe in market reform comes to power, it will set the country back economically. It takes years to build up a reform oriented economy like Egypt’s but takes one day to tear it down.

Again celebrations following Mubarak’s departure could be premature and at this point it’s really any ones guess who Egypt’s next rulers will be.

SURVIVING THE GLOBAL DOWNTURN: AFRICA UPDATE 2012 -2016

Posted: January 17, 2012 in Africa Policy, Africa Trade, Global

A lot has been said about the downturn in the Eurozone hurting Africa and what the continent should do to survive this global rebalancing period – a significant chunk of Africa’s trade is with Europe. However, Africa still has the edge, not because of trade with emerging Asia (China too is slowing down) but because of a lot of slack African countries have accumulated over the years, especially in policy and infrastructure. Tightening up these loose ends will shield the continent from the ongoing global downturn and through the global rebalancing period.

African policy needs to shift rapidly in the following areas;

Rapid movement towards trade integration, within the regional trade blocs frames work. Growing economies and a large consumer base (1 billion people) already guarantees businesses market access and profits. According to the Africa development bank, in 2010, the combined GDP for the east Africa community (EAC), Economic community of West African states (ECOWAS), the central Africa community (CEMAC) and the southern Africa community was $184 billion, $565 billion, $123 billion and $888 billion respectively. Thanks to pro market reforms, Africa’s consumer class is growing once more.

The regional trading blocs will give African multinationals, foreign investors and small businesses access to a larger market. This access will improve efficiency, innovation and profits for businesses. The regional trading blocs will also enable Africa compete favorably with other emerging markets for credit and foreign investment in addition to creating jobs for Africans.

Already negotiations for a common market are at advanced stages in East and West Africa. South African and Nigerian multinationals in telecoms and banking sectors are already active in west and central and east Africa. They would be expected to operate within the frameworks of the regional trading blocs when they become fully operational.

Rapid improvement in the business environment. Corruption, poor access to credit, bureaucracy, tax laws and obsolete business practices are an impediment to trade across the continent. Africa could easily double the value (revenues, jobs, innovation, profits etc.) from the foreign direct investment (FDI) it receives currently just by improving the business environment.
Infrastructure development. In 2009, I carried out a simple correlation analysis between roads and gross domestic product (GDP) for at least 10 sub-Sahara African countries and found a negative correlation. In other words current levels of road infrastructure in Africa actually reduce economic growth. Africa can get much more value out of current FDI levels if they had good roads, railways, telecoms infrastructure etc.
Freedom and democracy. Improvements in Freedom and democracy are needed to sustain the flow of investment in Africa. Freedom and democracy positively feeds into the rule of law aspect of business and is therefore very crucial to FDI. In Africa today, high income alone does not guarantee political stability, this is why the Arab spring happened. Although sub-Sahara African countries have lower per capita incomes when compared to their counter parts to the North, sub-Sahara Africa did not experience the kind of unrest that engulfed North Africa last year. This difference in outcomes was largely because sub-Sahara Africa is freer when compared to the North.

These are the major causes of leakages in African economies. Africa can easily get higher economic growth out of current levels of investment if the rule of law, better infrastructure and business environment was in place. Africa will not feel the negative impact of a prolonged downturn in the Eurozone if some of these policies are pursued rigorously.

Moving fast on the implementation of these policies will maximize the impact of existing capital flows into Africa. In other words, Africa must get more bang out of current levels of investment, to survive this global rebalancing period.

CENTRAL AFRICA REGIONAL ECONOMIC OUTLOOK – A REVIEW (FINAL)

Posted: October 2, 2011 in Africa Policy, Africa Trade

FASTEST GROWING SECTORS

The fastest growing sectors in this region are construction,
mining, ICT and retail. Construction is growing due to demand for buildings
especially around oil production. Governments (Equatorial Guinea, Cameroon, Gabon)
in the region are investing heavily in infrastructure and also demand for
housing is up due to a growing middleclass.

High commodity prices as the global economy recovers is
driving growth in mining. Oil majors (Shell, Total, ENI) are active in the region
and exploration and discoveries of new oil (Cameroon, Chad) fields are ongoing.

ICT sector growth is due to telecoms market liberalization
and a growing middleclass. Domestic consumption is a major driver of growth and
is fueling expansion in the retail sector of the economy.

