01 May 2014 - Peter Leger
We recently returned from a visit to Pakistan where we met with a cross-section of businesses. In all honesty, we weren’t quite sure what to expect which allowed for a pleasant surprise. The management teams we met with were most impressive and the companies well run, with exciting prospects given the dynamics of the Pakistani market. What was even more striking was the general level of interest in Africa by the companies we met with. Given that we normally have to deal with Afro pessimists when meeting with people outside of the continent, this was a refreshing change.
The detailed knowledge of the various African markets took us by surprise and reflects the level of consideration that has been given to these markets. An appreciation of how African economies are tracking and the sectors with the greatest momentum was a consistent theme.
It is fairly common knowledge that South Africa is a consumer of imported cement from Pakistan. Claims of dumping are made, although our take is that the price received in the domestic versus the export market is similar. Twenty five percent of cement produced in Pakistan is exported, mostly to Africa. Through insights gained from exporting, a plant is now being built in the DRC, and thoughts of plants in East Africa and southern Africa are being developed. Negotiations to build an Egyptian plant are under way. Cement is not a great export product, yet consistent overpricing by players in the African market is leaving the door open for these companies to develop markets and follow this with investing in cement plants on the ground.
Pakistan experienced a massive increase in lending growth from 2003 to 2008. Advances growth into the retail space exploded and was poorly thought through. With the crisis of 2008, this imploded, resulting in large bad debt levels and a number of banks that were technically insolvent. This certainly was not unique to Pakistan, and echoes of a similar story could be heard across the globe. The banking market is very similar to Kenya and Nigeria in that the banks are still fairly simple in nature. They take cheap deposits, and make a turn on government securities and corporate lending. Retail books and products are still developing.
Having dealt with the issues of their domestic markets, a number of the banks we met with have invested in African banking assets. Again, they have targeted East Africa and have bought interests in small banks with a view to grow these organically. They are following existing Pakistani clients into the region, again talking to their growing investment. Having built up expertise in a market with dynamics not dissimilar to those in Africa, they feel that they are well positioned to compete.
In addition to direct investments, trade between Africa and Pakistan has been growing strongly at 15% per annum for the last decade. This has taken trade to $1.7 billion annually, with rice and cotton products being the largest.
Pakistan is home to a number of large family conglomerates which are astutely looking to deploy capital, both locally and internationally. African countries are increasingly being identified as attractive international investment destinations, and investments made to date are working well. We welcome all forms of competition that drive market normalisation and the cost of capital down. While the multi-nationals have had a long history of investing across the continent, more and more new faces are appearing. One should expect to see more cross-border Frontier investments as companies look to deploy capital and appreciate opportunities in markets with similar dynamics to what they are used to. We welcome this new interest and competition.
PETER LEGER joined Coronation in April 2005 as a portfolio manager. He has 15 years’ experience in the financial markets in Africa as both a portfolio manager and research analyst. Peter currently heads up the Africa ex-SA unit for Coronation, which includes the Coronation All Africa and Coronation Africa Frontiers funds.
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