From financial restructuring and the global economic slowdown, to debt investing and politics, we forecast the road ahead in the coming 12 months.
A Global Slowdown in 2019 Will Hit Africa (Hard)
Economists are not in a consensus on whether there will be a recession, but they are all in agreement on a downturn in 2019.
“There is a confluence of deep-seated, structural headwinds that threaten to upend the global economy,” warns Zambian-born economist Dambisa Moyo.
A mix of massive debt burdens on governments, corporations and individuals juxtaposed with political instability, growing inequality, and a workforce ill-prepared and ill-adapted to rapid technological change, among many other structural factors, will underpin a hard 2019 for many countries.
The Chinese economy is already slowing, and the U.S. economy is expected to follow the same course in 2019, having a distressing effect on emerging economies with consumption of goods and services from emerging markets likely dropping in the coming year.
The economic malaise in India and Brazil as well as slow growth in the European Union only add to the concerns for some African leaders.
The economists (in a relatively small group) betting on a moderately bullish global economy in 2019 point to a massive downturn in 2020, suggesting a downturn is inevitable and timing may be the only disputed factor.
More Financial Restructuring in 2019
Restructuring in 2018 was not as big as expected in some economist and banker corners, but it will likely be a different narrative in 2019.
Many companies are not prepared for a global slowdown, especially after less than exciting growth numbers in the last three years (due to low commodity prices).
A significant amount of debt was issued in 2013-2015 with maturities in 2018 ignored by many lenders. Maturities in 2019 are top of mind for many companies, while maturities in 2020 are not far out enough to create a timeframe for finding a solution to balance sheet challenges.
A new slump in oil and gas prices will not have a similar dramatic effect on African economies as the price plummet in 2014 had on 2015, but the current price levels indubitably suggest that $100 oil prices are far away, and firms must adjust their operations and cost structures for the long term (many national firms are still in the early to middle stages of that change process).
Power companies will also be a concern for many African economies as their balance sheets and accompanying debts will weigh on government coffers. Lastly, the challenges encountered by many financial institutions in the last couple of years with interest rate caps, limited retail growth, and high non-performing loans (NPLs) could boil over in a greater economic slowdown.
Brexit Will Force Some Changes for Africa-Focused Investors
Africa-focused investors are in the same boat as other emerging market investors – if not London, then where? This question is layered with several realities of recent years in the industry. Africa investors have gone through cycles with office location and regional focus.
The early 2000s are best characterized by firms being based in the U.S. (i.e., Emerging Capital Partners in Washington, D.C.) or the U.K. (i.e., Helios Investment Partners in London) but then development finance institutions (DFIs) started advocating a focus on localized offices towards the end of 2000s in cities such as Lagos, Nairobi, and Johannesburg, among others.
Localized offices have struggled with economic troubles in South Africa (and the declining appeal of Johannesburg), the never-too-high appeal of living in Lagos, the politics of Kenya (and a growing local objection to foreigners flooding Nairobi), and the emergence of Francophone and Lusophone economies (and the lack of flight connections within Africa).
As a result, London was re-emerging as the headquarter focus for many firms. An unplanned Brexit (or “no-deal Brexit”) will confound many emerging market players (including those Africa-focused players) as there is no uniquely popular financial home for many firms if London struggles to maintain its place.
Some investors are already blaming Brexit (and its unexpected unpredictability going into 2019) for the growing expectations of a 2019 economic downtown and their potential exit from London (a city many of those departing have called home for decades).
Debt Investing Will Be the Focus in 2019
Africa investors will focus on debt investments (with some equity kickers). Equity investing is simply not providing the returns imagined by investors. Many L.P.s quietly confirm that the annual internal rates of return (IRR), net of management fees, remain under 5 percent for Africa-focused investors, with the number only slightly rising to sub 6 percent when excluding South Africa.
This level of return pales in comparison to mezzanine and credit investors, and look unattractive when placed side-by-side with infrastructure funds.
Expect many investors to be happy to put in debt structured investments into Africa coupled with security against assets, potential risk guarantees from local banks or international institutions and an equity kicker to gain on the upside.
Debt investors also benefit from weak financial institutions in many countries when it comes to lending. High NPLs at some banks across the region have spurred a decline in lending appetite in the near-term.
Interest rate caps create mixed results, subsequently creating more opportunity in some countries and exposing the challenges of lending in general in other countries.
Politics and Poverty Will Be Dangerously Overlapping Subject Matters
Many countries, including Nigeria and South Africa, have elections in 2019 (see some predictions here). The trajectory of these countries will depend on their ability to enable democracy and economies to address the concerns and challenges of many individuals feeling left out of the system.
Nigerian politicians must prove their victory and subsequent decisions can help the country escape its economic malaise while South African politicians, specifically the African National Congress (ANC), will have to shore up its voting base under President Cyril Ramaphosa in the next five years (assuming a victory in 2019) or deal with more investor and citizen flight from the country.
Tunisian politicians are still working to prove democracy works in North Africa and that it will solve the economic challenges of the ‘average’ Tunisian.
All this political rancor will overlap with undying clamor from politicians and philanthropists among others that enough is not being done to address poverty in Africa, in particular sub-Saharan Africa.
Education and healthcare investment may be up in Africa but many children (and families) are still trapped by location on the continent (i.e., being born in certain cities severely undercuts opportunity for certain people without access to living necessities such as running water and basic healthcare).
And many investors admit that there are parts of Africa that they simply will not invest in, at least, in the near-term, and as such, public and philanthropic capital will have to step in.
Article by Kurt Davis Jr. He is an investment banker with private equity experience focused on Africa, Middle East, and Turkey. He earned an MBA in finance, entrepreneurship and operations from the University of Chicago and J.D. in tax and commercial law at the University of Virginia’s School of Law.