BMI View: Our 'African Lion' economies are poised for rapid growth over the long term and investment opportunities abound. In this article, we highlight 10 such opportunities across a range of industries.
BMI hosted a briefing entitled 'African Lions: Exploring Key Growth Markets' at the London Stock Exchange in June. We put forward our thesis that although many of the leading economies in Sub-Saharan Africa (SSA) will encounter substantial political and economic headwinds over the coming two years, the long-term growth story is intact and investment opportunities abound.
Nigeria is a case in point. The country faces a tense, divisive election in early 2015 that will test its democratic structures, but investors cannot afford to ignore the immense opportunities presented. The vast, burgeoning consumer market will generate rapid growth in demand for goods and services such as private healthcare and education. Meanwhile, the ongoing privatisation of the power sector will provide massive impetus to a range of industries.
Kenya is another of our African Lions that presents huge investment possibilities despite the significant challenges that must be surmounted. The economy is rapidly evolving towards higher value-added goods and services, aided by technological advances such as mobile banking.
| African Lions |
|Map - BMI's 'African Lion' Economies|
Although each of our African Lions will undoubtedly go through its ups and down over the coming 10 years, the overall growth trajectory will be positive and activity will proliferate across industry; major resource projects will create spillover effects for associated goods and services. Here, we present 10 compelling investment opportunities that the region has to offer. Each has its nuances and risks, which are explored in detail in our Industry analysis on Business Monitor Online.
1) Gas production in Mozambique: In the wake of huge offshore discoveries, Mozambique is destined to become a significant gas producer. The greatest boost to output will come in 2020 with the large-scale development of deepwater discoveries to fuel a liquefied natural gas (LNG) plant. In addition to the exciting prospects for the oil and gas sector, the infrastructure requirements (roads, pipelines, ports etc) to monetise such discoveries provide attractive opportunities to a wide range of industries. Moreover, given the scale of discoveries to date, there should be ample supplies to support both domestic industry and LNG needs. Gas production therefore yields opportunities for domestic industrial projects that can take advantage of gas as feedstock: Gas-To-Liquids, gas power generation, methanol and fertiliser production, and liquefied petroleum gas projects.
| Gas Boom Ahead |
|Mozambique - Gas Production, Consumption And Net Exports|
2) Geothermal energy in Ethiopia and Kenya: Kenya and Ethiopia are both taking steps to harness their underdeveloped geothermal resources in a bid to diversify their power markets away from unreliable hydropower and costly oil imports. If developed successfully, this would provide both countries with an indigenous and 'clean' baseload energy supply, whilst also helping to meet rising power demand and support energy-intensive industries such as hydrocarbon exploration. Although funding continues to pour in from international financial institutions and development banks, greater private sector involvement will be necessary in order to expand the nascent industries. Both countries are taking steps to encourage private investment into the sector and we expect the respective governments to invite bids to develop new capacity over the coming years. We believe the two countries will drive the East African Rift Valley geothermal expansion.
3) Infrastructure in Côte d'Ivoire: We are bullish Côte d'Ivoire's infrastructure market, forecasting that the construction industry will grow by 12.8% in 2014 and 12.1% in 2015 in real terms. In line with the country's USD22.8bn National Development Plan, significant public and private investment is taking place and the country is set to see a rapid expansion of its transport and power networks. Government investment into addressing the country's wide-reaching infrastructure deficiencies, following decades of underinvestment, is filtering through to projects, while private investment is also picking up as political stability improves and the economy gains steam. In particular, we highlight the use of the public-private partnership (PPP) model in developing major projects such as Abidjan Port, Henri Konan Bédié Toll Bridge and the Azito Power Plant.
4) IT services in Ghana, Kenya and Nigeria: We have a positive growth outlook for the IT sector in Ghana, Nigeria and Kenya, on the back of ongoing investments in broadband networks and rising demand for IT services from the financial, telecoms, energy and retail sectors. Since the beginning of 2014, global IT firms SAP, Oracle, IBM, Hitachi Data Systems, Dimension Data and Business Connexion have all increased their interest in the three countries' IT markets by establishing offices, building local partnerships and launching locally tailored products. Although growth in the IT market is tightly correlated to economic growth, with businesses more willing to invest in IT hardware and services during times of prosperity, these countries also benefit from strong government support for the sector. Ghana's government has been particularly proactive, prioritising the development of e-governance programmes and, in May 2014, announcing a USD9mn investment to build state-of-the-art business process outsourcing (BPO) centres in Accra to process data from state agencies within and outside Ghana.
