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Investing in Africa, Good News, Bad News and Faux Pars

Accra Mall Ghana

As people around the globe eye Africa for potential investment and South Africans head north there is some encouraging news to feed those ambitions, worrying reports to temper our enthusiasm and some mistakes to learn from.

Ghana’s capital Accra is awash with educated, well-dressed young up-and-coming people, driving top-of-the-range cars living in stylish houses. It’s indicative of Ghana’s economic growth, 14.4% last year. According to the World Bank many African economies are forecast to be among the world’s fastest growing in 2012. Top of that list are the DRC, Nigeria, Ghana, Liberia and Ethiopia.

US-based business consulting company Ernst & Young reports: “There is a new story emerging out of Africa: a story of growth, progress, potential and profitability.”  US secretary of state for African affairs, Johnnie Carson is quoted as saying that Africa represents the next global economic frontier. China’s trade with Africa reached $160 billion in 2011, making the continent one of its largest trading partners.

London based magazine The Economist reported last month: “Since The Economist regrettably labelled Africa ‘the hopeless continent’ a decade ago, a profound change has taken hold.” Today “the sun shines bright … the continent’s impressive growth looks likely to continue.”

Africa’s trade with the rest of the globe has skyrocketed by more than 200% and annual inflation has averaged only 8%. Foreign debt has dropped by 25% and foreign direct investment (FDI) grew by 27% in 2011 alone.

Despite projections for growth in 2012 being revised downward due to the so called Arab Spring , Africa’s economy is expected  to expand by 4.2%, according to a UN report earlier in the year. The International Monetary Fund (IMF) is expecting Sub-Saharan African economies to increase at above 5%. Added to that, there are currently more than half a billion mobile phone users in Africa, while improving skills and increasing literacy are attributed to a 3% growth in productivity.

According to a UN report the think tank,  McKinsey Global Institute writes, “The rate of return on foreign investment is higher in Africa than in any other developing region.”

An end to numerous military conflicts, the availability of abundant natural resources and economic reforms have promoted a better business climate and helped propel  Africa’s economic growth.  Greater political stability is greasing the continent’s economic engine. The UN Economic Commission for Africa (ECA) in 2005 linked democracy to economic growth.

All this growth and urbanisation is putting a strain on social services in the cities, it has also led to an increase in urban consumers. More than 40% of Africa’s population now lives in cities, and by 2030 Africa’s top 18 cities will have a combined spending power of $1.3 trillion. The Wall Street Journal reports that Africa’s middle class, currently estimated at 60 million, will reach 100 million by 2015.

Then there’s the more sobering news.  “A sustained slowdown in advanced countries will dampen demand for Africa’s exports,” writes Christine Lagarde, managing director of the IMF. Europe accounts for more than half of Africa’s external trade. Tourism could also suffer as fewer Europeans come to Africa, effecting tourist dependent economies like Kenya, Tanzania and Egypt.

The South African Reserve bank warned in May that the financial crisis in Europe, which consumes 25% of South Africa’s exports, poses large risks. Adverse effects on South Africa could have severe consequences for neighbouring economies.

Another worry is the resurgence of political crises. Due to the so called Arab Spring, economic growth in North Africa plummeted to just 0.5% in 2011. Recent coups in Mali and Guinea-Bissau could have wider economic repercussions. “Mali was scoring very well, now we are back to square one,” says Mthuli Ncube, the AfDB’s chief economist. Ethiopia, Kenya, Uganda and other countries have militarily engaged in Somalia, which may slow their economies. And Nigeria is grappling with Boko Haram, a terrorist sect in the north of that country.

A cause for concern what many are referring to as Africa’s “jobless recovery.” Investors are concentrating on the extractive sector, specifically gold and diamonds, as well as oil, which generates fewer employment opportunities. 60% of Africa’s unemployed are aged 15 to 24 and about half are women. In May, UNDP raised an alarm over food insecurity in sub-Saharan Africa, a quarter of whose 860 million people are undernourished.

But none of this is deterring South African business interest north of the border. One may ask why? South Africa’s domestic market is not providing local companies with enough growth opportunities, prompting many of them to look at the rest of the continent. This according to Ernst & Young’s Africa Business Centre’s leader, Michael Lalor in an online press conference recently: “While South Africa is still growing well compared to the advanced economies, it’s certainly not keeping up with some of the other rapid-growth markets.” Says Lalor.

