Post on 08-Aug-2020
DUET GROUP Dr Ayo Salami, CIO of Duet Africa Funds
Africa – The Next Frontier of Growth Investment
Source: Economist
Changing perceptions of Africa
May 13th 2000 March 2nd 2013
Page 2
Global Land Mass and Proportion of World’s Resources
Square Miles:
China 3,705,390
United States 3,618,770
India 1,266,595
Europe 1,905,000
Argentina 1,065,189
New Zealand 103,736
Total 11,664,680
Africa 11,707,000
Proportion of global resources in Africa:
Land Mass 20%
Diamonds 90%
Gold 50%
Phosphate 90%
Platinum 40%
Petroleum 8%
Natural Gas 12%
Source: Academic Centre for Education Development; Ayittey, George B.N. Africa Betrayed, 1993, Palgrave Macmillan , ISBN: 0312104006
Page 3
Africa in perspective
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4f
Gro
wth
(%)
Growth in Real GDP Population (growth) Growth in real per capita GDP
Since 1995, Real GDP growth has exceeded
population growth
Source: World Bank Data
Population and GDP Growth (Sub-Saharan Africa ex South Africa)
17 consecutive years of growth in real per capita GDP
Page 4
Macro overview
0%
25%
50%
75%
100%
2000 2009 2020
<$1,000 $1,000-$5,000 $5,000-$10,000 $10,000-$25,000 >$25,000
Ho
useh
old
s (
%)
57%
More than 50% middle class by 2020
Sources: Euromonitor, Standard Bank Research
Consumer expenditure in SSA was approximately $800bn in 2010 and is expected to reach $1 trillion by 2010. Consumer
spending is growing at approximately 4% per annum.
Page 5
Rise of the African consumer
Sources: United Nations Population Division
Compared to Develop Markets, the Sub-Saharan Africa (SSA) has
a much younger population growing at a faster rate: This supports
economic growth and consumption.
Developed Markets are not getting younger. Sub-Saharan
Africa (SSA) offers a young and growing population.
Page 6
Young Population
African growth is supported by a young population
Sources: UN Habitat, Standard Bank Research
0%
25%
50%
75%
100%
1950 1965 1980 1995 2009 2020 2035 2050
Rural population Urban population
Urbanisation is bringing people closer to economic opportunities
By 2050 about 60% of the people in SSA will live in cities compared to 40% today implying that 800 million more people will
live in urban environments.
Page 7
Urbanisation
0
5
10
15
20
25
30
2007 2008 2009 2010 2011 2012 2013
USD
bn
Nigeria Pension Assets
In 2002 when pension reform was introduced,
Nigeria had pension assets of less than USD1bn.
Assets are approaching USD30bn and growing at
CAGR of ca.30% per annum
0
150
300
450
600
2000 2002 2004 2006 2008 2010
Fixed telephone lines Mobile cellular subscriptions
15m
540m
At the beginning of the 21st century, over 70% of
Africans had never heard a phone ring. Today,
mobile penetration is approaching 60%.
Source: Duet Asset Management, Pencom Nigeria
Capital and technology enabling rapid change
Page 8
Nigeria Basic Facts
Page 9
Population: 170m Economy: USD500bn (largest in Africa and #23 in the world with a vision is to become a top-20 economy by 2020) GDP Per capita: (USD2,800, # 128 in the world)
Democratic transition (third republic) began in 1999. There are
three branches of Government at the Federal level
• President (elected for four year term with 2 term limit)
• National Assembly : Senate 109 members, House of
Representatives : 360 members
• Independent Judiciary
36 state Governments (Governor with a state assembly)
2015 witnessed the first transfer of power from a ruling to
opposition party in Nigeria’s history
Source: Independent Electoral Commission
Nigeria Election results
1999 2003 2007 2011 2015
PDP 62.7 61.94 69.82 58.89 44.96
APC 53.96
AD 37.22
ANPP 32.19 18.72
CPC 31.98
Others 0.08 5.87 11.46 9.13 1.08
President Buhari – Version # 2, is a former military ruler (1984-1985) and during his previous 20 month rule, he gained a reputation as an
incorruptible and austere leader. This is probably his greatest strength and his source of appeal.
He took a rather simplistic approach to governance that reduced all of Nigeria’s multifaceted challenges into a single issue – “Indiscipline”. He
promptly launched a “War against Indiscipline”. Civil servants turning up late for work were made to perform frog jumps. Traffic offences and
queue-jumping were punished by public floggings.
