Evolving Insolvency Law: A Lifeline to Debt Laden Companies in Kenya

The 2008 financial crisis sparked a widespread assessment of global insolvency laws and identification of effective instruments available for financially distressed companies. The financial services industry’s self-examination has generated one practice that has now become increasingly popular: the introduction of restructuring options within existing insolvency laws to give failing companies a pathway to solvency. Studies have shown a positive correlation between insolvency law reform and the survival rates of distressed companies; these laws have also been found to promote job preservation.

In 2016, Kenya enacted the Insolvency Act, which now allows for insolvent companies to be rehabilitated. The Act introduced two new procedures, administration and company voluntary arrangements (CVA), commonly referred to as out-of-court restructuring. With liquidation of insolvent companies bearing potential losses to creditors of up to 85%, restructuring emerged as a preferred alternative. However, recent high-profile cases of insolvency highlight the need to further develop this restructuring framework. Some of the recent high-profile insolvency cases include:  ARM Cement, Nakumatt, Uchumi, Deacons, and Kenya Airways - who have a collective debt of over $2bn.

A successful restructuring is not only one that restores the company back to solvency, but also ensures high returns to creditors.This brief examines the emerging practices in resolving insolvency in Kenya, highlighting its shortcomings, and makes recommendations on how the process can be more balanced and efficient. The first two sections will give an overview of the benefits of restructuring, and the approach Kenya has taken to resolve insolvency. The last two parts highlight areas of intervention identified through our analysis.

To learn more, download the latest Botho Brief.

Author: Bathsheba Asati, Research Associate, Botho Emerging Markets Group

Kenya in a Globalised World -- Where is the Balance Shifting?

By Aparupa Chakravarti, Director, Botho Emerging Markets Group

In a world of shifting alliances and spheres of influence, countries must think strategically about their bilateral and multilateral relationships in order to better anticipate evolving challenges and opportunities. This is particularly necessary to hedge against fluctuating sources of global turbulence and uncertainty. As Kenya contends with volatility among some of its most influential external partners, notably the United States, the United Kingdom, and China, the country will soon chart new waters with these long-term partners while deepening those with promising new and  unconventional partners amongst its African and emerging market peers.

Ambiguity in US-Kenya Trade Due to Protectionist Administration and Slowing Economy  

With $572 million in Kenyan imports in 2017, the US is one of Kenya’s top 3 trading partners. Notably, 70% of Kenya’s exports to the US, which are largely agriculture and apparel, fall under provisions of the African Growth and Opportunity Act (AGOA). AGOA aims to stimulate economic growth, encourage economic integration, and facilitate sub-Saharan Africa's integration into the global economy through duty-free imports of African goods. Although AGOA was recently extended to 2025, its status as a United States Trade Act -- rather than a trade agreement -- means that it can, at any time, be “amended, extended or repealed for example through an Act of Congress.” Given the Trump Administration’s threats to undermine core principles of multilateral trade and skepticism of long-standing pillars of US commercial diplomacy such as NAFTA, no trade agreement is safe -- AGOA included. Considering the central role that AGOA plays in US-Kenya trade, volatility in US trade relations would have a disproportionate effect on Kenyan exports.

Furthermore, with the US economy projected to lose momentum this year due to the risk of a recession in 2020, Kenya is likely to feel the impact through a knock-on reduction in remittances, the country’s largest source of foreign-currency. While it is too early to ascertain the exact impact of the US slowdown on the Kenyan economy as some analysts argue that the forecasts are overstated, the shadow of a sluggish US economy undoubtedly adds an additional layer of ambiguity to the future of US-Kenya trade.

Brexit Brings Mixed Benefits for Kenya
Like the US, the UK’s foreign policy future remains uncertain, as Whitehall prepares to exit the EU this year. While Brexit propels the UK to build new trading partnerships, Theresa May and her government have signalled their intention to leverage the Commonwealth to plug the trade gap. However, African countries might not benefit as much as anticipated: developing countries stand to lose trade preference to the UK that allow them to export their goods with low or no customs. The EU has existing trade deals with more than 70 countries including Kenya, which the UK would lose in the event of leaving without a deal. While the UK has pledged to replicate these existing deals, as of February 2019, it had only signed continuity deals with members countries of the Eastern and Southern Africa (ESA) region, which includes Madagascar, Mauritius, Seychelles and Zimbabwe. Without a trade deal between the UK and Kenya, tariffs will be set in accordance with World Trade Organization (WTO) rules.

This shift in status would substantially affect Kenya as the UK is its third largest trading partner.  One of the clear effects is a potential hike in tariffs. In the case of Kenya, this could be to the tune of over 5% of the value of Kenya’s exports to the UK. Kenya’s rapidly growing flower industry alone faces an additional £3.6m annually.

