Gulf Co-operation Council (GCC) countries are placing more attention on new markets in east, west and southern Africa as their trade flows with the continent expand, according to a report released by the Economist Intelligence Unit (EIU) this week.
Africa boasts some of the world’s fastest expanding economies, driven by natural resources, a young population, rising consumer needs and major infrastructure requirements. The GCC’s geographical proximity and good air links are growing trade, and investors are seeking new equity and investment opportunities.
The EIU study, entitled GCC Trade and Investment Flows, explores the GCC’s economic ties with each world region and identifies major growth drivers. Key findings show the GCC’s push into Africa is broadening by sector and geographical location. From telecommunications and private equity in West Africa to energy projects in South Africa and Mozambique, investment flows are diversifying. Opportunities in infrastructure are a primary growth driver, where, according to World Bank estimates, $96bn a year is required to bridge the gap, while fast moving consumer goods (FMCG) is one of the fastest-emerging opportunities on the continent, driven by increased spending power and rising consumer needs.
The EIU identifies opportunities for Gulf players to invest in infrastructure, where, according to World Bank estimates, $96bn a year is required to bridge the gap. ‘GCC entities are active, through a mix of private money and development loans,’ it says. DP World and Agility of Kuwait are present in ports and terminals while Saudi Arabia’s Bin Laden Group and Kharafi Group, also of Kuwait, have been building airports and roads.
TAQA of Abu Dhabi is erecting a power plant in Ghana, and Saudi Arabia’s ACWA has recently invested in a coal plant in Mozambique, a solar facility in South Africa, and is bidding for plants in Botswana and Namibia. In September 2014, the Investment Corporation of Dubai announced that it would be investing $300m in Dangote Cement of West Africa, which has a market capitalisation of about $23bn, and the following month the chief executive of the Investment Corporation of Dubai (ICD) announced they were looking at further investment opportunities in African agriculture.
In banking, there has historically been little synergy between the GCC and Africa, but in September 2014 Qatar National Bank (QNB), which already has a presence in North Africa, acquired a stake in regional commercial bank, Ecobank Transnational. ‘Gulf companies, particularly those run by families, prefer using known banks and this move by QNB is well calculated. The growth of Islamic finance in Africa is another facilitator for GCC investment. South Africa, Kenya and Senegal are planning sovereign sukuk (sharia-compliant bonds) and these could open the door to a new flow of capital markets activity,’ the study commented.
Africa’s tourism industry is attracting attention. The Dubai-based Jumeirah Group, which has begun growing in North Africa, has signed a management agreement for a hotel in Mauritius and are also discussing deals in Nigeria, Angola, Kenya and South Africa. The Investment Corporation of Dubai has bought a stake in Kerzner International, responsible for resorts such as Atlantis and the One & Only. ‘Africa is on the radar screen of a lot of the countries in the Middle East,’ notes Rassem Zok Standard Banks chief executive officer for the Middle East and North Africa. ‘Africa is regarded by many developed economies as one of the final remaining frontier markets with significant opportunities … and the GCC countries are very aware of this.’
Zok says fast-moving consumer goods (FMCG) is a ‘hot sector’ but mining, oil and gas are also increasingly being targeted for GCC investments. George Abed, senior counsellor and director Middle East and North Africa (MENA) at the Institute of International Finance, agrees that there are significant opportunities for GCC investors in Africa, but cautions that the ‘sudden surge in interest has made for a crowded field’ and there are ‘probably now more funds than fundable projects.’ Similarly, Rachel Ziemba, director of global emerging markets at Roubini Global Economics in London, also says that Africa markets are ‘quite shallow, particularly from a portfolio point of view’ which could be a barrier for GCC investors.
Dubai-based Abraaj has navigated this by using its 2012 merger with Aureos Capital to build up an extensive continental portfolio worth close to $2bn across sectors including mining, tourism, manufacturing and healthcare.
One of the barriers to greater GCC investment in Africa is a perception of high political risk. But Nasser H Saidi, former chief economist at the Dubai International Financial Centre (DIFC), and member of the IMF’s Regional Advisory Group for MENA believes that Africa offers high-yield opportunities. ‘Why should the GCC countries invest in US Treasury bills at 0.5 percent yield when next door you can have risk-adjusted returns on investments of 15-30 percent?” he asks, adding that more can be done to capitalise on the Gulf’s geographical position between Africa and China. ‘The UAE has the locational comparative advantage of being closer to Africa than China, but institutional structures need to be put into place to maximise this opportunity,’ he says. Zok acknowledges that Africa is not always the easiest place to do business and says a careful analysis of markets and local partners is required. ‘Political instability is something you have to work around. It is better if it is not there, but it does not rule out opportunities. You have to study a country, see how you can mitigate risk.’