He cut the budget deficit by downsizing the civil service by ca.30%. He broke off relations with the IMF (refusing to devalue the currency), but
subsequently introduced an austerity programme with greater severity than that demanded by the IMF.
He severely curtailed press freedom and threw over 500 politicians into jail on allegations of corruption for which they were never charged. For
gregarious people like Nigerians, this was shock therapy and there were few complainants, when he was ousted in a palace coup in August
1985.
For his second term in office, Mr Buhari can be expected to run a more interventionist Government and anchored on 8 broad points
– War on Corruption
– Food security to position agriculture as the main supplier of raw materials for domestic industrial processing and manufacturing
– Accelerated power supply to expand electricity generation and distribution of up to 40,000 megawatts in four to eight years (current capacity is about 5,000 mgws)
– Integrated transport network
– Free education
– Devolution of power from the Federal Government
– Affordable health care
– Accelerated economic growth
Page 10
Nigeria : Political Overview
Slow down in growth from 8.5% in the last decade to ca.6% due to combination of base effects and lower oil prices. However average of 6%
growth in a low oil price environment demonstrates that the economy is not driven by oil.
Page 11
Nigeria : Economic Growth
0
2
4
6
8
10
12
14
0
10
20
30
40
50
60
70
80
90
100
19
91
19
92
19
93
19
94
19
95
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00
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01
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14
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20
16
GD
P G
row
th
Cru
de
Oil
GDP Growth Crude Oil
Avg Nig : 4.0% Global : 3.1%
Avg Nig : 6.0% Global : 3.8%
Avg Nig : 8.5% Global : 3.8%
Source: World Economic Database (IMF)
Oil sector represents only ca.10% of GDP, demonstrating that the economy is not dominated by oil.
While GDP growth has been positive in the last 19 quarters, oil sector growth has been positive in only 6 quarters.
Page 12
Nigeria : Structure of the Economy
Source: World Economic Database (IMF)
0
5
10
15
20
25
30
Agricu
lture
Trade
Cru
de o
il
Man
ufactu
ring
Telecom
Real Estate
Oth
ers
Techn
ical services
Co
nstru
ction
Finan
ce
Edu
cation
Pu
blic A
dm
in
Pu
blish
ing an
d B
road
casting
Transp
oratio
n
-20
-15
-10
-5
0
5
10
20
11-Q
1
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11-Q
2
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11-Q
3
20
11-Q
4
20
12-Q
1
20
12-Q
2
20
12-Q
3
20
12-Q
4
20
13-Q
1
20
13-Q
2
20
13-Q
3
20
13-Q
4
20
14-Q
1
20
14-Q
2
20
14-Q
3
20
14-Q
4
20
15-Q
1
20
15-Q
2
20
15-Q
3
GDP Growth Oil Growth
Easy oil revenue resulted in inefficient collection of taxes
For the first time since the 1970’s the Government is aiming to raise more than 60% of revenues from non-oil related
sources
Page 13
Nigeria : Tax Efficiency Declined
Source: World Economic Database (IMF)
0
5
10
15
20
25
30
35
40
0
10
20
30
40
50
60
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00
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15
% o
f G
DP
Go
vt R
eve
nu
e (
USD
bn
)
Govt Revenue % of GDP
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2013 2014 2015F 2016F
Oil Revenues Non-Oil Revenues
Source: Budget office of the Federation
Page 14
Nigeria : Significant Scope for Revenue Improvement
Source: World Economic Database (IMF)
0
5
10
15
20
25
30
35
40
Israel
Brazil
Sou
th A
frica
An
gola
Egypt
Ch
ile
Malaysia
Ke
nya
Ind
ia
Gh
ana
Ethio
pia
Tanzan
ia
Ind
on
esia
Nige
ria
Tax to GDP Ratio (2015) Nigeria does not have a revenue problem, it has a tax
collection challenge. Low oil prices may finally provide the impetus for longer term reform.
The new head of the Federal Inland Revenue Service (FIRS) was spectacularly successful, when he headed the Lagos State Revenue Service.
While the Government has ruled out raising tax rates, increasing the VAT rate from 5% to 10% could generate additional USD4bn (40% of the deficit for 2016).
Current focus is on tax compliance: -
FIRS claims to have identified 360,000 payer of Corporation tax in 4Q15 following commencement of an tax compliance audit and the figure will reach 500,000 by 1Q16. if successful, this will increase the number of taxpayers by almost 2.5x.