New Chapter for China-Kenya
China represents another uncertain area for Kenyan trade diplomacy due to a slowing economy, which has dropped to its lowest annual rate in three decades, partially fuelled by China-US trade friction. Kenya has another pressing cause for concern: its loan repayments to China for the Standard Gauge Railway are set to triple this July, as the five-year grace period extended by Beijing in May 2014 draws to a close. A depressed economy is likely to dampen Beijing’s willingness to extend this grace period further or to negotiate repayment terms. Furthermore, there are other developments in China that also merit attention: recently, for example, the Chinese government introduced a tax cut for Small and Medium Enterprises (SMEs) in China in an effort to boost local manufacturing. For Kenya, this is likely to result in cheaper imports competing with domestic producers. In 2017, China was Kenya’s top import origin, with trade topping $3.91B.  To reduce over-reliance on Chinese goods and ease competitive pressure on Kenyan manufacturers, Kenya might consider sourcing products from neighbours as well as other emerging global manufacturing behemoths such Vietnam, Indonesia, or Bangladesh, in tandem with bolstering domestic manufacturing capabilities.

Promising Horizons Across The Red Sea
Given uncertainties of trade relations with the US, UK, and China, Botho Emerging Markets Group recommends that the Kenyan government and private sector should explore high-potential partnerships with Gulf state allies, particularly the UAE and Saudi Arabia.

The UAE and Saudi Arabia are the second ($11 billion) and fifth ($3.8 billion) largest investing countries in Africa by capital investment. Both countries also rank among Kenya’s top 5 import origins. Saudi Arabia and the UAE have positive, if modest, growth projections for 2019 - 2.4% and 3.7% respectively, according to the IMF - driven in part by a bid to diversify their economies into non-oil sectors.

The Red Sea region, in which Kenya is often included, has the potential to be far more than a mere geographical demarcation. Comprising 28 countries with a collective GDP of close to USD 2 trillion,  the Red Sea accounts for an estimated 10% of all global maritime trade. Yet, intra-regional trade is relatively low - 16% as of 2015 compared to 69% for the EU - despite the existence of compelling asymmetrical opportunities. For example, even though roughly 30% of Sub-Saharan Africa’s non-oil exports are food products and GCC countries are net food importers, the majority of the GCC’s food imports is sourced from non-Red Sea countries.

Looking at the Horn of Africa, specifically, Gulf countries have increasingly solidified their presence in the region, fuelled by geopolitical and economic interests. Ethiopia is progressively asserting itself as both a political and economic powerhouse within the region, re-establishing old ties, such as with Eritrea - that too, under the aegis of Saudi Arabia - and positioning itself as a regional manufacturing hub. In order to effectively tap into the Gulf investment community and growing interest in commercial partnerships, Kenya must bolster its commercial diplomatic efforts and leverage its status as East Africa’s largest economy to attract more Gulf capital to fuel its developmental ambitions.

For Kenya to maintain and reinforce its position as a regional leader, the country must diversify its risk in a turbulent global economy. Central to this is building new relationships with non-traditional trading partners, such as the UAE and Saudi Arabia, as well as bolstering relationships with neighbours in the region.

Botho Op-Ed for The East African on Regional Free Trade Opportunities

The op-ed below, written by Archie Matheson, Head of Policy and Analytics at Botho Emerging Markets Group, was originally published by The East African on 4 March 2019, and highlights the challenges of implementing the proliferating web of trade agreements in the region.

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Amidst the hope and enthusiasm surrounding the potential Continental Free Trade Area, we are neglecting one of the most important offices behind practical regional economic integration.

Though discussions of African trade during 2018 were dominated by the agreement to establish a Continental Free Trade Area (CFTA), even if ratified during 2019 its practical outcomes will not be realised for many years; substantive discussions on rules of origin and tariff lines have not yet taken place. By contrast, should the Tripartite Free Trade Area (TFTA) by ratified by the requisite number of countries – as seems possible during the coming months – over 90% of tariff lines have already been agreed, meaning actual implementation would take place in the shorter term. Indeed, by combining COMESA, EAC, and SADC – thus including over half the continent’s countries – TFTA will undoubtedly be, and to an extent already is, the primary building block of any CFTA.

In turn, the creation of TFTA is depending heavily on existing procedures and ideas from COMESA. Thus, it would be fair to say that COMESA is a driving force of regional economic integration. Within COMESA, below the ultimate decision-makers – the COMESA Authority and Council of Ministers – are the brains and engine of progress, the COMESA Secretariat. For trade matters, it is the Secretariat’s duty to support the drive for higher intra-COMESA trade in line with established protocols.

And within the Secretariat there is a department which puts this responsibility into practice, an office small in size but large in mandate: the Directorate of Trade and Customs. Given the role of COMESA on the continental stage, it is perhaps the most important office related to African trade, active in three main areas.

The Directorate helps to resolve trade disputes, relating to both rules of origin and non-tariff barriers (NTBs), covering both trade in goods and trade in services. It is called upon to give official opinion, share recommendations, arrange dialogue between disputing parties, lead on-the-spot verifications, and, if necessary, refer cases to the Council of Ministers. In January 2019 alone, three full interventions were needed and successfully completed.

It develops ideas and policies which are then presented to the Council for approval, seeking greater harmonisation and introducing trade facilitation measures. As an example, it was the Directorate which developed the NTB Reporting System which was implemented by COMESA, subsequently adopted by TFTA, and due to be discussed for incorporation into CFTA at this month’s UNCTAD meeting.