INFLATION

Inflation average for the region is 2.75%. Every country has
an inflation rate below 5%. Low inflation rates are as a result of subdued
economic growth for this region more than it is a reflection of effective
monetary policy. Inflation averages for West Africa (4.8%), East Africa (6%)
and Southern Africa (7.8%) trade areas are higher when compared to rates for
the central Africa region. Average growth rates are also lower for this region
when compared to West and East Africa.

Amongst other factors non French speaking African countries
have more control over their economies than countries in the CEMAC region. They
are independent when making decisions about market liberalization, monetary and
fiscal policies. The CFA zone or CEMAC countries monetary policy is controlled
by the French treasury. This region lags non French speaking countries in
reform and economic growth.

BUDGET DEFICIT

Average budget deficit for the region is 2%. Chad has the
highest deficit at 12.5% while Gabon recorded a surplus of 3.7% last year. For Chad deficit accumulation was due to food
crises last year, election spending, golden jubilee anniversary celebrations
and security. Deficits for these
countries were very low in 2010 because of improvements in commodity prices and
their balance sheets are expected to improve further as demand for commodities
remain high in global markets. Cameroon, Central Africa Republic, Congo
Republic and Equatorial Guinea’s budget deficit were all below 3%.

This is good news for investors because the government has
been prudent fiscally, it leaves room for greater private consumption in the
economy and it also means that taxes need not necessarily go up to close the
deficit. Despite an attractive fiscal position lack of independence in monetary
policy is a major hindrance to investment and growth.

FOREIGN DEBT TO GDP RATIO

The average for this region is 14%. Every country in this
region has a debt ratio of less than 30%. This means prudent economic
management and better budgetary coordination amongst others. Debt accumulation
is largely due to infrastructure development and high food prices.

It is good news for
investors because it leaves more than enough room for CEMAC countries to borrow
for infrastructural development which should fuel economic growth.

CONCLUSION

The outlook for this region based on natural resource wealth
and market reforms is bright. The demand for commodities will remain high
globally. CEMAC countries are resource rich with a very small population which
easily guarantees a high living standard in the future. High growth sectors
(Mining, ICT, Construction and Retail) will continue to attract significant
foreign investment.

Poor human development and political reform as well as
threats of civil conflict are a real problem in this region. Also these
economies are still high risk due to a lack of diversification.

However, some improvements have been made around
transparency and the rule of law in the last decade and governments across the
region are committed to build upon this limited success.

Country	GDP (billions of dollars)	Real growth rate (%)	Inflation (CPI)	Fastest growing sector	Budget Deficit (%)	Population (millions)	Foreign debt to GDP ratio (%)
Cameroon	45.9	3	1.4	Agriculture, telecoms, retail trade	-0.9	21.2	5.9
Central Africa Republic	3	3.4	1.8	Agriculture, construction, ICT	-0.3	17.8	15.2
Chad	17.5	5.9	0.6	ICT, Construction, Transport	-12.5	46.5	26.5
Congo Republic	15.7	10.2	4.8	ICT, Construction, Energy	-0.5	29.3	16.5
Equatorial Guinea	18.3	1.2	4.7	Energy, Construction	-2.6	19.2	9.7
Gabon	22.3	5.5	3.2	Energy, Construction	3.7	15.7	14.9

Source: ADB/IMF/Countries statistics office

CENTRAL AFRICA REGIONAL ECONOMIC OUTLOOK – A REVIEW (1)

Posted: August 29, 2011 in Africa Policy, Africa Trade

The economic and monetary community of Central Africa (CEMAC)
was set up to promote economic integration amongst members who share a common
currency the CFA Franc. Member states include Cameroon, Chad, Congo Republic,
Central African Republic, Gabon and Equatorial Guinea.

CEMAC’s objectives include the promotion of trade and the creation
of a common market.

CEMAC countries like Francophone West Africa do not have a
free floating currency. The CFA franc is pegged to the French currency the
Euro. Monetary policy is limited to the regional central bank flooding the
market with Euros or the CFA franc when the CFA franc appreciates and vice
versa to manage inflation and flow of investment. Countries in this region do not have an
independent monetary policy. In other words the French treasury regulates the
value of the CFA franc.

