18 STAR BIZ NAIROBI STAR Friday, 7 November 2008

WHETHER you live in Nai-robi, London, New York or Timbuktu in Mali, the recent months have been like riding a wild roller coaster.

Everyone has been watching everyone else in a � nancial world that spins for 24 hours with small intervals between Asia and Europe and then Europe and North America. You could not have written this script even if you had tried.

Little Iceland, with a population of about 350,000, had gone on a spending spree where they had bought up whole swathes of the UK High Street, a few football clubs and had funded Victor Tchenguiz and his share raids on the likes of Sainsbury. Then it turned out that the money for this binge had all come from local authority deposits and the like in the United Kingdom.

Now the money has gone, the Krona has devalued by 97 per cent, the shelves in Reykavik empty, the average debt per Icelander is $800,000, and Gordon Brown has threatened to invade.

Lehman was declared bankrupt, vener-able banks were reporting losses which were so extraordinary as to be unbeliev-able, policy makers were tossing around eye-popping rescue packages. And then the British government basically had to rescue HBOS and Royal Bank of Scotland.

The entire edi� ce of the world as we knew it appeared to be about to fall asun-der.

In Africa, we had felt safe at a distance but then in October, the Nairobi Stock Exchange crashed 40 per cent lower than the lows reached in January and Febru-ary when our political risk indicators were � ashing red.

Nigeria slid to a year’s low and in South Africa, the Rand tumbled from 7 to the US dollar to 12 in a few short weeks. It seemed a tsunami was washing over the continent and that we were just dangling in the wind.

The actual source of the contagion was of course the American and British banks who had been able to borrow more than $30.00 for every $1.00 they had in equity. During the fat years, they were making handsome returns on this borrowed mon-ey.

They were able to generate $10.00 prof-it on the $30.00 and come back to their shareholders saying: “We are the masters of the universe. See we are making $10.00 for

every $1.00 of capital. We deserve $5.00 as bonus and the rest is for the shareholders.”

They went to the regulators and said: “we are the New Age economic wizards. We have our own proprietary models so ‘take it easy, everything is peachy.”

The regulator then was Alan Greenspan. A couple of weeks ago, he admitted in his own words but the gist was this: “Look I might have got it wrong, I trusted the banks to take care of themselves.”

Down on the ground, the US real estate market was going higher and higher. The bank salesmen were saying ‘‘ that house you always wanted, you can afford it now. Cannot pay the in-terest? Have a teaser rate at near enough 0 per cent. Don’t worry the rate will go up in two years. You can self-certify what you earn”.

In the risk depart-ments of the banks, they bundled up hundreds of differ-ent mortgages into bonds. Whiz kids with PHDs from Ivy League announced: “These pools mean less risk because there is diver-si� cation.”

And voila! the ratings agencies classi-� ed the bonds as AAA and things took off again. Banks all over the world thought to themselves, well the ratings agencies have rated them AAA, and they carry higher in-terest rates, so let’s buy some.

A few smart fellows down on the ground said sotto voce: “Many of these houses are

empty. The owners have walked away. The other owners might do the same when their teaser rates end. Others never were able to afford the mortgage payments that they themselves had self certi� ed!”

One very smart man called John Paulson (not Hank) went to all the banks and said: “I am a rather conservative man and I want insurance on my AAA bonds.” The banks thought: AAA bonds never fall below 95 cents in the dollar. Our models tell us that. We can make some extra money on this man. Let him pay us one cent and if these bonds ever trade at 90.00, we will give him 5 cents insurance.’

And John Paulson bought as much insur-ance as he possibly he could for a single cent in the dollar.

Within a few months, huge numbers of these loans were not pay-ing interest and were in default. Houses all over America were now lying empty. What the

banks had all said was worth $1.00 was now worth a great deal less.

The banks started selling the houses at less than half they were supposedly worth. On that equation of $1.00 of capital against $30.00 of borrowed money, they had lost $15.00 of the $30.00 of borrowed money. There was a systemic risk.

Then Merrill Lynch sold a huge bundle of loans for 20 cents in the dollar and had to lend the money to the buyer and the game was up. That was about in August. That’s

the origin of the economic tidal wave which has reached our African shores.

Now clearly there are challenges. Kenya’s highest foreign exchange earner is remit-tances which totalled $1.3b dollar annually and they are set to slide. That is inevitable. Tourism markets are entering a recession. There will be less discretionary spending money available so high end roses and hor-ticulture will surely feel a pinch.

However, Africa has its own momentum and traction. Ours is a late cycle industrial revolution. We are looking to plug the Afri-can masses into the knowledge economy at a wholesale price around $30.00 a month.

Two years ago, my car broke down half way between Nairobi and Mombasa. This boy appeared and stood watching. He told me he had taught himself Latin. I know Latin. I checked. He knew.

If we can connect him to the knowledge economy, instead of watching cars whizz by, then he can join in and pay his way. That’s why microlending makes a compel-ling case. In fact, micro� nance has a default rate of 2 per cent.

The most intelligent and best risk adjust-ed returns are to be had by lending at com-mercial rates to the world’s poor. Indeed, this is the story of Equity Bank. In fact, for the � rst time in my lifetime, that my sav-ings would probably be safer in a blue chip Kenyan Bank than in London or the US. This is remarkable.

It is human capital arbitrage. The Indians did it. The Chinese are doing it. In today’s world, it does not matter if there is a gap in the development curve because you leap-frog. So the big picture is intact.

I fully expect that African equity markets will rebound strongly. In the global down-turn, every equity market was sold off at the same time. The baby was thrown out with the bathwater. However, in the past week the NSE has rebounded with a mus-cularity and retraced 50 per cent of its fall from 5,000.

That leads me to believe that investors will recognise the real value in Africa and that its renaissance, whilst slowed, is in no way compromised.

The world is multi-polar now and you will note the arrival in Kenya of Gulf Afri-can Bank, the Libyan interest, the Chinese as long term players and a burgeoning do-mestic middle class.

We remain on the runway ready for take-off.

WHY NAIROBI STOCK EXCHANGE WILL REBOUND VERY STRONGLY

ROBUST: In the past one week trading at the Nairobi Stock Exchange has bounced back after poor showing. Investors hope the good performance will be sustained.

It is encouraging that Gulf African Bank,

Libyans and Chinese have entered Kenya as long term players

By Aly Khan Saatchu

I fully expect that African equity markets will rebound strongly. In the past week, the NSE has rebounded strongly and retraced 50 per cent of its fall from 5,000. That leads me to believe that investors will recognise the real value in Africa.

By Aly Khan Saatchu

markets will rebound strongly. In the past week, the NSE has rebounded strongly and retraced 50 per cent of its fall from 5,000. That leads me to believe that investors will recognise the