Furthermore, it leads trade negotiations on behalf of COMESA with multiple trade partners. These include talks on TFTA, CFTA, EPAs with the EU, AGOA with the US, and bilateral agreements with numerous countries. By providing extensive support for COMESA’s Council of Ministers, the Directorate is the engine room which facilitates the effective functioning of free trade across COMESA, and beneficial trade beyond.

For an office with such far-reaching responsibilities, it would be reasonable to expect an array of specialists, sufficient in number to cover the rules of origin, NTB, and small-scale trade issues which arise under Trade in Goods, or the challenges posed within the 12 separate sectors which sit under Trade in Services; experts to drive improvement in trade facilitation; and negotiation specialists for the multitude of international trade agreements.

Yet, staggeringly, the Directorate has only four full-time staff: a Director, Senior Trade Officer, Senior Customs Officer, and a Senior Research Fellow. They are assisted by no more than a handful of shorter-term contract staff. Although through its Trade Facilitation Regional Programme the EU will shortly fund two new project staff to deal with small-scale trade, total numbers are chronically insufficient. The consequences for COMESA members, importers, and exporters are costly – not through a lack of will or ability, but a lack of funding and corresponding capacity.

When trucks or containers are held at land borders or ports, they incur charges daily; resolutions are required within days, rather than weeks or even months. Often these charges are easily avoidable, but instead result in needless costs for exporters and importers – and ultimately producers and consumers. As an example, each time an on-the-spot verification is needed, one senior staff member must travel, leaving the Directorate severely short-handed. If two verifications are needed at once, one dispute must wait – one of several instances was in May 2017, when Kenyan food and beverage importers incurred huge expenses as their containers of Mauritian industrial sugar were held waiting in Mombasa, since the relevant official was tending to an Egypt-Sudan dispute over ceramics. These manufacturing businesses lost money, and had a greater inclination to look for non-COMESA sugar thereafter.

The team is not large enough to manage intra-COMESA issues, let alone negotiations relating to regional integration and global trade. Can member states be sure that they will be getting the best possible trade deals? Further, there simply isn’t the bandwidth to dedicate time to additional innovative trade facilitation development, or to encourage and secure member endorsement of harmonisation procedures.

Having been elected as COMESA’s new Secretary General, Chileshe Kapwepwe suggested that the opportunities offered by COMESA and further regional integration are seized, but also highlighted that this requires a well-managed, well-resourced COMESA that is appreciated by its member states. Together with development partners, members states need to respond to this call to action, for while they extol the virtues of the more distant CFTA, they can realise more immediate benefits by investing in an overworked office which is central to functional African trade.

The Essential Oils Industry in Rwanda

The essential oils industry in Rwanda offers investors a niche and high-value opportunity in an underdeveloped and high growth market.

Essential oils are concentrated plant chemical extracts obtained by distillation or mechanical methods that have the characteristic fragrance and flavour of the plant or other source from which they were extracted. Once the chemicals have been extracted, they are either sold as pure oils or combined with a carrier liquid to create a product that is ready to use. There are over 90 commonly used essential oils, with widely-used oils including orange, lavender, peppermint, eucalyptus, patchouli, geranium, and avocado.

The global essential oils industry is currently valued at approximately USD 6 billion, with this number expected to grow to around USD 13 billion by 2023. Essential oils are increasingly being used in a number of high value industries, including: Flavour and Fragrance, Beauty and Cosmetics, Food and Beverage, and Pharmaceuticals.

The rapid increase in demand for essential oils is being driven by several factors, most notably:

  1. Rise in disposable consumer income, particularly in Asia, Latin America and Africa, and

  2. Changing customer habits, with a growing interest in naturally-sourced products.  

Rwanda is well-placed to take advantage of the increasing demand for essential oils. The country has the climate and soil to produce high-quality and high-volume plants, particularly patchouli and geranium, from which two of the most popular essential oils are produced. Rwandan farmers can produce three or four harvests a year, a clear advantage compared to many other essential oil producing countries (e.g.  South Africa has only two harvests a year).  

The Rwandan government has identified the modernisation of its agricultural sector as an important aspect of its Economic Development and Poverty Reduction Strategy (“EDPRS”), currently transitioning from its second phase (EDPRS-2, which ran from 2013 to 2018) to its third phase (EDPRS-3, running from 2018 to 2023). Central to the government’s strategy is the move to producing high-value crops, with the plants used in manufacturing essential oils (e.g. patchouli and geranium) recognised as one such opportunity for farmers in the country.

A central tenet of the government’s EDPRS-2 and EDPRS-3 strategy is the move to the private sector as being the driver in enhancing economic growth and reducing poverty. With this being the case, the government has offered a number of incentives to encourage both foreign and domestic investors, including tax exemptions and low-interest loans. The government has also invested in key infrastructure and R&D across a number of sectors, with the aim of improving Rwanda as an investor destination. In 2016, for example, the government built the first essential oils testing and certification laboratory in East Africa, meaning that products can now be tested to international standards locally.

The essential oils industry in Rwanda is underdeveloped, with one company – Ikirezi Natural Products (“Ikirezi”) – currently active and exporting essential oil products, featured in this brief as a case study.