The combined gross domestic product (GDP) and population for
this region is $123 billion and 147 million respectively. A common market will
allow an investor tap into a potential market of 147 million people and a much
larger regional economy as compared to an economy of no more than $20 billion
and a population of no more than 24 million people – the average for this
region.

Even though CEMAC is smaller than her counterparts to South
(SADC), East (EAC) and West (ECOWAS), it has the advantage of a common currency
which could guarantee a faster movement towards a common market.

POLITICAL OUTLOOK

Chad and Central African Republic are post conflict fragile
states. Continued reform and economic growth is crucial to maintain stability
in both countries. After decades of war Chad has been relatively peaceful since
2009. Chad also has an unfavorable climate which fuels poverty and conflict.
The country is prone to drought due to desertification and the Lake Chad a
major source of livelihood is drying up. Central Africa Republic had successful
presidential and parliamentary elections earlier this year, this should help in
consolidating the fragile peace. However, the threat of conflict is real as
rebel forces were active in November, 2010.

Gabon, Congo Republic and Equatorial Guinea have held fairly
successful elections in the last two years. It is also important to note some
of the longest serving presidents (Cameroon and Equatorial Guinea) in Africa
are also in this region.

REAL GROWTH RATE

Average real growth rate for the region is 4.8%. Chad (5.9%), Congo Republic (5.5%) and Gabon
(10%) growth rates were higher than the regional average in 2010. Growth in
recent years is mainly due to high commodity prices in the international market
especially crude oil. Expansion in construction due to demand from businesses
and individuals as well as infrastructure is another major driver of growth.

Telecommunication sector due to market liberalization and
proliferation of mobile phones is another growth driver. Retail trade because
of a growing middle class is also another major driver of economic growth.

LARGEST SECTOR

The largest sector in the region is Agriculture and Mining.
This is due to the role agriculture plays in developing economies and the fact
that these countries are resource rich.

Metals and crude oil
production accounts for at least one third of GDP in Congo, Equatorial Guinea
and Gabon. Agriculture dominates the economies of Cameroun, Central African
Republic and Chad. Crude oil is also a major revenue earner for Chad and
Cameroon.

Although Agriculture is huge in some of these economies,
farming is largely subsistent and they rely heavily on food imports.

EAST AFRICA REGIONAL ECONOMIC REVIEW (2011) – FINAL

Posted: August 4, 2011 in Africa History, Africa Policy, Africa Trade

This is the final part in this series

HIGH GROWTH SECTORS

Mining, agriculture, construction, finance, retail and telecom are the fastest growing sectors in the region. Growing consumer demand and the need for new infrastructure are the main drivers of growth in construction. As an economy grows a country needs new ports, roads, rail and power plants amongst others. Consumers need new homes and businesses will build new offices and factories. Majority of monies raised from sale of bonds on the international market will go to the construction sector.

Growing appetite for commodities like gold due to quantitative easing and the push for greater exports from countries in North America and the Eurozone as a way out of their debt crises is driving demand for metals.

Abundance of these metals in Africa (and yes Africa has comparative advantage in this area) is not the major reason for growth but the improvement in the rule of law, greater transparency and economic reforms amongst others.

Economic growth and reform in the last decade has meant that East Africans have a growing middleclass. Demand for cars, electronics and other consumer durables are up. The retail sector is still in an expansionary phase, competition is not strong and demand exceeds supply for these products and profits can be staggering. Consumers in Africa have little or no debt and are living in a part of the world where incomes will increase going forward.

The success of mobile telephony in Africa is no longer hidden and is one of the best things to happen to the continent in the last decade. The advent of cell phones has increased productivity and has coincided with a period of good growth. Telephone penetration rates across the continent is still low (40%) and there is still a lot of room for suppliers to make money, Airtel the latest entrant to the market is testament to this fact.

As economies in the region continue on the growth path demand for mobile phones will continue to expand – it is a crucial infrastructure for businesses and individuals. Major players in the region include MTN, Safaricom and Airtel amongst others.

The finance sector is crucial to the growth of economies in the region. For an economy to expand banks must lend to the real sector. The finance sector is still underweight in its contribution to GDP in the region. Bank lending to the real sector is grossly inadequate and stock exchanges in the region are not liquid enough to raise capital required for expansion.

BUDGET DEFICIT

The average budget deficit for the region in 2010 was 4.7%. Tanzania (7.8%) and Kenya (6.8%) had the highest deficits due to fiscal problems.

