With the year 2018 now officially upon us, we thought it wise to make a few economic and political predictions for the African continent in the year ahead.
More Francophone West Africa private equity deals and offices
Francophone Africa has been the talk of the continent for a couple of years now. Yet the presence of firms, especially those with local offices, remain quite low compared to southern and eastern (let alone northern) Africa. Many investors report deal flow in the region but a language gap and a lack of familiarity (or absence of local team members) are the hurdles stalling transactions.
This should change in 2018 as the waiting game is likely getting ‘too old’ for some firms…the trajectory continues to trend up! A bump in growth in Ghana and Nigeria can only be a nice additive to the Francophone story.
Kenya will economically over-perform in 2018
It is no secret that 2017 was a tough year for Kenya. Two election processes to re-elect President Uhuru Kenyatta slowed economic growth and cost the country a significant amount of money. The election process is done but with remnants of tension throughout the country. The economic energy and capital restricted (or held back) by the political challenges in 2017 will break out in 2018. This should be an economic boon for the country.
The International Monetary Fund (IMF) predicts 5.5 percent growth in 2018. Kenya should achieve this and more with a big bump in foreign investment and investors returning to the more favored East African country for investment (at least compared to Tanzania, Ethiopia, and Uganda).
A U.S.-Niger incident may happen again
The challenges in the region with extremism will persist, particularly as ISIS members return from Syria and Iraq to home countries in the Sahel region. U.S. President Donald Trump maintains a stated ambition to wipe out ISIS across the globe, which includes Africa.
This administration will not want to allow another ISIS caliphate (similar to Syria) to emerge. Another subsequent prediction is that the U.S. Congress will conduct some version of an investigation into U.S. involvement in Africa. This will nevertheless not slow U.S. efforts in 2018.
Impact investing will get its opportunity
Large-cap private equity funds have had their struggles…they will rebound (so not counting them out!). But, in the interim, impact funds are moving quickly into the market (especially East Africa) to demonstrate their ability to deliver better results. This is an opportunity to see if their model is (good or bad) competition or complimentary to large-cap private equity funds.
More financial restructuring in 2018
IMF president Christine Lagarde sounded the alarm on a potential debt crisis in Africa, with about $20 billion of sovereign bonds issued in the last five years. The concern is very much justified, with a significant portion of the debt scheduled to mature in the next few years. But the debt crisis does not end there, with many companies facing an emerging debt problem on their balance sheet.
Airlines will face challenges in the new year. Kenya Airways restructured in 2017 – watch the airline sector in 2018. Mining and oil & gas companies will also be closely watched in 2018, with low prices during the last couple of years having hit many companies hard. And, with some private equity firms under-performing, some investors will be looking to restructure capital for portfolio companies.
Limited partners (LPs) have reported a 4.4 percent annual internal rates of return (IRR) net of management fees over a five-year period ending 31 Dec. 2016, according to the Africa Private Equity & Venture Capital Fund. Many limited partners will push some assets to be moved off the balance sheets of private equity firms.
The Democratic Republic of the Congo (DRC) will have an election
The DRC will have an election…this is a bold prediction for 2018. But current president Joseph Kabila’s term ended in late 2016, yet he has delayed the election into 2018 for security and coordination reasons.
DRC electoral laws allow almost an unlimited number of candidates to run for parliament, with current estimates suggesting more than 25,000 candidates on the ballot. Each paper ballot will require a name and photo on it and must be trucked or flown to 126,000 polling stations around the country.
The electoral commission estimates the election will cost $525 to $600 million. U.S. ambassador to the United Nations (U.N.), Nikki Haley, with other U.N. member support, is pushing the DRC to have this election in 2018.
A further delay will only stoke more tension and, although demonstrations have been generally banned since September 2016, the worry for a greater conflict boils beneath the surface. Thus, an election is a bold prediction for 2018, even if it means a few countries may have to help pay the bill.
Kurt Davis Jr. is an investment banker with private equity experience in emerging economies focusing on the natural resources and energy sectors. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at email@example.com.
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