Analysts are pointing out that many of the other emerging markets, such as China and South America, are difficult to enter, making the rest of Africa the obvious choice. Asia is seen as almost excessively competitive. Latin America ventures mean dealing with a very strong and ever present Brazil. Therefore Africa, given its sustainable growth story and its potential, is an obvious region for South African companies to grow into.

Quoted by howemadeitinafica.com Lalor says that most Johannesburg Stock Exchange-listed companies are currently developing strategies for the rest of the continent.   Ernst & Young is experiencing strong interest from foreign companies to invest in the continent. “The response from our clients and from potential investors is overwhelmingly positive, to the extent that we simply cannot keep up. So there’s no doubt that we are seeing significant interest, both spoken, interest in spirit, but also people putting their money where their mouths are,” he said.

These sentiments are confirmed by a survey done last year by Price Waterhouse Coopers. A CEO survey published by PwC found that 94% of South African company heads expect their business in Africa to grow in the next 12 months. PwC interviewed 32 South African CEOs in the ICT, financial services, and consumer and industrial products and services industries.

With this in mind it’s worth turning to Raymond Booyse, founder of consultancy firm Expand into Africa, who identified four mistakes often made by South African companies venturing into the rest of the continent.

The first was: Not doing your homework. South African firms are frequently not prepared to spend money on market research. “Go and look if there is a market for your products or services. After you’ve established that there is indeed a market, find out who your competitors will be,” says Booyse.

Booyse points out that South African companies underestimate transport costs and ignore how local laws and regulations influence doing business.

Secondly: Ignorance. Many South African business people are ignorant of local cultures and attitudes according to Booyse. By way of example, ignorance doesn’t realise that just because they’re both former Portuguese colonies, what works in Angola’s capital Luanda, doesn’t necessarily mean it will work in the northern Mozambique. In a recent report, research firm Nielsen noted that African consumers’ attitudes towards technology, fashion and how to spend leisure time vary greatly. No prizes for that one.

Thirdly: Arrogance. Booyse says that South Africans sometimes think they know what people in the rest of the continent need. “In the rest of Africa, South Africans are often regarded as arrogant.”

Finally: Not being prepared for the high costs of doing business in Africa. Many South African companies are not aware of the high costs involved in doing business in the rest of the continent. “If you want to spend two weeks in Angola it will cost you R40,000 (US$4,700),” notes Booyse. “It is not cheap and easy.” Flights for example, from South Africa to either Kinshasa or Lubumbashi can be costly, and hotel rates are also very high.

It’s clear that Africa is a fertile place to plant seed. But Africa is not for the faint-hearted as business is done in a very different way to elsewhere in the world, with all manner of social and political hoops to jump through. South African companies have a potentially bright future and definite advantages if they are prepared to take risks, stay humble and do their homework.

Financial Services Employment Around The Globe

There are no prizes for guessing how much pressure, employment in the financial services sector is under these days. Scrutinizing some statistics coming in from the world’s leading financial cities may lead one to some more thought provoking conclusions. Keeping in mind that the amount of office space required is directly proportional to the volume of jobs thereby creating a knock-on effect in the commercial property industry.

London: the Confederation of British Industry and PricewaterhouseCoopers reported that UK financial institutions plan to slash investment and reduce jobs in coming months, responding to increased competition, a more imposing regulatory atmosphere and a decelerating world economy.

New York: American Banks have been most prominent in the news when it comes to layoffs last year. Bank of America, Citigroup and Goldman Sachs made approximately 60 000 jobs redundant in 2011. RBS is dropping 3500 more jobs over the next three years in addition to the 1100 slashed last year.  It’s been reported that Morgan Stanley is to shed jobs this coming month.

Looking over the last decade there are some surprising trends. Some markets have experienced growth in the financial services industry.

Toronto: There was a marked increase in financial employment during the past decade, with the exception of a recession-related decline by 2010. But overall since 2000 where Toronto’s figures for the sector were at 223 100 the growth has been a steady 3.7%. Today, financial services jobs figures are at 319 500.

Zurich and Geneva: Financial sector job growth in Zurich has increased over the last ten years. From 70 000 to 92 400 Zurich has grown by 2.7% in financial services jobs. The lesser Swiss market of Geneva has experienced similar growth over the same period. Switzerland not being a member of the European Union is arguably better placed to weather the region’s turbulent economic situation.

The most optimistic figures are coming out of Asia. Although not entirely surprising given upward growth rates in that region over the past ten years.

Shanghai: This centre of financial service for the mighty Chinese boom has experienced the highest increase in financial services employment with the total number of people employed in the sector nearly tripling over the past decade moving from an estimated 85 000 jobs in the sector in 2000 to over 217 000 by 2010. That’s an increase of 11%!