To learn more, download the latest Botho Brief.

Botho Op-ed for ZAWYA/Thomson Reuters: "Golden Green"

Originally published 6 January 2019:

https://www.zawya.com/uae/en/business/story/Golden_green-ZAWYA20190106121024/?platform=hootsuite

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Africa's renewable sector offers opportunities for Gulf investors

As the UAE prepares for a future where green is the new gold, Africa’s energy gap presents an opportunity for the UAE to position itself as a global leader in green investments. The UAE has traditionally been reliant on oil to buoy its economy but it;s time to leverage one of its other big assets - its financial services industry - to catalyse more investments in energy infrastructure in Africa.

As the largest investor by capital investment in Africa (second only to China as of 2016) the UAE must leverage its existing relationships in the world’s highest potential energy market.

Over two-thirds of Africa’s vast population, an estimated 600 million people, lack access to energy. But Africa’s energy poverty masks the wealth of natural resources that can be used to light up the continent. With significant geothermal, hydro, wind and solar resources, investments in green energy could yield significant returns. Morocco, Kenya, and Rwanda are three countries with particularly compelling prospects for UAE green investments.

Sun shines on Morocco

Morocco is a natural candidate for expanding renewable investments. Despite its abundance of sunlight, 90 percent of its energy resources are imported — costing Morocco approximately $8-$10 billion annually from 2011 to 2013. With this high import bill and rapidly rising electricity demand driven by economic growth, Morocco has set a target of 42 percent renewables by 2020, and 52 percent by 2030 – one of the most ambitious clean energy targets globally. Furthermore, the kingdom has been at the forefront of developing the independent power producer (IPP) model for large-scale utilities plants in North Africa.

Established in 2010, the Moroccan Agency for Sustainable Energy (Masen) drives solar projects and is already yielding results – the first phase of the Moroccan Solar Plan NOOR was switched on in 2016. Upon completion, the 580 MW complex will be one of the biggest facilities of its kind in the world, reducing Morocco’s fossil fuel dependence by about 2.5 million tons of oil per year, and providing export opportunities to neighbouring countries.

Even so, despite these strides, Morocco still has a $24 billion green investment gap, offering the UAE ample opportunity to partake in Morocco’s solar revolution, a country with which it already enjoys cordial relations.

Renewables already light up Kenya

While renewable energy currently makes up 70 percent of Kenya’s installed electric power capacity - compared to the world average of 24 percent - the country is targeting a 100 percent transition to green energy by 2020. The renewable energy sector in Kenya is among the most active on the continent; investment across renewable energy technologies grew from virtually zero in 2009 to $1.3 billion in 2010. While flagship projects as Lake Turkana Wind Farm and Menengai Geothermal Power Station attract headlines, significant opportunities are emerging for renewable energy startups.

One significant startup is Pawame, a UAE off-grid solar company that has connected 4,000 homes to solar in Kenya, having a positive impact on 20,000 lives. It recently raised $2 million in seed funding to help grow its business in Kenya. In the long run, it aims to electrify the 150 million households (70 percent of the population) in sub-Saharan Africa that don’t have access to grid power through micro-credit.

Kenya’s renewable energy potential remains largely untapped, having harnessed only about 30 percent of its hydropower sources, approximately 4 percent of the potential geothermal resources and much smaller proportions of proven wind and solar power potentials. There is, therefore, more opportunity for smaller scale renewable energy projects and innovative startups like Pawame.

Rwanda becoming a renewables force

With a strong, progressive government and an expanding renewables sector, Rwanda is a small country punching above its weight. Rwanda’s investment in clean energy has increased from zero in 2015 to $350 million in 2017, ranking fifth globally among countries that have created opportunities for investments in clean energy, according to Bloomberg New Energy Finance’s annual ClimateScope index. Most future investment in Rwanda’s energy market is expected to go toward expansion of the grid and to off-grid companies working with communities in peri-urban and rural areas.

As a commitment to being a leader in green growth, Rwanda inaugurated an Electronic Waste Plant in 2017 – the first of its kind in East Africa. The Rwandan government leased the Plant to Enviroserve Rwanda Green Park, a subsidiary of the Emirati company Enviroserve Services LLC Dubai, to run and manage. This partnership reflects the potential for more collaboration between the Rwandan government and the UAE’s private sector.

From e-waste recycling to delivery of medical supplies by drone, from renewable energy to car sharing schemes, Rwanda aims to be Africa’s leader in green innovation. Importantly, the UAE has the right technology and know-how to ensure that Rwanda achieves this.

Power to the people

Power shortages are stalling Africa’s development. Investment in renewable energy is set to close the current energy gap - positioning Africa as a global leader in the green clean energy revolution. From investments to technical expertise, the UAE can tap into this revolution and strengthen its competitive position in global markets in green investment and exporting green technologies.

Botho Founder Quoted by African Business Magazine on Chinese influence in Africa

Originally published on September 24, 2017
https://africanbusinessmagazine.com/sectors/development/chinese-influence-grows-as-us-flounders-in-africa/

As the unfolding tariff war between the US and China looms ever larger, Africa finds itself in a bind as the world’s greatest superpowers vie for trade supremacy. While some say that Africa will be forced to pick sides, Africa wisely shows signs of wanting to maximise both partnerships. Yet recent events show Africa moving ever closer to Beijing while Washington undergoes an apparent crisis of confidence in its approach.