A deficit in the African context is incurred when a country has to borrow money to pay for commodities like oil and food. Africa is a net food importer. A deficit can also be incurred when an economy slows down due to global commodity price shocks. Africa is primarily a commodities exporter. In Kenya and Tanzania’s case deficits were incurred due to food and oil price shocks following the global recession. Deficits for the region are not at all bad when compared to countries in the Eurozone where deficits are in double digits in some cases.

There are still dangers of running higher deficits due to rising oil and food prices, but in the short term the danger is less as the global economy, especially emerging markets recovers. Also countries in the region will continue to implement counter cyclical policies which will allow room for deficit spending in the future.

FOREIGN DEBT TO GDP RATIO

Average debt to GDP ratio for the region is 25%. All countries in the region have a debt ratio of 30% or less. This will allow room for borrowing to finance infrastructure projects in the future.

Debt profile for the region greatly improved in the last decade due to economic growth and debt forgiveness amongst others. A low debt profile means that government books is in relatively good shape and makes the region attractive for foreign investors. Also this will leave a lot of room for borrowing to finance infrastructure projects which is sorely needed in this region.

What this means for business and economics in the region is that these countries are in a good fiscal position and governments in the region need not raise taxes to pay off debt. It also bodes well for investor confidence because the government is lean and the economy is efficient.

It is expected that countries in the region would take on more debt in the future to pay for infrastructure projects – they have the capacity since debt is still very low. At the same time economies in the region are undergoing rapid expansion which means that average debt for the region could still remain low this decade.

BUSINESS ENVIRONMENT

Apart from Rwanda which is considered a top reformer globally every other country in the region deteriorated in the rankings according to the World Bank doing business report for 2010. This means that the business environment is still difficult, that infrastructure is poor, government is corrupt and the rule of law is still not very effective.

However, business and regulatory environment in the region has greatly improved in the last decade. It is expected that this trend will continue as countries in the region are eager to attract greater foreign direct investment needed to push past growth to development.

Country	GDP (billions of dollars)	Real growth rate (%)	Inflation (CPI)	Fastest growing sector	Budget Deficit (%)	Foreign debt to GDP ratio (%)	Business Environment
Kenya	65	5	4.1	Agriculture & manufacturing	-6.8	26.1	Dropped
Uganda	42	5.1	7.3	Telecom, financial services &construction	-2.5	15.5	Dropped
Tanzania	62	6.8	8.9	Agriculture,Mining&quarrying, manufacturing, construction	-7.8	30.3	Dropped
Burundi	3.3	3.9	7.1	Agricultural industries, Mining & Construction	-4.5	30.2	Dropped
Rwanda	12	7.4	2.3	Agriculture, Construction, Telecoms	-1.9	23.3	Improved

EAST AFRICA REGIONAL ECONOMIC REVIEW (2011) – PART 2

Posted: July 28, 2011 in Africa History, Africa Policy, Africa Trade

CONSUMER PRICE INFLATION

Inflation average for the region (2010) is 6%. Uganda, Tanzania and Burundi have inflation rates above the regional average. Inflation in the region is due to structural deficiencies such as poor infrastructure, poor harvests due to poor rains amongst others. In recent times high food and energy prices following the global downturn of 2008 as well as loose money and increased government spending has fueled inflation in the region. Central banks across the region have undergone reform in the last decade and are more effective in targeting inflation.

A key driver of inflation in Sub Sahara Africa is poor infrastructure. Food crops are usually produced in rural areas but lack of transport infrastructure like roads and bridges limits supply to urban population centers and drives up food prices. Also lack of storage facilities means that crops cannot be stored for off-season and drought periods. Monetary policy has limited effect on inflation in Africa.

LARGEST SECTOR

Agriculture is the largest sector for all countries in this region. Total sector contribution is about one third of total GDP for every country in the region. Agriculture and related industries is also a major foreign exchange earner and employer of labor. Countries in this region are major producers of tea, coffee, flowers, cotton and tobacco. Agriculture remains the major revenue earner for this region despite major oil discoveries (Uganda) and massive expansion in commodity (gold) prices.

Despite the size and productivity of this sector research and development is poor, farming is at a subsistence level, credit is not easily available to agribusiness due to perceived high risk caused by poor infrastructure and these are areas of opportunity for investors. Further development of the agricultural value chain is key to boosting revenue earnings for countries in the region.