Eliminate the issuance of duty waivers
Recovery of stolen funds
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16
De
fici
t %
of
GD
P
Go
vt E
xp (
USD
B
n)
Govt Exp Deficit (% of GDP)
Page 15
Nigeria : 2016 Budget is expansionary
Source: World Economic Database (IMF)
Government implementing counter-cyclical expansionary budget in 2016.
Depending on the oil price, the final deficit is likely to be between -2.2% and -3.5% of GDP
30% increase in Expenditure
Source: World Economic Database (IMF)
With one of the lowest debt ratios in the world, the Government has the room to implement its counter-cyclical
expansionary budget. There is no requirement for emergency funding.
Page 16
Nigeria : Debt Ratio is Very Low
0
10
20
30
40
50
60
70
0
10
20
30
40
50
60
70
80
20
00
20
01
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03
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04
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20
16
% o
f G
DP
Gro
ss G
ovt
De
bt
(USD
bn
s)
Gross Govt Debt % of GDP
0
20
40
60
80
100
120
Un
ited
States
Egypt
Un
ited
Kin
gdo
m
Brazil
Israel
Ind
ia
An
gola
Ke
nya
Malaysia
Sou
th A
frica
Ind
on
esia
Ethio
pia
Ch
ile
Nige
ria
Debt to GDP (2015)
Source: World Economic Database (IMF)
Page 17
Nigeria : Debt Burden is Sustainable
Domestic debt, $54.7
Multilateral $7.6
Bilateral $1.7
Eurobond, $1.5
External $10.7
83% of Nigeria’s debt is domestic debt
87% of the external debt is concessional borrowing from multilateral and bilateral agencies.
Commercial external debt is only USD 1.5 bn (2.3% of total debt).
The current budget deficit can be funded from domestic sources without resorting to external borrowing
Source: Debt Management Office
Page 18
Nigeria : Objectives of the 2016 budget
Stimulate the economy to achieve a real GDP growth rate of 4.2% in 2017
Reduce the cost of governance, extract efficiencies in the public service and enhance collection of internally generated revenues
Increase government expenditure on infrastructure
Fund the budget deficit and negative trade balance cost effectively
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009 2010 2011 2012 2013 2014 2015 2016
Satutory Transfers Debt service Recurrent Capital Expenditure
Expenditure Profile
Source: Budget Office of Nigeria
Page 19
Nigeria : Addressing Infrastructure deficit
Increase capital expenditure to 30% of spending (currently 12.3%)
• 2015 spend on travel + stationary + consumables = NGN18.9bn
• 2015 spend on Road = NGN 19.8bn
N1.8trn to be invested: Transport, Roads, Housing, Power, Health
Source: Budget Office of Nigeria
35%
16% 4%
11%
4%
1%
3%
3%
3%
20%
Works Power and Housing
Transport
Agriculture
Defence
Interior
Communication
Health
Education
Water
Others
Allocation of 2016 Capital Budget
Page 20
Nigeria : Funding the Deficit
Projected budget deficit of N2.2trn (USD 11bn) in 2016 (-2.16% of GDP)
N1.8trn borrowing to be structured to achieve cost effectiveness and acceptable debt sustainability ratios:
• N635bn ($3.5 - $4bn) to be raised from multiple external sources including multilateral agencies and export credit agencies
• N1,2 trillion (USD6bn) to be raised in domestic market
Paradoxically, the projected increased deficit in 2016, may not add much upward pressure on domestic yields. Since the introduction of the Treasury Single Account (TSA) in September, about NGN1.1 trillion (USD5.5bn) of T-bills have matured which was not rolled over.
In 2016, an estimated NGN1.9 trillion (USD9.5bn) of Open Market Operation (OMO) bills will mature and if the CBN continues with its current policy (post-June 2015) of not rolling-over maturing OMO T-bills, then domestic banks alone can fund the deficit.
Pre June-2015, when excess liquidity in the financial system was around NGN200bn, additional Government borrowing of NGN1.2 trillion would create ripples and some upward pressure on yields. However with excess liquidity now running at around NGN800bn and with the possibility of an additional NGN1 trillion being injected into the system in 2016, it appears that the domestic borrowing requirement for 2016 can be comfortably accommodated.
