The Macro Case for the Ivory Coast

Opportunities everywhere

Despite the negative picture in the last post, I actually think that this is a great time to invest and start a business in the Ivory Coast, and that there are opportunities everywhere.  Here’s why:

In one sentence:

It’s a bit like in the 1950s in Europe, it’s after a war, there are lots of undeveloped sectors, the economy is generally not dominated by large companies, the population is young and, it seems we are in the beginning of several positive long term trends.

And in further detail:

Post crisis bounce-back
Reversion to the mean after a decade of wars and crisis.  Ouattara doesn’t need to do a good job, just not be a disaster for the economy to bounce back.

A competent government
I’m cautiously optimistic that the Ouattara administration will do a good job though. I hope/think they will strengthen rule of law, have a reasonable economic policy, stop the decade-long decay of the infrastructure, and not put too much tax and aid money in their own pockets.

African growth trends
Strong economic growth in both Africa as a whole and regionally in West Africa, which has been going on for a while and is likely to continue  (at least according to IMF projections below). And natural resources is only a part of the story.  I would actually guess that commodity prices will go down in the near future (except agricultural commodities and possibly oil), but that Africa’s growth will keep up reasonably thanks the non-commodity exporting part of the economy.

Unique Ivorian factors
If Ouattara doesn’t disappoint I would estimate that the Ivory Coast will grow faster than the Africa average even after the post-crisis rebound, due to having a good mix of main commodity exports (agricultural products and oil), a by African standards relatively varied economy, a major port, better infrastructure than other west African countries (despite the neglect) and – this will depend on the Ouattara administration – a relatively benign institutional framework, protected property rights, openness for investments and a for Africa high degree of economic freedom.

Favourable demographic trends
A young and growing population, urbanisation, increasing labour force. The graphs say it all:

Abidjan, population. Source: Wolfram Alpha

Africa’s and Ivory Coast’s weight in the world is set to increase, and with it values of markets, businesses and most likely properties. And the problems the western world has right now with not enough young people having to support too many old people, are not going to hit Africa in the foreseeable future.

Emerging Middle Class
With both per capita economic growth and population growth, that essentially means a swelling middle class. (Just the ultra-rich getting richer cannot cause the growth numbers projected by the IMF above). And a swelling middle class means a growing demand for all kinds of goods and services above basic needs, opening up for businesses serving those needs.

Here are McKinsey’s projections from last year for increased spending power in Africa:

Getting in early
Timing. Valuations and perceptions still tainted by the crisis.  And Africa has a history of disappointing investors. All of this makes the present day a good entry point for investments. Unlike emerging Asian economies great growth is not yet priced in.  Big corporations and large international capital investors have by and large not yet found their way to the Ivorian market.

There is an New York based mutual fund called Nile Capital that makes a similar case in a report from June this year called Africa Investing: The Benefits of a Diverse Continent. They write:

Twenty years ago, far-sighted investors focused on the emerging and frontier markets of Asia –  especially China and the “four Tigers” of Hong Kong, Singapore, South Korea and Taiwan. Most  investors in these markets have been richly rewarded, especially if they bought early and held patiently.

Today, there are signs of comparable opportunity in the emerging and frontier markets of Africa. For example, economists project that several African markets have the potential to approximate the sustained GDP growth rates produced by China and the four Tigers over the past two decades, with Africa as a whole expected to grow by more than 5% over the next ten years.

[…]

The real difference between Africa and the rest of the investment world is that we don’t feel crowded by “big money.” Analyst coverage of leading growth companies in Africa remains light, and local investors still create most of the demand for the shares we hold. However, it will not be this way for much longer. Over the next decade, more analysts and big-money global investors will undoubtedly discover what the diverse continent has to offer, and wish they had known to invest now.

Virgin territory
Without large companies dominating the economy (and as is sometimes the case in the west, lobbying politicians to write laws and regulations that benefit them, but makes life harder for smaller competitors and new entrants)  a lot of sectors are virgin territory for entrepreneurs that can try out their ideas without going up against behemoths that have perfected business strategies for decades. Admittedly entrepreneurs have to go up against a slow and corrupt bureaucracy, a weak legal system, an unreliable electric supply, a high crime rate etc, but these are the things that are hopefully improving and the reasons big corporations have stayed away.

In Abidjan last time, I lunched at a place called Castle Fried Chicken in the central plateau district.  Food was actually pretty bad, but the interesting thing is that a long running clone of Kentucky Fried Chicken can be in business. In most of the rest of the world it would have been closed down pretty swiftly. So if someone manages to open a fast food chain in Abidjan with good food, there is a good chance of creating a lasting profitable business – that might be bought up when some of the big multinationals start paying attention to the Ivory Coast.

More unique Ivorian factors
As mentioned several times before on this blog, there aren’t many tourists visiting the Ivory Coast.  That may change, and be a big boost for the economy.  Other potential positive stuff coming up is the relocation of the African Development Bank other international bodies to Abidjan. Before the crisis, Abidjan used to be where organisations and journalists were based because of its – you’ve heard it before – political stability, and well Abidjan was and is a pretty cool city.

Then we have large funds coming to the Ivory Coast from the IMF, the World Bank, the EU and France that hopefully will be used wisely.  Although looking at the Ivorian budget for 2011, an enormous part (some 40% I think) was debt servicing, so all these funds coming in just kind of compensate for that.  With the Ivory Coast being accepted for HIPC debt reduction things should get better.