Why Investors Need to Capitalize on Africa’s Tripartite Free Trade Bloc

Konstantin Makarov |

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A recent meeting of African leaders in Egypt failed to steal headlines, as the world remained engrossed by the just-concluded G7 summit. Heads of state representing 26 different nations converged in early June to create the Tripartite Free Trade Area. This unprecedented initiative foretells a significant change that should attract the interest of investors eyeing Africa.

The tripartite bloc is comprised of 26 countries that make up 57% of Africa’s population and 58% of its GDP. The colossal scale of the coalition alone will spur accelerated momentum of economic growth throughout the continent, and investors can capitalize on the dividends of economies of scale and bolstered intra-regional trade.

Intra-African exports account for an estimated 12% of the continent’s total exports, a meager amount compared to Latin America’s 21% and Asia’s 39%.

These enhanced regional ties will be crucial for three reasons:

1. A Stronger Investment Footprint for the US

In 2013, trade numbers between the US and Africa stood at $60 billion. This is fairly modest compared to China’s $170 billion and the EU’s more than $200 billion. It indicates American investors are missing out on the potential of the “Africa rising” windfall.

The tripartite bloc promises to make it easier for American exporters to access the African market. The International Trade Administration, the group that oversees US-Africa trade, has offices in South Africa and Kenya — both of which are members of the bloc. American investors should view opportunities in these vibrant, growing countries from a very strategic vantage point.

Some American investors are already doing so. Budweiser entered the Kenyan market in early 2015, and footwear producer Brown Shoe Co. (BWS) looks to enter into the Ethiopian market. Countries in the tripartite bloc provide a platform for American investors to consolidate their presence in a growing region and carve out a foothold for future success.

2. Long-Term Resilience

The tripartite comes as a timely move that will help investors in Africa capitalize on fast-growing consumer spending that’s projected to surge from $860 billion in 2008 to $1.4 trillion in 2020.

The bloc will provide a vital buffer that protects the continent’s investment climate from external shocks in an increasingly volatile global economy, assuaging the high-risk perception plaguing African countries.

South Africa’s economic performance, for instance, has reflected marked susceptibility to fallout from shocks of the global economy. In 2009, at the height of the recession, its GDP fell by 1.5 percent. Some of Africa’s major trade partners — namely Japan and a handful of EU nations — continue to confront headwinds and post-anemic economic growth numbers. The key emerging markets of China and India also seem to be losing steam. China’s 2015 economic growth is projected to decelerate to 7.1 percent.

The opportunities engendered by the tripartite bloc will enable these partners to tap into Africa’s growth markets and harness them to inject long-term resilience.

Additionally, the agreement will ensure the response to political shocks — like those witnessed in Burundi— would come from a concerted African public relations voice that minimizes the contagion effect of such events.

3. Unlocking an Expansive Market

The tripartite bloc promises a cohesive and expansive market, especially for a region that’s often plagued by small, fragmented markets and a host of tariff and nontariff barriers. Unlocking this market will reveal attractive opportunities for investors looking at Africa. For example, the continent is home to the fastest growing mobile market in the world. With an estimated 649 million mobile connections, it became the second-largest global market in 2011.

This pace of growth has seen megadeals like June 2010’s $10.7 billion acquisition of Kuwaiti company Zain Group’s African assets by India’s Bharti Airtel. From an intra-regional front, Morocco’s Maroc Telecom finalized a $538 million deal in January 2015 in which it acquired Emirates Telecommunications Corp.’s subsidiaries across six West African countries.

Despite these promising trends, there’s still quite a lot to be accomplished in spaces like mobile and general information communication technology in order to maximize the bloc’s effectiveness.

Consider, for example, that the African Union Commission on Information Communication Technology recently cited the high cost of mobile roaming charges as a key impediment to intra-regional trade. With a heightened focus on the free movement of information between bloc members, we’re bound to see elevated efforts to address the cost of roaming that could unlock additional opportunities. This will harness the true potential of the African telecommunications space. It appears it’s already happening: Kenya’s largest telecommunications company, Safaricom, has released an East African package that aims to address the high cost of roaming within the EAC. 

Once in full swing, the tripartite bloc should serve as a game changer in heightening investor access to previously undiscovered markets. For instance, the Democratic Republic of the Congo posted a strong 9.5 percent GDP growth in 2014, which was double the Sub-Saharan Africa average. But this fast-emerging market still suffers from an investor misperception of regressive state control and high political risk.

The tripartite bloc will quell misplaced fears and open up countless lucrative investment opportunities for businesses and individuals across the globe.

 

Konstantin Makarov is the managing partner of StratLink Africa. With more than 14 years of experience in financial markets, specifically emerging markets, Konstantin brings a holistic approach that addresses challenges faced by companies, fund managers, and family offices that are operating or considering investing in the emerging and frontier economies.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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