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Isaac Kwaku Fokuo Jr., founder and principal at Botho Emerging Markets Group, commented: “Since China replaced the United States as Africa’s largest trading partner in 2009, its trade with the continent has soared by 83% from 2009 to 2011 and surpassed $200bn in 2013,” he says. “By contrast, US trade with the continent reached an all-time high of $105bn in 2008 and has fallen ever since. China has woken up to the promise of African economies while the US appears sluggish.”

Africa: The Next Frontier in Saudi Arabia’s Expanding Sphere of Influence

by Ameera Tameem (Gulf Regional Lead, Botho Emerging Markets Group) and Akinyi Ochieng (Esther Ocloo Fellow, Botho Emerging Markets Group)

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Crown Prince Mohammed bin Salman first announced Saudi Vision 2030 in 2016 to position Saudi Arabia as the leader of the Arab and Muslim world. Leveraging its strategic location near key waterways such as the Red Sea and Gulf of Aden, Vision 2030 intends to transform Saudi Arabia into a global gateway and trade hub for emerging markets. As Saudi Arabia aims to become a global investment powerhouse, the ambitious plan is likely to drive more Saudi investment towards Africa.

The Kingdom of Saudi Arabia is now the fifth largest investor in Africa, with nearly $4 billion dollars in investments across the continent. In the last three years, over 20 African heads of state have visited the nation to meet King Salman bin Abdulaziz of Saudi Arabia to enhance bilateral cooperation in key areas including the economy, security and intelligence.

Today, the Kingdom approaches African countries as viable, profitable trade partners — territories where capital may be invested for sizeable returns. Following South African President Cyril Ramaphosa’s visit to Saudi Arabia, the Kingdom and the UAE jointly pledged $20 billion towards South Africa’s infrastructure, stressing the introduction of alternative energy such as solar panels and wind turbines. This was a landmark moment for the GCC-Africa relationship.

Recent Saudi investments in Africa have focused primarily on energy, housing, agriculture and water. According to Islamic Development Bank (IDB) President Dr.Bandar Hajjar,  "these infrastructure projects will go a long way in addressing the development challenges of our member countries. They will greatly contribute in creating employment and providing an enabling environment for the growth of the public and private sector.” Headquartered in Jeddah, IDB has pledged to fund the expansion of electricity infrastructure in Gabon, and facilitated $805 million in investment in countries such as Burkina Faso, Senegal, Mali, and Tunisia.

There are already signs of progress that Saudi’s expanding interest in Africa will soon bear fruit: the Republic of Congo is poised to join the Organization of Petroleum Exporting Countries (OPEC) soon. Plans to improve healthcare standards in Nigeria in partnership with Saudi German Hospital in an initiative led by the country’s former Vice President, Atiku Abubakar, has demonstrated both Saudi Arabia’s leadership in medical research and their ability to foster successful Public-Private Partnerships (PPPs).

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Preparing for a Post-Oil Future

Established in 1971, Saudi Arabia’s Public Investment Fund is one of the largest sovereign wealth funds in the world, rising to 11th place in sovereign rankings in 2017. In the past year, the Fund’s expansion plans have been the subject of considerable interest in the financial services sector. Saudi Arabian Oil Company’s (ARAMCO) now-scrapped initial public offering, Elon Musk’s statement that Saudi Arabia's sovereign wealth fund might back a deal to take Tesla private, and the backing of the landmark $100 billion Saudi-backed Vision Fund managed by SoftBank, are all tell-tale signs that the Kingdom is doubling down on its strategy for a post-oil future.

Despite the falling production of wheat, Saudi Arabia continues to supply its demand from domestic capacity. However, climate change, water scarcity, and a booming young population mean that the Kingdom will soon be unable to meet growing demand, and will need to import additional supplies. The solution has been to invest in foreign agricultural production as a “means to ensure a long-term, reliable supply of stable commodities”; Saudi Arabian investors have looked outward to secure their food security. They reportedly own over 800,000 hectares of farming land abroad, and recognising the urgent need to promote food security, the Saudi government established the King Abdullah Initiative for Saudi Agricultural Investment Abroad in 2009, which provides large Saudi agribusiness firms with access to credit, as well as strategic and logistical support to invest abroad.

Saudi Arabia’s military presence has recently expanded to nearby Djibouti. Sources report that a planned military base expansion is meant to  safeguard the strategic Bab Al Mandeb strait, as well as the Kingdom’s interests in key waterways and proximity to agricultural investments.

Saudi Arabia increasingly views Africa as a key partner in its reformation agenda to evolve, modernise and reinvigorate its economy. The Kingdom’s increasing investment in the region not only diversifies the Saudi investment portfolio, but also secures opportunities to collaborate with key countries across Africa embarking on similarly ambitious plans for economic development.

