Understanding investor risk in Sub-Saharan Africa and other emerging and frontier markets

By: Jackie Crafford, j.crafford@primeafrica.net

Exceptional economic growth over the past decade has made international markets such as Sub-Saharan Africa (SSA) an increasingly interesting investment destination for international investors. Those investors that have been successful have been the ones who have understood and mitigated the unique investment risks that characterizes such markets, throughout the investment life cycle. Various risk assessment tools are available through which to quantify and assess these risk and their mitigation options, both in SSA countries and in other emerging and frontier markets.

Valuable risk environment context is provided by a comparison of the salient market features of, for instance, SSA to the USA.

In one way both the SSA and the USA comprises more or less the same number of states, each with their own unique characteristics, but that is where the similarity ends.

Fundamental market demographics differ starkly. SSA has a population of nearly 3 times that of the USA, and that on a GDP of less than 10% of that of the USA. Similarly, SSA has 15 securities exchanges with a total market capitalization of less than 10% of that of the NYSE. Thus, compared to the USA, SSA has a very low baseline economic and investment activity.

However, it is exactly this low baseline that provides a tremendous potential for economic growth and investment. Mobile communication technologies and natural resource wealth in particular has been empowering both education and economic activity. As a result, GDP growth (in US$ terms) since the 2008/9 economic crises has exceeded 10% per year, far exceeding that of the USA, and forecast growth (by the International Monetary Fund) to 2020 is similarly expected to exceed that of the USA.

investor risk

South African investors in particular have been showing interest in investing their SSA neighbors. For that reason, many international investors are also seeing South Africa and South African companies as gateways into Africa. In a 2015 survey conducted of 1,000 South African CEO’s, 50% of them indicated plans to expand operations into SSA. Similarly, the African Private Equity and Venture Capital Association reports that 983 transactions with a total value of US$34.5bn, have been completed, and reports very promising trends for 2015 (www.avca-africa.org).

But realizing the investment potential in SSA has unique risks. A case in point is the story of Wal-Mart Stores. When Wal-Mart made a US$2.4bn investment to secure a stake in South Africa’s Massmart in 2010, the world’s biggest retailer was buying a gateway to the high-growth markets of SSA. Yet Massmart has only been able to add fewer than 10 stores to the existing 25 outside its home market since 2010, lagging South Africa retail rival Shoprite, which had doubled its outlets to 300 stores. Massmart’s slow inroads into SSA north of South Africa, highlight the challenges of doing business in Africa.

What are some of the key challenges? Although it is not appropriate to generalize investment challenges in a SSA region that comprises a vast, non-singular market, generic areas of challenge can nevertheless be identified.

  • Firstly, there are challenges related to the supply of infrastructure, goods and services. Transport and other physical infrastructure may be problematic; power and communications systems are not always reliable; finding skilled and experienced staff often presents a challenge; and supply chains may be unreliable.
  • Secondly, each SSA country has unique socio-economic settings. Each has unique cultural settings which need to be respected; different languages spoken; unique and different visa requirements, laws and regulations to be adhered to; various local economic empowerment requirements; and different health and safety issues to be addressed.
  • Thirdly, the investor has to understand the security of the investment. Some SSA countries experience political turmoil; and various levels of corporate governance challenges exist which could put assets at risk.
  • Fourthly, various economic and financial issues exist, relating to risks exchange rate fluctuations; non-payment; striking balance between return on investment and affordability for African consumers; or dealing with competition from Chinese owned companies.

How to address these challenges? Various analytical tools exists through which to assess risk.

Venturing into any new market requires an understanding of risk. And in SSA this starts with clearing up the most important misconception namely that “Africa as a single place”. Ease of doing business across SSA markets vary greatly, and it is important to identify and quantify the associated risks with a view to prioritizing best investment destinations. Economic risk variation results from diverse economic development histories; diverse natural resource profiles; varying economic profiles of mega-cities and other large urban centers; and various country-specific socio-economic characteristics. The risk may further vary as a result of the attributes of the investment itself. It is however possible to do accurate profiling of “ease of doing business”, investment destination raking and determining security of investments. Such analyses are based on data sourced from various international and country databases (such as the World Bank, IMF, country statistical authorities); satellite image analyses; combined with country-specific knowledge.

At a country level it is important to note that various special investment promotion programs exist that seeks to create attractive investment environments. These programs greatly assist with analyzing and managing risk. A special case in point is USAID’s Power Africa program. This program seeks investment in 30,000MW of power generation infrastructure in renewables, hydro and natural gas and offers transaction support, financing and other services to its project partners (https://www.usaid.gov/powerafrica).

Once the investment destination has been prioritized, market intelligence tools may be used to estimate and forecast salient market features. This would include estimating key attributes of market risk such as market size, growth potential, segmentation, pricing strategies and other features. Data for such analyses is available through trade databases, satellite imagery, country-specific knowledge, and proprietary surveys.

At a project level, various techniques exist through which country-specific and project risks may be integrated into discounted cash-flow analysis. This enables the quantification of risk as a percentage of the project Internal Rate of Return (IRR) and other salient measures.

Regular tracking of salient market features provide an important risk management tool. Trackers of competitor activity, customer feedback, exchange rates, economic growth data, external shocks and other salient information provide successful African investors with competitive advantage.

EHS-Support and Prime Africa can offer US investors with a range of risk management tools of the nature described above. These tools can be applied to the quantification and management of investment risk throughout the investment life cycle, both in Africa and in other emerging and frontier market destinations.


Prime Africa consultants will be in the United States in October and will be presenting market and economic analysis techniques for assessment of risks in acquisitions in Africa and other emerging markets at numerous forums. Prime Africa completes African market analysis for numerous multinationals and has conducted major economic and business risk analysis projects for private sector clients and investment banks for African projects. EHS Support and Prime Africa are available for an in-person meeting. For more information, please contact Kevin Simpson, or Jackie Crafford at j.crafford@primeafrica.net or +27 82 319 2929.



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