Low Asset Prices Present Investment Opportunities In Lusophone Africa
This is the second in a two-part series. The first article, The Anglos Are Coming To Francophone Africa, spoke to the rise of French Africa in investment circles.
Investors are strategically betting on the upside in Francophone African countries due to strong economic growth rates and currency stability with the CFA franc.
Lusophone Africa presents a similar story — OK, not exactly identical — but it does present opportunity. Low assets prices have replaced the exorbitant numbers promulgated during the heyday of oil and gas, particularly in Lusophone African giants Angola and Mozambique.
Moderated commodity prices — an economic euphemism in these countries — also quell competition, furthering the case for the big two, while the economic outlook suggests economic upside and returns in the long term.
Mozambique was the star child of emerging markets in 2014. The discovery of offshore natural gas and a growing middle class was the classic underwriting for optimism in 2015. The country was projected as the fastest growing economy for 2015 through 2020, only trailing Ethiopia. The times have surely changed.
Mozambique gained independence from Portugal in 1975. The ensuing 16-year civil war ended in 1992.
After averaging 7.3 percent economic growth between 2005 and 2015, the Mozambican economy grew a paltry 3.6 percent in 2016 — its lowest growth rate in 15 years. Analysts estimate that the economy will grow about 4.5 percent in 2017 and 2018 and jump above 5 percent thereafter.
Mozambique’s economic struggles can be boiled down to three things.
- Low foreign reserves/foreign exchange.
- Reduced public expenditures.
- Damaged perception among private investors and banks.
The country’s no-longer-hidden debt — owned by state-owned firms — is core to the lack of reserves and expenditures. Debt restructuring efforts can restore some confidence in Mozambique’s economic system. The government is working on strengthening its coffers and pushing infrastructure investment. Private investors are finding a government more willing to deal on better terms, and companies are pricing assets at fairly digestible prices.
Logistics companies, according to one private equity investor, are selling far below the inflated prices of 2014. J&J Transport, a logistics company that received private equity backing in 2014, manifests the challenges in the low commodity environment.
Financial services is also trading down, especially after the Mozambican Central Bank took over the country’s fourth largest bank, Moza Banco, because Moçambique Capitais could not provide it further capital injection.
Real estate also remains a strong play. In March 2017, U.K.-based Actis, a private equity fund focused on emerging market investments, announced a $96 million mall investment in Maputo. Actis’s Baia Mall is a prime example of investors betting on the upside.
Buying now makes sense as a small upswing in gas prices and infrastructure spending—the latter likely driven by IMF public efforts to restructure debt to affordable levels—will create a bump in growth and long term outlook.
Angola is more troubled than Mozambique. Low oil prices— the new norm, according to some industry experts—have drastically slashed the Angolan government’s ability to raise revenue and spend on infrastructure. Previous budgets in 2014 and 2015 generally bet on $90-plus oil, yet oil barely sits above $50 dollars a barrel today. The Angolan economy grew 0.6 percent in 2016.
But it is important to remember that oil price crashes have previously marred growth rates in the county. Oil plummeted from a high of $147.27 per barrel on July 11, 2008 to sub-$60 by the end of the 2008. Economic growth in Angola dropped precipitously from 22.6 percent in 2007 to 2.4 percent in 2009, according to the World Bank. Yet, equally important to the story, Angola recovered again when prices rebounded. The challenge in the current market is the reality that growth may not rise above 3 percent until around 2021.
All these numbers underscore a market where the government cannot support its infrastructure ambitions. Fundo Soberano de Angola, the country’s sovereign wealth fund, recently announced a $180 million investment for port infrastructure. But in light of the sharp drop in general spending, local sentiment is that the money may be phased in gradually. Local project managers bank on private sector investors to cover the spending gap in the short term through the Public Investment Programme (PIP).
Private investors can take comfort in the Angolan government’s track record in spending big on infrastructure. Those investors willing to buy into the real estate and logistics sectors today will find payouts in a couple years, specifically as investment in African oil and gas returns.
It is not a matter of if but when. Current investment points to a supply deficit in a couple years that should boost oil prices. Petroleum services and warehousing will also become important — Angola’s current offerings could be improved to better support both the oil sector and consumer goods sub-sectors such as agribusiness.
President Jose Eduardo dos Santos announced in December 2016 that he will step down before the 2017 elections. The ruling party — the People’s Movement for the Liberation of Angola — elected João Lourenco, a former defense minister, as vice president ahead of the parliamentary elections. The leader of the winning party automatically becomes the president.
There appears to be an easy transition of government coming in the next political process. That has to be viewed with a little positivity.
Kurt Davis Jr. is an investment banker focusing on the natural resources and energy sectors, with private equity experience in emerging economies. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at email@example.com.