Hong Kong: This city was recently rated the world’s top financial centre deposing previous number one New York City according to World Economic Forum. Like Shanghai, Hong Kong has also experienced a rapidly expanding financial job market. The economy and property markets of Hong Kong have climbed recently due to positive domestic and regional economic growth as well as increased investment into Asia Pacific, all of which has secured Hong Kong’s status as one of the top global financial centres with financial services jobs growing 2.1% from 171 000 in 2000 to over 210 000 in 2010.

Singapore: Jobs in the financial sector are greater here than Hong Kong.  Growing by 4.6% over ten years from 100 500 jobs to 157 100. In fact the jump was 25% between 2007 and 2010 and doubled between 1996 and 2010. One could suggest that Singapore has escaped the global financial crisis given there has not been any annual decline in employment figures.

But New York City is the world’s largest market for financial services employees. Not having recovered fully from the 2001 recession, by 2008’s global financial crisis further job cuts were a certainty. The so called recovery beginning in 2009 has been decidedly feeble and has not been able to hold back the flow of cut backs. Measuring over the same ten period as above New York City’s financial services jobs shrank from 600 000 in 2000 to 531 000 in 2010.

Chicago: That other great bastion of the US financial industry dropped by 0.9% from 310 000 to 284 000 jobs over ten years.  Boston figures have also declined.

London: Across the pond, London’s recovery has been stronger than any of the main U.S. financial centres, and there’s even been a little growth of 0.1% between 2000 and 2010. London employs 300 900 in the financial service industry as opposed to 297 300 eleven years ago. As the largest financial centre in Europe, London has been confronted head-first with the Eurozone crises, while the so-called Tobin tax on financial transactions, along with a number of other upcoming national and regional regulatory changes, loom on the horizon as well.

The European Commission, the executive body of the European Union (EU), has proposed implementing a tax, starting in 2014, on all transactions involving stocks, bonds and derivatives that are conducted between financial institutions. It would apply to banks, insurance companies, investment funds, stockbrokers and hedge funds, among other financial firms. In spite of all these obstacles, however, it’s worth noting that London is still in better shape than New York—at least when it comes to the recovery in financial services employment.

One may well enquire as to what the share of financial employment is, as a per cent of the total labour force? Are some financial centres more specialized in financial services employment, versus other industries?

It’s Asia again: Studies show that Singapore, Hong Kong, and Shanghai have not only created more financial jobs over the past decade, they are becoming more specialized. Also gaining market share are the Swiss markets of Zurich and Geneva, both financial centres have become relatively more concentrated in financial services employment, though this growth has stalled since the global financial crisis of 2008.

Similar research reports that, for the most part, the more established financial centres such as New York and London have actually become less specialized in financial services employment.

Politics and regulation are likely to be very influential on the future of global financial centres and consequently the financial services employment rate. The potential financial regulation, the global economic slowdown and the EU crisis are all creating great uncertainty for financial centres.

The UK for example is resisting the EU’s proposed Tobin Tax on financial transactions especially in the light of Ernst & Young, warning that the EU could face up to a €116 billion shortfall in EU finances as a result of the loss in economic activity associated with the imposition of the tax. London is also resisting the EU’s proposed Tobin Tax on financial transactions. On London’s upside: the offshore Yuan market is gaining increased interest, with British and Hong Kong government leaders announcing plans this week to enhance cooperation in establishing London as a new hub for the offshore Yuan market, as a complement to Hong Kong.

In Asia, financial centres like Hong Kong, are displaying a far more positive outlook and higher growth rates than their American and European counterparts. In Europe there is some variance across markets; Swiss banks for example are expected to continue outperforming their European Union equivalents, thanks to favourable tax treaties and a less arduous regulatory environment.

Gulf and Asian markets are also jockeying for the growing Islamic finance market. Cities such as Dubai, Seoul, and Moscow are all competing to emerge as more prominent players in the financial market.

Pressure on employment in the financial services is real and continues to be influenced by the great undercurrents of politics, regulation and growth.  Could those in the financial services sector end up following the money, relocating from city to city as each financial centre prospers or declines? Or is it possible for growth to continue ad infinitum in each financial centre without shedding the ‘deadwood’ accumulated over a prolonged stretch of growth? Office space in global financial cities dries up or opens up in direct proportion to financial services jobs. It will pay landlords to pat the goose that lays the golden egg.