HIGH GROWTH SECTORS

STOP THAT SUPER TAX

Posted: July 12, 2011 in Africa Policy, Africa Trade, Global

Tanzania, Ghana, Guinea, Gabon, Mozambique and Uganda are planning to raise taxes on mining companies to get a bigger slice of their commodities wealth. Tanzania is leading the way with a proposal for a super tax on mining companies. In South Africa nationalization of mines is a topic that has refused to die. Please read.

[http://www.iol.co.za/business/international/african-countries-finally-lay-claim-to-spoils-of-sought-after-commodities-1.1096283]

WHY THIS IS HAPPENING

There is a growing appetite in the global economy for metals.

China and India amongst other emerging markets need these metals for their manufacturing sector and for energy security.
Europe and North America need to revive exports if they must reduce debts and deficits and manufacturing is key
Money Printing – The Americans are the biggest culprits due to quantitative easing. However central banks around the world are printing money too because interest rates are still too low – the global economy has not fully recovered from the credit crunch of 2008. This is driving investors and speculators to put their monies in commodities.

Countries like Chile, Russia, Canada and Norway amongst others are traditional suppliers but cannot compete with Africa. This is because of higher taxes and regulation that comes with mature markets. There are also concerns around depletion of reserves as is the case with Russia.

Africa today has comparative advantage in commodities mining. Comparative advantage means that Africa is the most efficient supplier of metals to the global economy. An underdeveloped market, sheer abundance and virgin territory ensure this. Governments across Africa keen to attract investors in mining will offer favorable tax regimes.

This is all set to change if governments across Africa go with this super tax.

WHY THE SUPERTAX?

There is a problem in Africa today; governments across the continent are deluged by offers from mining companies. However, (apart from South Africa) they may not have human and other capabilities to efficiently handle such investment. If African governments have to do business with top mining companies who have the best geologists, accountants, economists etc. they need to match these companies in terms of human resources. This is how you attract investment and keep it. I am not sure these countries are up to scratch in this area.

In the last decade, infrastructure for natural resource contracts was signed between African and Asian countries – China leading the bandwagon. This might be a good short term remedy. However, to sustain long term investment (a majority of these deals have unraveled), Africa must do better.

In Tanzania’s case, the people felt cheated by government and the mining companies – largely due to a lack of transparency in the way these deals were signed. Whereas it is the fault of the government, the civil service does not have the resources – human to competently handle investments in the mining sector.

Tanzania also has a shambolic tax collection regime and contracts are not transparent due to corruption in government. Enter the super tax.

IMPLICATIONS

A super tax is not the best way for African countries to get a greater share of their commodities wealth, what it will do (in the long run) is discourage the development of African owned mining companies. The reason countries allow foreign investment is because it drives local investment. India and China did not have multinationals (Tata, Huawei, Airtel etc.) until they liberalized their economies in the seventies and eighties.

Feeling cheated out of mining revenue is not something new. Canada another country rich in resources faced the same challenge. American companies controlled Canadian mining for years until Canadians learnt how to mine. Despite early negative experiences no one can deny the role American mining firms played in the development of indigenous Canadian mining companies.

For instance, the entry of Mobile Telecom Networks (MTN) a South African multinational into the Nigerian telecoms market spurred local investment and the creation of Nigerian multinationals like Globacom and Visafone. In order words the liberalization of Nigeria’s telecoms sector has spurred the development of Nigerian telecom multinationals. Today Globacom is active in at least five West African countries.

What a super tax will do is discourage foreign investment in Africa’s mining sector. This will hurt local investment and discourage the development of indigenous African mining companies. Because higher taxes mean smaller profits, it paints a picture – that mining is not profitable and so discourages local entrepreneurs and venture capitalists. In other words Africans will not learn the business of mining if this policy goes through. The likelihood that we will not have an African version of Barrick Gold or Vale or Anglo American or Sasol just went up.

THE WAY FORWARD

The alternative is to allow these companies keep more of their profits. Profits will encourage local entrepreneurs and spur the development of indigenous mining companies as well as create jobs for Africans.

AS PRESIDENT JONATHAN ANNOUNCES HIS NEW CABINET…………

Posted: July 8, 2011 in Africa Policy, Global

This article is a brief but concise look at policy changes that could be expected from the new cabinet and how it will impact the Nigerian economy four years out.