Inside The Growth of UAE Investments in Africa

by Ameera Tameem, Gulf Regional Lead, Botho Emerging Markets Group

For the past decade, the UAE has been the leader in African investment within the Gulf Cooperation Council (GCC).  With investments in all four corners of the continent, the UAE is the largest  investor in Africa, second only to China as of 2016.

Nearly 140 Fortune 500 companies including AIG and Lockheed Martin, have established their MEA (Middle East and Africa) headquarters in Dubai as the city cements its reputation as an entry hub for Africa.

Numerous South African companies have also established offices in Dubai in an effort to enhance their international presence and be in closer proximity to attractive  North African markets. According to the Dubai Chamber of Commerce (DCC), over 12,000 African companies were registered in Dubai as of 2017.

Recognizing the plethora of opportunities for investment in multiple African sectors such as infrastructure, technology and energy, Dubai has increased  non-oil trade with the continent by 700% over the past fifteen years, according to the DCC.

Abu Dhabi, meanwhile, has focused heavily on investing in infrastructure. The emirate has lent considerable capital to the construction of large-scale projects such as the newly announced oil pipeline between Eritrea and Ethiopia, renewable energy projects in the Seychelles that include a solar farm, and an electric power grid on the island of Mahé, as well as the expansion of rural infrastructure in  Uganda and Tanzania, jointly funded by the Abu Dhabi Fund for Development (ADFD).

The ADFD, the emirate’s foreign aid agency, has invested over $50 million to encourage UAE companies to invest in Chad in alignment with the country’s National Development Plan 2021. The fund has also funded over 66 projects in 28 African nations including Benin, Comoros,Cape Verde among others.

In recent months, the UAE has also made inroads as a political actor in the Horn of Africa region. Abu Dhabi’s Crown Prince, H.H Sheikh Mohammed Bin Zayed, played an instrumental role in brokering the Ethiopian-Eritrean peace accord while Dubai Ports (DP) World has invested over $440 million to build and manage a world class port in Berbera, Somaliland over a 30 year concession period. The UAE has also pledged  to fund and train the breakaway state’s security forces, in response to mounting disagreements with Djibouti over the disputed concession of the Doraleh port.

Moreover, alongside Saudi Arabia, the UAE has also committed  funds and military expertise to help curb the rising wave of extremism in the Sahel by constructing a military school in Mauritania opened in early 2018.

The rapid investment in political, economic, and military capital in Africa sends a clear message: the UAE is poised to become a major player in Africa’s geopolitical future.


 

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Brief No. 2 China in the UAE (China in Middle East & Africa Series)

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In 2015, the Chinese embassy reported nearly 300,000 Chinese nationals living and working in the United Arab Emirates (UAE). These figures include traders who arrived in Dubai in the 1980s from Fujian and Zhejiang provinces, young professionals working in tourism, retail and finance, as well as employees

in state-owned enterprises involved in energy, construction, telecommunications and finance projects.

China is the UAE’s biggest import origin country and ranks third among export destinations... Dubai is home to Dragon Mart, the world’s biggest Chinese trading hub outside China, which welcomed 120,000 daily visitors and housed 1,700 Chinese retailers as of 2015. According to Dubai Chamber

of Commerce and Industry, Chinese investment in the UAE amounted to USD $2.33 billion in 2016.

Chinese investments in Dubai, however, have declined in recent years as a result of falling oil prices, which have dealt a serious blow to the UAE’s economy. The country’s capital, Abu Dhabi,
is largely dependent on oil and gas exports, and declines in commodity prices have led to a drop in revenue. While Dubai is not as reliant on oil incomes as the other emirates, it has not escaped the effects of falling oil prices due to its role as the primary investment and trade destination for oil-rich countries in the region.

Increased levels of political engagement from Beijing in Saudi Arabia have also affected Chinese investments in the UAE. Since 2016, Chinese president Xi Jinping has met with King Salman of Saudi Arabia twice. In January 206, Jinping visited Egypt, Iran and Saudi Arabia while in March 2017 King Salman of Saudi Arabia visited Beijing. In contrast, no such meetings have taken place between China and UAE leadership since 2016. Moreover, the UAE has not been identified as one of the 63 Belt and Road target countries.

In light of weak economic growth and shifts in the Middle East’s political economy, this report explains current trends in Chinese trade and investment in the UAE, and identifies emerging opportunities for China in the Emirates and the Gulf region.

The content of the following report draws upon data and insights from more than 30 business owners, professionals and officials. Names, titles and company information mentioned in the report are considered sensitive information and may not be re-published without express permission of the Sino-Africa Centre for Excellence at Botho Emerging Markets Group.

These briefs are informal notes for stakeholders on the implications of shifts in development and trade between China and various countries across the Middle East and Africa. They highlight emerging trends or topical issues, and are issued every quarter. Contributions are welcome.

Brief No. 1 China in Egypt (China in Middle East & Africa Series)

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This report examines the state of Chinese trade and investment in Egypt in various sectors including stone material processing, textiles, manufacturing, infrastructure, and energy. The report draws on data collected from interviews with 20+ Chinese business leaders in the country in June 2017.