| Government And Economy Support IT Growth |
|Nigeria, Kenya, Ghana IT Market Growth, 2011-2018|
5) Mobile towers in Côte d'Ivoire, Ghana, Nigeria and Tanzania: SSA's mobile network operators' profits are being squeezed by declining revenues from traditional voice services on one side, and stricter quality of service requirements and rising demand for mobile services on the other. In response, mobile operators in Côte d'Ivoire, Ghana, Nigeria and Tanzania have cut operating costs by selling or offloading management of their telecoms towers to independent towers firms. BMI has a positive outlook for these countries' towers markets, as strong private consumption growth is supporting rising demand for mobile voice and data services, while the presence of at least four mobile operators in each country should ensure a high tenancy ratio on telecoms towers. In July 2014, Airtel joined other regional operators MTN, Orange and Millicom International Cellular ( Tigo) to adopt the tower outsourcing strategy, with the sale of 3,100 towers to Helios Towers. We expect SSA's other major independent tower firms, IHS Towers, Eaton Towers and American Towers Corporation, to express interest in the remainder of Airtel's 15,000 towers across the continent.
6) Oil production in Angola: Angolan oil output is set for strong growth over the next 10 years. A spate of major projects is due to come online by 2021, bringing around 1.2mn barrels per day of new capacity. Project delays are not uncommon in Angola, but the comparative stability of the operating environment and the involvement of multiple industry heavyweights significantly limit the downside risks here. New upstream and transport infrastructure will be needed to support the increase in output, and with the bulk of new production concentrated in deepwater and technically challenging plays, growth will be heavily services-intensive. Local content requirements are minimally enforced, and given limited domestic capacity, the opportunities that accrue to the foreign private sector will be substantial.
| Strong Pipeline |
|Angola - Oil Production Forecasts, b/d '000s|
7) Pharmaceuticals and healthcare in Nigeria: We see Nigeria as an untapped opportunity for pharmaceuticals and healthcare (P&H) in West Africa, owing to prevailing socio-economic factors, the sheer size of the USD558bn economy and the possibilities for regional expansion. There is a considerable market for healthcare services and goods within the country given the scale of private, out-of-pocket spending and the state's embrace of PPPs. The four biggest factors driving spending growth in P&H are: a large disease burden of tropical and infectious diseases; urbanisation and increasingly sedentary lifestyles from an enlarging middle class; increasing life expectancy and rapid population growth; and large-scale infrastructure spending and rising incomes amongst consumers. We note that consumption of healthcare and pharmaceuticals in Nigeria is overwhelmingly driven by private consumption (70% of total). Affordability will be the primary impediment to unlocking the Nigerian market.
| Private Spending A Key Driver |
|Nigeria - Health Spending, USDbn|
8) Power supply in Nigeria: Nigeria's power sector offers huge opportunities for resolute investors. Gas shortages and decrepit distribution infrastructure are risks to market entry; however, our view is predicated on colossal untapped demand for power. Private sector investment is necessary to support the construction of new capacity and meet surging electricity demand. The unbundling of Power Holding Company of Nigeria (PHCN) and the transferral of the successor companies to the private sector indicates the privatisation process is gaining momentum. The sale of 10 gas-fired power plants to the private sector is also proceeding and we believe independent power producers will increasingly enter the market.
9) Telecare in Kenya: Mobile network operators in Kenya are well placed to take advantage of the services gap in other sectors of the economy to deliver innovative telecoms crossover services that could provide sustainable long-term revenue growth and enhance customer loyalty. In addition to the financial services sector, which is benefitting m-commerce services, there are services gaps in the healthcare insurance sector. In a low-tech, resource-limited environment such as Kenya, mobile health insurance will work well as it uses a technology that millions of people have access to. Approximately 97% of the Kenyan population lacks access to affordable and timely healthcare because they are uninsured. Furthermore, rising consultation fees, payments for laboratory tests and for drugs leave many citizens unable to pay the regular and mandatory monthly health insurance premiums boosting the demand for micro-insurance products in a market in which the population is accustomed to mobile payments. ?
10) Vehicle assembly in Nigeria: We see the new Nigerian Automotive Industrial Development Plan as the catalyst for reviving the country's dormant vehicle production industry. We believe the remaining few domestic assemblers with capacity available from the previous wave of production will capitalise on the speed with which carmakers want to set up local production operations. The timing is also favourable as a growing middle class has boosted demand for vehicles. BMI data shows car ownership has increased from 1.7 cars per 1,000 people to 6.9/1,000 in the decade from 2003 to 2013, and will reach 9/1,000 by the end of our forecast period in 2018.