Prof Bart Nnaji – Power Sector Reform

This is perhaps the reform that will push Nigeria from a 7%+ growth economy into double digits. Adequate power supply will reduce inflation, reduce unemployment, boost manufacturing and investment amongst others.

Right now the manufacturing sector is all but dead and existing businesses like finance and telecoms amongst others operate inefficiently because of poor power supply. The problem with power in Nigeria is that of excess demand but inadequate or nonexistent supply. There are many demanders (Individuals and business) and only one supplier – power holding company of Nigeria (PHCN). That is why electricity is very expensive – when analyzed from the standpoint of diesel generators, collapsing businesses and a comatose manufacturing sector and not from low PHCN tariff perspective. What reform will do is open up this sector to private participation so that the number of suppliers and output can significantly increase going forward.

Diezeani Alison-Madueke – Petroleum Subsidy Reform

Late President Yaraduas’ finance minister stated that Nigeria spent $4bn (60% of total capital expenditure) in 2009 to pay for a subsidy that hurts the Nigerian economy. What the oil subsidy does is alter the market for petroleum products by grossly increasing demand and contracting supply – in order words it creates an articificial price and the government pays for the difference. This disenfranchises real producers from entering the market. Because real producers cannot enter the market oil pipelines and refineries will continue to decay, and no new ones will be built until the subsidy is removed.

If reforms are followed through poor infrastructure plaguing the downstream oil sector (refineries and pipelines) will be reversed and the days of long queues at petrol stations will be history. It will also have multiplier effect on agriculture, power and manufacturing sectors of the economy since oil is an important input in manufacturing and power generation.

Dr Okonjo-Iweala – Government Reform

Dr Okonjo-Iweala is expected to continue pursuing counter cyclical policy that was introduced during her first stint as finance minister. This is where Nigeria spends less than she makes from crude oil and saves the rest. This policy led Nigeria to accumulate at least $60 billion in foreign reserves before the recession of 2008. This reserve is crucial to attracting much needed foreign capital to Nigeria. This is because foreign investors are more confident in putting their monies in African countries that have reserves.

Dr Iweala is also a fan of leaner efficient government as well as a vibrant private sector. Her tenure as finance minister (Obansanjo’s administration) ushered in telecom sector reform, debt reduction, counter cyclical economic policy and other reforms that grew the private sector in Nigeria. It is expected that she will continue in the same vein – to make policy that will grow the private sector (like power and petroleum subsidy reform amongst others) and make the public sector efficient

WHAT WENT WRONG WITH THE EURO…… LESSONS FOR AFRICA

Posted: July 5, 2011 in Africa Policy, Africa Trade, Global

Before you adopt a common currency be sure you are dealing with one country not a group of countries with different monetary and fiscal capabilities.

Every country has fiscal (government) and monetary (Central Bank) authorities to make policy geared towards growth and development. There are also global forces to contend with since we live in a globalised world. Policy in Brussels today can affect the value of the Yuan(China) or the Rand (South Africa).

For instance the Naira (Nigerian currency) sold for N118 to $1 before the global recession of 2008. The recession caused capital flight as investors pulled their monies out of Nigeria to support operations in the west. This caused the Naira to plummet to around N150 to $1. In other words the Nigerian economy was weaker and the Naira depreciated accordingly.

The Cedi (Ghana), Rand (South Africa) and Shilling (Kenya) to mention a few also plummeted in the same period. The degree of movement of a nation’s currency (apart from foreign factors) also depends upon policy and strength or how efficient the economy is. These currencies plummeted by various degrees and some like the South African Rand appreciated in the same period due to flight from the dollar as a fall out from quantitative easing. Every economy and therefore currency adjusts differently in today’s boom and bust cycles.

Every economy has its unique strengths and weakness based on resources, management and policy. Every currency moves according to the strength of the economy it represents. In other words it is impossible to divorce an economy from its currency.

This is the mistake the EU made when the Euro was created. Europe got one currency with at least ten different economies. It was more like a one size fits all currency, when the reality on the ground was different. Europe was awash with cheap money (Euro) in the last decade when fundamentals in the different member states did not support it. Some (Germany) did a better job fiscally while others (Greece, Ireland) spent beyond their means. Today you have a weak Euro because fundamentals in the zone are weak. Germany is doing very well because they can sell their products cheap (due to a weak Euro) abroad, if Germany had to use their currency (not the Euro) it would be stronger to reflect the fundamentals of the German economy. That way Germany will not be able to sell their products abroad because it is expensive and their economy would be weaker.