Egypt is a difficult business environment for Chinese enterprises. Top challenges reported by Chinese companies include business registration and licenses, access to finance, customs and trade control as well as access to land. However, despite currency shocks and political risk challenges that have driven away other investments, Egypt remains a promising new market for Chinese companies attempting to establish a foothold in the MENA/Sub-Saharan Africa region.

Chinese activity in the Egyptian economy first emerged through investments in the stone-processing sector during the 1990s. Today, the sector remains dominated by Chinese firms, which produce 70% of Egypt’s stone material exports and employ over 3,000 Egyptian workers. The China in Egypt Stone Material Association, launched by the Chinese embassy, now plays an instrumental role in unifying the business community, facilitating dispute resolution, and establishing industrial codes. Chinese companies in the stone material sector are well-integrated in the local labor market and procurement system, and work closely with the Bedouin community to ensure security.

Between 2000 and 2010, the number of Chinese companies investing in the Egyptian textile sector increased as demand for textile products from socks to shoes and clothes increased. However, due to the political turmoil of the Arab Spring in 2011, textile exports shrank and many Chinese-owned textile shuttered their operations. As the Egyptian state stabilizes today, several Chinese businesses have returned to the area or entered the market due to the reduction in competition.

Manufacturing companies such as Jushi, a leading supplier of fibreglass and reinforcements, and New Hope, an animal feed producer occupying a vast area of 29,000 square meters in Beheira province north of the Egyptian capital Cairo, have achieved remarkable growth in Egypt and introduced the “Made in Egypt” brand internationally.

The manufacturing industry has witnessed a flurry of interest from Chinese multinationals. China’s SAIC Motor Corporation Limited, a Chinese state-owned automotive design and manufacturing company headquartered in Shanghai, is now planning to construct a factory in Egypt in order to supply the Egyptian market as well as markets in the Middle East and Africa with active free trade agreements with Egypt.

Similarly, China’s Guangzhou Goodsense Decorative Building Materials Co. Ltd. is constructing a new factory in a 16,000 square-metre area located in the Suez Governorate Ataqa industrial zone under a USD $100 million Egyptian-Saudi- Chinese joint venture.

While Egypt urgently needs more infrastructure projects, poor availability of foreign exchange renders such initiatives difficult. Several projects have been announced, but have experienced delays in negotiation and implementation. Nevertheless, some notable successes do exist. Sinopec, China’s second-largest oil group by market capitalisation, for example, has joined American company Apache as a junior partner in an oil and gas exploration project located in Egypt’s Western Desert. By spending $3.1bn on a 33 per cent stake in the project, Sinopec is deepening its commitments in Egypt having previously embarked on another joint venture there in concert with Tharwa Petroleum, an Egyptian company, in 2005.

China is now the largest investor in the Suez Canal Economic Zone with a Tianjin-based state-owned company as the major developer of the Teda Industrial Zone in Ain Sokhna, which lies on the western shore of the Gulf of Suez. Teda currently hosts several successful companies in Egypt and is ready to launch its second phase of development.

As Egypt emerges as a promising production center, investments by Chinese companies are likely to continue to grow.

These briefs are informal notes for stakeholders on the implications of shifts in development and trade between China and various countries across the Middle East and Africa. They highlight emerging trends or topical issues, and are issued every quarter. Contributions are welcome.

Botho Op-Ed for World Economic Forum: "Move over G7. The future belongs to a more inclusive G20"

As the titans of Western democracy are slowly eclipsed by emerging markets, the G20 appears a better equipped forum than the G7 to navigate the challenges of the global economy. But to succeed where the G7 has failed, the G20 must redefine its membership and broaden its mandate.

Botho Op-Ed for African Business Magazine: "The Red Sea – a new area of prosperity"

Originally published on June 21, 2018, and co-written by Carlos Lopes, former United Nations Economic Commission for Africa
https://africanbusinessmagazine.com/sectors/finance/the-red-sea-a-new-area-of-prosperity/

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The countries of East Africa and the Gulf, bordering the 2,200km length of the Red Sea, share close geographical, historical, cultural, and political links.

Religion is obviously part of that cement, as is the arid nature of their territories. Geostrategic interests and demographic dynamics should have brought the two sides of the sea even closer. Yet, it is easy to overlook such links when assessing economic prospects.

Long-term forecasts for the region’s share of global trade remain flat. Trade forecast between the Middle East and Africa for 2050 is 10%, compared with today’s 9%.

According to the Dubai Chamber of Commerce, the total FDI into sub-Saharan Africa was merely $9.3bn from 2005 to 2014, 10 times less than the amount for North Africa. These lacklustre intra-regional trade flows mask an untapped opportunity. Today, the Red Sea, the shortest shipping lane between Asia and Europe, crossed by an average 47 ships a day, does not emerge as a catalyst for the development of the people who live on its shores. 

The Red Sea serves intense flows of dry commodities and manufactured goods, whereas agricultural products, essential for the food-insecure Gulf, could have been given priority.

Investments from the well-endowed Gulf sovereign funds are placed far away, neglecting neighbours that could offer economic complementarity, a migrant workforce and more reliable security prospects if their societies could just be richer.

Recent developments, however, point to a shifting tide. It started with King Abdullah’s announcement of a planned $500bn megacity on western Saudi Arabia’s coast. A mirror smaller city in the Egyptian Southern Sinai would also be funded by Saudi Arabia for $10bn.

