Insecurities market?

The sub-Saharan frontier markets have had a good run in recent years. Both the numbers and the narrative are positive – strong growth, a young and expanding labour force, increasing urbanisation, better governance and a growing middle class with spare money to spend. The World Bank sees the region posting growth of 5.6% in 2013 and forecasts a rise to 6%. The African Development Bank chimes in with yet more good numbers: “Africa is presently home to some of the fastest growing economies in the world, with several countries experiencing growth rates of 7% per year or higher.” Back in 2000, a leading financial weekly cast Africa as the ‘Hopeless Continent’. More recently the same publication has trumpeted ‘Africa Rising’ and the ‘Hopeful Continent’. The turnaround seems complete.

The traditional view of the region has highlighted poor regulation and governance, inadequate infrastructure, localised conflict and a relatively small consumer base. Although these are being addressed across the region, it still remains high-risk and most experts in the field agree that any investor considering entering this market ought to do so with a long-term view.

Which brings us to one seemingly ordinary Saturday morning in September 2013. When a band of Islamic terrorists ambushed the Westgate shopping mall in the Kenyan capital Nairobi, inflicting the second serious attack in 15 years on East Africa’s economic powerhouse, the media coverage was immense and intense.

Many questions have been asked since, not least about how much of a threat terrorism presents to local and international businesses and investors. What key investment themes are likely to face direct the consequences of these groups’ activities? Should investors be worried and what they can do to safeguard their resources (human and material) against this threat?

The US State Department’s assessment of violent flashpoints in the region includes local insurgency groups, as well as those associated with global jihadist networks.

Two notable groups named are Boko Haram in northern Nigeria and Al Shabaab, operating in the Horn of Africa.

The links that both Boko Haram and Al Shabaab have with global jihadism are best not overstated, according to Sarah Collier, senior analyst with the risk research and analysis group, Maplecroft.

“Terrorism groups in Sub-Sahara Africa include Boko Haram and Al Shabaab and are still primarily motivated by local concerns,” she says. “Militant groups are increasingly viewing attacks on Westerners and high-profile targets, including Nairobi’s Westgate shopping mall, as key in advancing their strategic aims and expanding their revenue.”

The sector most vulnerable to terror attacks is tourism, and the immediate reaction to terror attacks is invariably a decline in visitors and a consequent loss of income. However, Collier points out that an important component of the continent’s tourism industry is safari wildlife tours, the rural nature of which make them difficult for militants to target.

“The impact is expected to be limited because tourism is not a major contributor to GDP for most African countries,” adds Investec Asset Management’s Africa portfolio manager Joseph Rohm. “Investment themes in the region are consumption, telecommunication, resource exploration, financial deepening and infrastructure spend. These are long-term trends [and] we do not expect terrorism to have an impact on them.”

The terrorist attack on Westgate, the most recent and high-profile in sub-Sahara Africa, is not expected to result in a fundamental denting of investor confidence.

“From the point of view of investors, there won’t be that much of a negative effect,” suggests Paul Ross, investment analyst at Renaissance Asset Management.

“Investors knew about the war [against Al Shabaab militants in Somalia] and the high risk that such a thing might happen. This attack was horrific but not nearly as destructive as that which took place in 1998, which [inflicted] huge infrastructure damage. Such horrific attacks make big headlines. There will have to be investment of government finances to take into account the war in Somalia.”

To some extent, of course, sensible investors in the sub-Saharan African frontier markets understand that these issues are all part and parcel of the deal.

“Investors with interests in sub-Saharan African countries most affected by terrorism – including Kenya, Nigeria and Somalia – have become used to operating in high-risk environments,” says Ross. “Indeed, companies that are prepared to invest in the most high-risk environments of sub-Saharan African are often large multinationals, which have the operational, financial and human resources in place to mitigate such risks.”

A balanced, realistic perspective is imperative if investors are to continue to seek returns in potentially lucrative frontier markets which cover a vast geographical area.

“Given the overall size of the continent, [the countries] where terrorism does pose a threat to business operations are fairly limited,” says Collier. “Even with these countries, the sphere of operations of militant groups is often limited to particular regions. Nigeria is a case in point in this regard, where the Boko Haram insurgency in the north of the country has not significantly affected investment in southern Nigeria.”

That sentiment is backed by Rohm at Investec. “The Boko Haram activity in Nigeria to date occurred mostly in the three north-eastern states that account for less than 5% of Nigeria’s GDP,” he observes. “Hence Boko Haram has had a limited impact on Nigeria’s GDP and have not attacked the economic centre of the country”.

So the analysts’ consensus is that Islamic terrorism does little to threaten the region’s economic fundamentals. Nonetheless, in the face of the threat investors can take some limited steps to mitigate risks to their businesses.

“They may employ private security, undertake intelligence monitoring and collaborate with state security services,” according to Collier.

The State Department’s report on the region shows that most sub-Saharan African governments are signatories to various UN or regional bodies and conventions committed to tackling the terrorist threats in the region. It remains unclear as to how insurance underwriters will react to this threat in terms of what products they will or can provide to local and international businesses. The security services, though, will most likely benefit from this threat. However, public funds will remain hard to access, according to Investec’s Rohm.

The growing risk of terrorism provides a counterpoint to the more simplistic ‘Africa rising’ narrative and underscores the substantial security risk faced by investors, says Collier, without significantly detracting from investment opportunities provided by the growing consumer class and natural resources wealth.

It has taken more than a decade for the adjective tagged to the region to shift from ‘hopeless’ to ‘hopeful’. The threat of Islamic terror in sub-Sahara African frontier markets need not, it seems, reduce investors to wasteful paralysis.

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