The economic scramble for Africa

For many years, large parts of Africa have been virtual no-go areas for foreign businesses with poor corporate governance, unreliable economies and political unrest deterring all but the most committed investors.

This is no longer the case. An economic revolution driven by the booming global demand for commodities over the past few years means the corporate world can no longer afford to ignore fast developing nations such as Nigeria, Botswana and Ghana.

Soaring stock markets, stable economies and decent levels of overseas investment have certainly improved the fortunes of many countries, which have been able to use part of their new-found wealth to fund internal consumer booms of their own.

Perceptions of sub-Saharan Africa have certainly shifted, says Innes Meek, director of CDC Group, a government-owned fund of funds investor which has around £2bn worth of assets in the world's poorest countries.

"South Africa has always been a magnet for business but other economies are now attracting interest," he says. "Nigeria, for example, has a substantial economy, backed by oil, and a large population which provides opportunities for businesses to grow."

According to Bryan Collings, managing director of Hexam Capital Partners, there are a number of reasons behind the turnaround in fortunes.

"A lot of politically stable countries endowed with resources such as oil and commodities have succeeded in strengthening their reserves, stabilising interest rates and providing a much better environment in which to operate," he says. "They have also benefited from the development of capital markets in the region."

Plenty of investment cash looking for a home has also been a driver. Not only has there been an abundance of private equity cash around, but prudent businesses that were cautious during the stock market downturn now have cash to invest.

"We've had greater liquidity over the past five years, as well as cheaper money and a reduction in risk aversion," says Mr Collings. "This means money has found its way into new markets and Africa has definitely been a beneficiary of these moves."

In addition, the fast developing sub-Saharan nations are looking attractive on a relative basis. "Fifteen years ago, places like Brazil and Mexico were still developing so money was being allocated to those markets rather than Africa," he adds. "As these places, as well as the likes of Poland and Hungary, have started maturing and have seen the levels of competition increase, so investors have started to look elsewhere."

This upbeat assessment is reflected in the performance of the sub-Saharan stock markets, which outperformed the likes of South Africa during the first six months of this year.

Sub-Saharan Africa - excluding South Africa - rose by an impressive 38.2 per cent and were not affected by either the March correction, which hit a number of rival emerging markets, or the Nigerian presidential elections a month later. This compares with a relatively modest 10.2 per cent rise for the MSCI Far East index and a fall of 5.5 per cent in the MSCI Eastern Europe.

There is certainly the potential to enjoy rich rewards from investing in Africa, adds Mr Meek at CDC. The combination of rapid development potential and the vast populations means that well-run companies can deliver fantastic returns.

"If you can score a hit in Africa, it can turn out to be a good one," he says. "We were early investors into Celtel [the pan-African telephone business] and that turned out to be a terrific investment as we made five times our money."

But that's not to say that sub-Saharan Africa is a panacea, points out James Thomson, manager of the Rathbone Global Opportunities Fund. There are still plenty of reasons why businesses and investors should approach these countries with extreme caution. "I am wary of investing in Africa for a number of reasons," he explains. "These include the lack of transparency in some countries, questions over financial stability and whether there is a level playing field for all investors."

Another serious concern is the continent's power supply problems. It is estimated that more than half of sub-Saharan nations are now facing crippling electricity shortages with blackouts becoming increasingly common."In many ways Africa is a victim of its own success as the higher-than-expected GDP growth has put a huge strain on the electricity supply, which is causing problems as there hasn't been any major investment in the industry for 15-20 years," Mr Thomson adds. "On the positive side, however, you can make money by investing in companies that are building power-producing capacity in the region."

The pace of development of African stock markets has not been as quick as many would have needed to take advantage of the capital available, which is why so many companies have opted to list abroad, such as on the London Stock Exchange.

There are other problems too. Bureaucracy can still be a hurdle for many businesses, while there is still a desperate need for better managed organisations of all kinds, in both the public and private sectors.

However, progress is being made, insists Professor John Mullins of the London Business School. Economic aid from around the world is now being partly channelled into helping young, growing African companies, which is helping to create jobs and bring prosperity to many countries.

"There have been concerns about where aid money has gone in the past but in this way agencies know it will go into real companies that can provide jobs," says Professor Mullins.

There is also a concerted effort to help train the business leaders of tomorrow.

So where do the sub-Saharan nations stand today? Tremendous progress has been made over the past few years, but some countries still have a long way to go, says Mr Meek at CDC.

"The emerging markets are generally doing better than they have done in previous cycles but there's clearly still huge scope for development," he says. "The trend is definitely positive as the likes of Ghana and Nigeria are far better run today. We're still not sure where on the economic curve Africa lies at the moment. People were still worried about investing in Asia five years ago and I would suspect that Africa is about five years behind that story, but it's heading in the right direction."

Jewels in sub-Saharan Africa's crown

Nigeria has probably developed the most in terms of its political and economic structures, according to Bryan Collings, managing director of Hexam Capital Partners, and is now reaping the rewards.

"There have also been improvements in the Congo and places like Mozambique, while Ghana has also been pretty stable," he says. "Central Africa is looking a lot better, although there are still political issues if you go too far east or west."

Botswana, however, remains a favoured hunting ground for James Thomson, manager of the Rathbone Global Opportunities Fund. "It is by far the safest of the countries, both politically and economically," he says. The sub-Saharan region countries have a combined population of 750 million and annual GDP growth of 6.7 per cent. Inflation, meanwhile, is running at about 7.1 per cent.

Nigeria is expected to enjoy GDP growth of an impressive 8.2 per cent this year, according to figures produced by the International Monetary Fund for its World Economic Outlook, up from 5.3 per cent last year.

In recent months, there have been signs that the internal domestic demand of Nigeria is beginning to grow, with the country's stock market rising by 56 per cent between January and the back end of July.

Even the results of the recent presidential elections in April have largely been accepted with the markets having by about 19 per cent since that time.