Instead Germany is trading with a rigged currency that thrives on the weakness of her neighbors. Such is the complexity of the Euro.

There is no such thing as harmonizing monetary and fiscal policies when you have independent states. The concept is “nonsense”, has no foundation in economic reality and the end result is chaos. Greece is in trouble while Portugal, Ireland and Spain will probably default in the near future. It is negatively affecting the global economy and the reason it cannot be fixed is that these countries cannot opt out of the Euro.

It is good that the Euro is unraveling at this material time. Perhaps African countries can learn from Europe’s expensive mistaken common currency experiment and think twice before adopting an “Afro”

“A common market not currency benefits all”

EAST AFRICA REGIONAL ECONOMIC REVIEW (2011)

Posted: July 4, 2011 in Africa Policy, Africa Trade

This is the first in a three part series

The East Africa region as represented by the East Africa Community (EAC) is a political and trade bloc made up of five countries – Kenya, Tanzania, Rwanda, Uganda and Burundi. All countries have undergone political and economic reforms in the last decade and are growing economically.

In 2009, the presidents of Kenya, Tanzania, Rwanda, Uganda and Burundi signed into effect a common market protocol which will see goods, services and labor flow through the region unhampered.

The region is regularizing the customs union, which allows for a common external tariff for goods coming into the EAC, which was a necessary precursor to the common market.

It is hoped that the deal will lead to a greater economic clout for the region. The common market came into effect in July 2010. The East African Community was launched ten years ago and has a population of 138 million.

This article will analyze trends that could be of importance to investors and small businessmen.

POLITICAL OUTLOOK

Rwanda and Burundi are post conflict but fragile states, especially Burundi. Rwanda has had a better transition from the wars of the nineties than Burundi. Burundi concluded elections last year. Both countries are fairly stable and committed to market reforms as a way out of poverty and securing long-lasting peace.

After post-election violence due to irregularities in the 2007 election Kenya, has emerged from that conflict rather well. Last year Kenyans voted on a referendum for a new constitution. Threats from post-election violence destabilizing the country in the future increasingly look remote.

Tanzania rates well in terms of political stability and civil rights. Peaceful elections conducted last year saw the ruling party win by a comfortable but slimmer majority.

Uganda recently concluded elections and President Museveni has been inaugurated as head of state.

Other potential sources of instability in the region include the conflict in Congo DR and Somalia. Bomb attacks in Uganda earlier this year is a constant reminder of the dangers of having a failed state (Somalia) as a neighbor.

GROSS DOMESTIC PRODUCT (GDP)

The combined GDP for the region for 2010 was $184 billion. Economic reforms in the past decade and recent developments like the common market protocol will guarantee that the economy for this region will continue to expand. There has been a steady economic expansion across the region in the last decade. A country like Burundi with a population of about eight million people and GDP of only $3 billion will not be able to attract significant capital needed for development. A Burundi that is part of a $184 billion dollar economy within the common market frame work has richer economic prospects and will attract investment. Major oil discoveries in Uganda and Southern Sudan will spur infrastructure development which will positively impact the middle class and demand for retail goods. The EAC is also part of the common market for eastern Africa (COMESA). This includes countries on the Eastern seaboard of Africa as well as those in the South African market (SADC). This gives the EAC exposure to a market of at least half a billion people and a combined GDP of at around $700 billion. The traditional growth sectors for East Africa are mainly agriculture, mining and tourism. Recent developments like the information communications technology (ICT ) boom in Africa means that retail and telecoms are sectors to watch in the near future.

REAL GROWTH RATE

The average growth rate for the region in 2010 was 5.6 percent. While not as buoyant as the large emerging markets in Asia the region clearly out performs countries in the West and some markets in Latin America. Tanzania and Rwanda lead in this area with a growth figure (above 6%) higher than the regional average. Tanzania growth is mainly due to doubling of output in gold mining amongst others while Rwanda’s relatively transparent economy is a magnet for investment in the region. Also both countries are largely more stable when compared to Kenya and Burundi.