Page 21
Oil Dependent Currencies
Source: Minister of Finance
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
0
100
200
300
400
500
600
700
800
900
Iraq
UA
E
Qatar
Saud
i Arab
ia
Ve
nezu
ela
Ku
wait
Libya
Iran
Ind
on
esia
Nige
ria
Algeria
An
gola
Co
lum
bia
Brazil
Kazakh
stan
Ru
ssia
Fore
x M
ove
Sin
ce J
un
e 2
01
4
Oil
pe
r C
apit
a
Oil per capita FX ChgSource: OPEC, Bloomberg
Page 22
Nigeria : Current Account Deficit
Source: Minister of Finance
-5
0
5
10
15
20
25
-15
-10
-5
0
5
10
15
20
25
30
35
40
20
00
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01
20
02
20
03
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04
20
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09
20
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11
20
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14
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15
20
16
C/A
De
fici
t (%
of
GD
P)
C/A
De
fici
t (U
SD b
n)
C/A Deficit % of GDP
Source: World Economic Database (IMF)
Page 23
Nigeria : Longer term reforms
Implementation of Treasury Single Account
Ongoing initiatives to increase internally generated revenues (expand the base and increase the number of taxpayers)
Refinancing of short term obligations into longer tenured instruments
Direct revenues from revenue generating projects financed will be used for debt service
Source: Minister of Finance
Profit Opportunities
Growth
Macro
Politics
Consumer Demand
Young Population
Attractive Valuation
Diversification
Africa offers significant profit opportunities – robust economic growth, rising consumer demand, strong
corporate earnings, well-capitalised banks without toxic assets, relatively cheap stock markets
Sub-Saharan Africa is one of the fastest growing regions of the world. GDP growth for 2014 is expected to
be 5.4%, whilst global growth is forecast at 3.6% and 2.2% for advanced economies (source: IMF WEO)
Improving macroeconomic fundamentals – low budget deficits, low inflation
Improving political situation with majority of countries having democratic governments
Robust domestic demand and is not predicated on huge stimulus packages, corporate bail-outs or
incredibly low-interest rates
Young population: 50% of the population under the age of 30
Current valuations provide an exceptional buying opportunity – trading at P/E 2014 15x, Div Yield 4.3%,
EPS growth of 15%
Uncorrelated with global markets providing the opportunity for portfolio diversification
Africa: The investment case
Page 24
Disclaimer
Page 25
This document, which is being provided on a confidential basis, has been issued by Duet Asset Management Limited, which is authorised and regulated by the Financial Services Authority (“FSA”). The information in this document does not constitute, or form part of, any offer to sell or issue, or any offer to purchase or subscribe for interests in any fund or company, nor shall this document or any part of it or the fact of its distribution form the basis of or be relied on in connection with any contract. Interests in any investment funds managed by Duet Asset Management Limited will be offered and sold only pursuant to the offering memorandum relating to such funds (the “Offering Memorandum”) which contains important information (including investment objective, policies, risk factors, fees, tax implications and relevant qualifications) and only in those jurisdictions where permitted by law. In the case of any inconsistency between the descriptions or terms in this document and any Offering Memorandum, the Offering Memorandum shall control. Interests described in this document shall not be offered or sold in any jurisdiction in which such offer, solicitation or sale would be unlawful until the requirements of the laws of such jurisdiction have been satisfied. This document is not intended for public use or distribution. An investment in any Duet Asset Management Limited investment fund is speculative and carries a high degree of risk and is not suitable for private investors. Duet Asset Management Limited has not taken any steps to ensure that the interests referred to in this document are suitable for any particular investor and no assurance can be given that the stated investment objectives will be achieved. No representation is made or assurance given that such statements, opinions, projections or forecasts in this document are complete or correct or that the objectives set out in this document will be achieved. Duet Asset Management Limited cannot accept responsibility for errors appearing in this document. The law may restrict distribution of this document in certain jurisdictions therefore; persons into whose possession this document comes should inform themselves about and observe any such restrictions. The interests may not be marketed, offered, sold or delivered, directly or indirectly, unless in accordance with all laws applicable to such marketing, offer, sale or delivery of the interests in any relevant jurisdiction. Opportunities for redemption and transferability of any interests described herein may be restricted so investors may not have access to capital when it is needed. There is no secondary market for the interests and none is expected to develop. The interests, which is under the sole investment authority of the investment manager may not be diversified which may result in higher risk. Leverage may be employed in the portfolio, which can make investment performance volatile. An investor should not make an investment unless it is prepared to lose all or a substantial portion of its investment. The fees and expenses charged in connection with this investment may be higher than the fees and expenses of other investment alternatives and may offset profits.