Pioneering African financier Idris Mohammed offers some diagnoses for the ills of Africa’s capital markets. His thesis: Africa has suffered from “abyssmal political leadership” and the fact that there has been very little “real capital that demands corporate returns on investment.”
“If you make Africans rich, they’ll be less poor. That’s my poverty reduction strategy.” Mohammed worries that African economics has overfocused on poverty reduction and underfocused on wealth creation. He points out that Africa is still the country with the lowest GDP, both on a regional and per capita basis. The continent – putting aside South Africa, “which is a developed country hiding out in Africa” producing 30% of the continent’s GDP – is in a pre-industrial state, with the highest sectoral economic contribution from agriculture.
Asia has outperformed Africa as a region over the past four decades – it’s only in the most recent decade that some nations, with 5% growth rates, are challenging Asian economies. This happens on a country by country basis as well, shown by a comparison of Nigeria and Indonesia, two large oil powers. “This story has occurred in an increasing aid environment.” While there’s been a great deal of aid, there are very low private investment levels, half of the level in all other regions. “Financing from debt, aid and natural resources – this is easy money.” There’s a need for more private capital, demanding higher rates of return.
While the political environment in Africa has been problematic – “We’ve had two kinds of leaders: morally bankrupt, and ideologically bankrupt” – the move towards democratization has been as rapid in Africa as in Asia, for the most part. We can’t just blame the political system.
The rise of mobile phones on the continent coincides with the rise in GDP per capita… and with a rise in investmen on the continent. MTN Nigeria was valued at $200 million some years ago when international investors began participating – it later sold for $5 billion, a dramatic increase. The next huge opportunity, Mohammed arguees, is power generation, lighting up the “dark continent”. Electricity consumption has been basically flat at 150 kilowatt hours per person per year. Asian consumption is about six times as high – American consumption is orders of magnitude higher. And industrialization requires energy. Investing in new power production historically costs about $1 million per megawat – this means that we might be talking about $70 billion in investment for the African continent. This is a huge amount of money, but not impossibly huge, especially in terms of telecoms investment.
Private equity financing is on the rise in Africa, representing $2 billion a year. The telecoms sector has been so successful, it’s starting to attract additional capital. “What I think Bono should be doing is telling the G8 to set up a fund of funds” to invest in new businesses in Africa. Beyond that. Mohammed wants to see a market capitalization ratio increase, which currently stands at 10% on the continent – raising this just 5% generates millions in new wealth.