Rising prices for agricultural commodities and metals on the international market as well a growing domestic demand for information communications technology ( ICT) products is responsible for growth. Also there is a rising middle class that is driving growth in retail and real estate amongst others.Reforms around contract law and economic liberalization amongst others have led to greater investor participation.

To be continued…………

The significance of stock market capitalisation (SMC) to Gross domestic product (GDP) ratio – An African Perspective

Posted: June 2, 2011 in Africa Policy, Africa Trade

SMC to GDP ratio is a statistic used to judge whether a stock market is over or undervalued. Usually a stock market capitalization to GDP ratio greater than 100% means that the market is overvalued and a ratio of around 50% means the market is undervalued.

A stock market is a place where companies trade shares to raise money for expansion. In return buyers of these shares get part ownership of the company.

How this works

Usually if a country is growing and people have jobs they would naturally spend on everything from food to clothing to cars. If a baby food manufacturer needs to expand (build new factories, buy machines, hire workers) because of a growing market they go to the stock market to trade shares in exchange for ownership.

Individuals interested in buying company stocks usually channel savings or other forms of wealth into stocks. In other words a stock market is an efficient channel for savings into the wider economy. This also proves the fact that economic performance and market capitalization cannot be divorced from each other. Also market performance is heavily dependent on the strength of the economy since companies expand based on demand for their products and individuals need to be financially buoyant to buy shares. This is why stock markets are declared overvalued when market capitalization to GDP ratio approaches 100%. It has the appearance of a stock market that is divorced from reality because GDP is the anchor for stock market performance.

In 2009 the New York Stock Exchange market capitalization approached 100% of GDP. This prompted market watchers and analyst to warn that the fundamentals of the US economy didn’t support such expansion as yet and that low-interest rates was largely responsible for pushing up valuations.

Another source of extra liquidity for stock markets is that foreign investors can buy shares and local companies can raise shares from other stock markets this is another reason why market capitalization to GDP ratio could exceed 100%.

African Stock Markets

For Africa the market capitalization to GDP ratio relationship is a bit more dynamic.

Apart from South Africa all the other countries have undervalued stock markets. It however (as in South Africa’s case) does not mean that the South African market cannot yield significant returns.

This also means that as an investor you are likely to get higher returns in Nigeria, Malawi, Kenya, Tunisia, Egypt, Mauritius, Morocco and South Africa – in that order. While returns in these markets are high because they are undervalued, there is also a disconnect between the strength of consumer markets versus stock market performance. This is because structural deficiencies like poor infrastructure means that market potential is not easily visible through the size of their stock markets.

The Nigerian stock market was at least 70% percent of GDP in 2007 but crashed the following year. The market was overvalued and share prices were inflated, the rise in stock value was not based on market fundamentals so that a correction had to happen.

For South Africa the reason for a very high stock market capitalization to GDP ratio (247%) is that the Johannesburg stock exchange (JSE) serves sub Sahara Africa.

Foreign companies looking to do business in Africa start in Johannesburg not because of an attractive market but because of developed institutions, transparency and good infrastructure. They use Johannesburg (JSE) as a staging point to move into Africa proper. Sub Sahara African countries are growing faster than South Africa, South African multinationals depends on subsidiaries in other African countries to pool in profit. Investing in sub Sahara Africa is a growth strategy for South African multinationals. Based on the strength of South Africa’s consumer market the JSE is grossly overvalued, based on the performance of sub Sahara African economies the JSE is undervalued, so this is an interesting dynamic.

Another supporting fact is that some Nigerian multinationals are not keen to move into South Africa because of higher taxes and other restrictions that come with a mature market. The consumer market is not as attractive as a result.

Countries with less than 100% market cap to GDP ratio all have higher growth rates than South Africa. For Africa there is an inverse relationship between growth rates and market capitalization.

The U.S. (95%), U.K. (over 100%), Canada (Over 100%) have market cap to GDP ratios of around 100%. As Africa continues to grow this is the direction their stock markets will go.

Country	Market Cap to GDP ratio (%)	Growth rate (%)
South Africa	247	2.4
Morocco	68.8	4.3
Mauritius	55.2	4.7
Egypt	47.7	4.2
Tunisia	36.7	4.3
Kenya	36.6	3.6
Malawi	29.3	6
Nigeria	19.3	4.4

Source: World Bank and Africa Development Bank