“If that pops, it will hit everyone.” In the first nine months of 2018, global merger and acquisition activity hit feverish levels last seen on the eve of the 2008 financial crash.
Western observers agree on the prospects. “We think the major Western economies are on the cusp of turning down into the worst recession we have seen in our history,” says Murray Gunn, head of research for Elliott Wave International. “Sitting near its highest ratio ever, US total credit market debt to gross domestic product (GDP) assumes a perpetual economic growth engine that quite simply does not exist.” And that is without factoring in how the government will pay for President Donald Trump’s big tax giveaway to corporations.
So what happens if the global business cycle turns? Who is prepared? And how might you hang on to your hat – and shirt – in the coming gale?
First, there will be a retreat of global investors from emerging and frontier markets. After quantitative easing (QE) – a posh term for printing money – got underway in the US, European Union and elsewhere, investors in these big markets struggled to find a return on their money at home. They created a wall of money that flooded into emerging economies such as Turkey and Brazil, and increasingly into Africa.
Many African governments took advantage and floated eurobonds. They have that extra money now, but will pay the price further down the line. Moody’s says that between 2022 and 2030, financing costs in emerging markets will jump from $7bn to $9bn per year, driven in part by repayments in sub-Saharan Africa.
As the US economy continued to improve and interest rates rose, those QE yield refugees have started to head home. And as that tide of liquidity has receded, we now know who’s been swimming naked, to paraphrase veteran US investor Warren Buffet.
“We are starting to see much more granularity coming into the pricing [of African bonds],” says Aly-Khan Satchu, a Nairobi-based analyst. “This is a big challenge for little countries. A lot of policymakers need to adjust to the new normal – currently, if you look at debt-to-GDP ratios, everyone is running on empty.”
Ghana’s central bank governor, Ernest Addison, has rung the alarm bell about hikes in the interest rate from the US Federal Reserve pushing up Ghana’s re-financing costs – though it hasn’t stopped Ghana’s finance minister talking about launching $50bn in 100-year bonds.
Next, China is a big worry. For those countries exposed to China, including some countries with big Chinese debt, things become even more complicated – and not just for raising money. Some are concerned that President Trump will lean into his trade war with China for political gain ahead of his 2020 election run. If China catches a cold, what does Africa catch? Already, Chinese growth has flattened, hitting Asian countries bound up in its myriad supply chains. This will hit African hard-commodity exporters, too.
If all that were not bad enough, Africa is embroiled in its toughest challenge yet: finding things to do for its hundreds of millions of young people. Morocco is ahead of the curve, with its successful industrial policy creating factory jobs in automobiles and aeronautics. But even Morocco is feeling the pressure. Some 300,000 young people graduate from university every year, with only an average of 100,000 jobs available.
The situation elsewhere is more troubling. The World Bank warns that recent gains made by the continent will be lost. Between 2013 and 2015, the number of people living in extreme poverty in sub-Saharan Africa rose from 405 million to 413 million, which is against the trend of the rest of the planet.
However, there remain opportunities and positive trends to embrace. Control Risks’ Africa Risk/Reward Index is positive, noting that reformers in Africa are attacking big structural problems – and it points to Zimbabwe and Tunisia for proof that changing leaders does eventually lead to progress. The key point is that while in developed markets there may be only marginal gains to be made from reforms, in Africa there are step changes ahead. Basic security, paved roads and a new port could turn Nigeria into the breadbasket of the region, for example, and a rival to Brazil. In a world with increasing food demand, agribusiness can be Africa’s strength.
Of course, people cannot eat potential. But that potential can be accessed fast in Africa. The tougher end of the business cycle tends to be when the better decisions are made about allocation of resources for key projects. The project preparation step “is often overlooked in the pursuit of quick returns,” said Tshepo Mahloele, chief executive officer of Harith General Partners, as he unveiled a new facility alongside Afreximbank in November to help de-risk big infrastructure projects across the continent.
Even for those with debt problems, there is such growing geopolitical interest in Africa that smart politicians may be able to get debt rescheduled – as we are seeing in Ethiopia, and potentially Kenya, with both countries important to both the US and China. It is unlikely that Beijing will let Angola go to the wall, either. African governments can also wring money out of Europeans fretting about demographics and migration, as the Niger government is doing so ably with France.
And if China pushes ahead with its structural reforms of the economy away from manufacturing and towards consumption, reaching the hungry and newly affluent Chinese consumer is another route to success for African players. Watch out for Ethiopia’s Garden of Coffee opening up 100 cafes in China by 2022. “The Chinese market opportunity is huge, with China essentially being where the US coffee market was 40-50 years ago,” Ethiopian entrepreneur Bethlehem Tilahun Alemu told reporters in late October. “So it was logical for us to expand into China.”
You should also watch out for global economic interest being piqued by regional blocs that actually deliver on their promises to create sizeable markets. East Africa is ahead here as a bloc that has invested the most in connective infrastructure, from roads to power lines to a new inland port in Rwanda. For Kenyan analyst Satchu, it is no surprise that the East African Community (EAC) has attracted so much interest from port operators, from China and the Gulf. “That sort of cash is not offered up lightly,” he says. He also suggests that Ethiopia is destined to join the EAC, adding 100 million people to the party.