In my previous blog, I touched on some of the opportunities I saw in Africa. In this post, I will discuss what I think are the continent’s key challenges and my outlook for the region.
Corruption is a major problem in Africa. However, it takes two to tango, so accusations of corruption against African governments could also potentially be lodged against entities in the developed world that seek to buy the influence of these governments. One important development has been the Cardin-Lugar amendment to the Dodd-Frank finance reform bill in the U.S., requiring among other things, that oil, natural gas and mining companies registered on the New York Stock Exchange disclose any payment made to a foreign government for the purpose of the commercial development of oil, natural gas or minerals. Some believe that the Cardin-Lugar amendment is more important to Africa than the debt relief of the last decade.
Those who are optimistic about Africa say that after many years of colonialism, it is beginning to demonstrate its potential. The continent does have its detractors, who say that while it may have been free of colonial rule for 60 years, the continent continues to battle poverty, corruption, AIDS and armed conflict. However, while Africa does have challenges, I am encouraged by another side of Africa that is gradually emerging with the development of capital markets, consumerism and technology.
I believe the opportunities for the development of Africa’s markets are appealing primarily because of the strong growth numbers now emerging out of the continent. Africa is expected to grow more than 7% annually in the next 20 years, due to an improving investment environment, better economic management and China’s rising demand for Africa’s resources. More than 100 African companies have revenues in excess of $1 billion. Africa also has impressive stores of resources, not only in minerals but also in food — 60% of the world’s uncultivated arable land is found in Africa. As global demand for hard and soft commodities continues to grow, I believe Africa is in an enviable position with its vast natural resources. The potential for long-term growth in consumer-related areas is also very attractive, with around 1 billion inhabitants on the African continent. These are people, just like many others all over the world, with aspirations to own their own homes and buy possessions such as cars, refrigerators, washing machines and the like.
Mexico has a wonderful combination of a dynamic economy with an active cultural scene. Just like other markets around the world, Mexico’s stock market suffered a crash at the end of 2008 and the beginning of 2009, moving from the 2007 high of almost 32,473 points to an October 2008 low of 16,979 points, an enormous decline. Since then it has climbed steadily, more than doubling to reach 38,600 points again at the beginning of this year.
The Mexican economy has mirrored the stock market. After a disastrous 6% contraction of the economy in 2009, Mexico grew by more than 5% last year and is expected to grow by 4% in 2011. Mexico took its medicine early in the crisis with fiscal reform in 2009 which included a value-added tax and cuts in government spending. The public deficit is now only 2.5% of the GDP and is expected to decrease to 2% in 2011. Public debt as a percent of GDP is 40%, which is considered reasonable when compared to other nations around the world. More importantly, foreign reserves are building up and have risen from the mid-2009 level of US$80 billion to over US$120 billion today.
In my previous blog, I’ve touched on how China’s latest Five-Year Plan is focusing on growing the domestic economy with a focus on harmony. A lot of the foreign investments and the large capital inflows into the Chinese market have all been focused primarily on tapping into one of the world’s largest consumer markets. However, what many are missing is that China is the world’s fifth largest investor in terms of outbound direct investment at about US$56.5 billion in 2009.
Last December, China announced US$16 billion in deals in India and early this year, top Chinese officials reiterated their support for European debt by pledging to purchase as much as 6 billion Euro worth of Spanish government bonds. China’s support for the European economy is regarded by many as a good strategy since Europe is currently China’s largest trading partner. Exports are still essential for continued growth in China as it would need time to further develop its domestic market. The purchase of European assets is also seen as a way to diversify China’s US$2.85 trillion of foreign reserves assets which are heavily weighted towards U.S. Dollar investments, particularly U.S. Treasuries.