Qatar, on the other hand, has struck a deal with Sudan to develop a port at Suakin, just off the coast. Djibouti, a key conduit between the Red Sea and the Gulf of Aden, has rapidly expanded its shipping infrastructure to 1.6m tons. UAE plans to expand Somaliland’s Berbera and Kenya’s Lamu ports.

Fierce rivalry for influence

These logistical developments are accompanied by a fierce rivalry for military influence. Along these coasts, as illustrated by Yemen’s civil war, the role of Africa has become more prominent.

Djibouti, with the largest diversity of foreign bases by square kilometre anywhere in the world, all of a sudden became the centre of attention in the Gulf of Aden. Proxy groups trying to intervene in internal conflicts are used by all players in the region against one another. These discoveries of mutual inter-dependence ought to be turned into peaceful opportunities for cooperation and economic activity.

For centuries, ships have moved between the coastal Gulf and the Somali and Swahili coast. Zanzibar was once the capital of the Sultanate of Oman; however, despite long-standing historical ties between the region’s port cities, nowadays visa restrictions between these countries remain high, impeding integration.

Linguistic patterns would ease this integration given that Arabic is spoken in several African countries including Egypt, Sudan, Somalia and Djibouti. Moreover, Swahili, spoken in Kenya, Tanzania, and Uganda, draws heavily from Arabic. The word Swahili 
itself is derived from the Arabic sawahili, meaning “language of the coast”.

By 2030, more than a quarter of the world’s population will be Muslim – opening up a vast opportunity for Islamic finance to move from a niche area to a dynamic market.  With Africa and parts of the Middle East representing a sizeable portion of such a population boom, Red Sea states could match demographic might with influence in capital markets. In 2016, the UAE established the world’s first Sharia-compliant trade bank to bolster its ambitions to be the centre of Islamic economic finance.  Countries in East Africa already have the legal and regulatory building blocks in place to expand their standing as Islamic finance centres. Sudan’s Islamic finance sector, for example, dates to the 1970s. Kenya’s treasury announced plans to mainstream Islamic financing last year. Ethiopia, which just got its first-ever Muslim national leader, as well as Uganda, are both exploring the possibilities of Sharia-compliant banking.

A regional exchange, like that of Latin America’s Pacific Alliance, could spur the integration of these states. In late 2017, Nairobi Securities Exchange and Nasdaq Dubai joined forces to create a Sukuk sector at the former’s stock exchange.

Expanding such partnerships would provide African companies, especially those in Red Sea states, with large Muslim populations, with significant opportunities to access the Gulf’s accumulated financial wealth. 

Enhanced security cooperation

Beyond migration and trade, consider the enormous benefits of enhanced security cooperation. From piracy in the Gulf of Aden to Egypt-Ethiopia’s growing contention over the Nile, cooperation between Red Sea countries is more urgent than ever.

Researchers from the London School of Economics found that for every $120m seized by pirates in Somalia, the cost to the shipping industry and the end consumer is between $0.9 and $3.3bn.

While piracy in the Red Sea has been virtually eliminated in recent years due to aggressive naval patrolling, in late March 2018, pirates hijacked an oil tanker off the coast of Somalia, a first after five years.

Red Sea states should come together to develop a regional information-sharing apparatus like Five Eyes, a multilateral agreement for cooperation in signals intelligence between Australia, Canada, New Zealand, UK and the US.

Weaponry spending and military training cannot be the sole mean of ensuring regional stability. Counteracting threats through credible intelligence-sharing must be a key feature of a Red Sea regional security agenda, a prerequisite to attract investors wary of political risk. 




Botho Op-Ed for African Business Magazine: “Harnessing the China-Africa ICT opportunity”

Industrialisation and urbanisation in Africa are following a trajectory that is somewhat distinct from the continent’s Western and Asian counterparts.

Benefiting from globalisation and tectonic shifts in science and technology, African countries have been able to “leapfrog” some of the stages of development that other nations had to plod their way throug

Botho Op-Ed for African Business Magazine: “China’s role as catalyst of African industry"

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As China continues to flex its muscles globally, its relationship with African states remains a point of fascination in the international arena.

The speculation around Sino-Africa relations oscillates between two extremes: is China a new imperial power, or a partner with which African countries can advance their developmental ambitions to mutual benefit?

The dominant narrative remains that China’s interest in Africa is confined to natural resources. While there is some merit to this viewpoint, African governments need to respond with actionable policies that leverage on economic development. In other words, can China serve as a catalytic force in a nation’s industrialisation journey?

The impact of isolated successes could be turned into a multiplier effect if African nations were to follow the Ethiopian example. With the change in its economic policies in 2008, allowing more Chinese investment into the manufacturing sector, its capacity has expanded, allowing the country’s unemployment rates to decrease significantly, and it has become one of the fastest growing economies in the Horn of Africa.

For example, Ethiopia is home to the region’s largest cattle population and it has used this as an opportunity to process leather products, attracting Chinese investment firms to make it a fully fledged industry, exporting the finished products to countries all over the world. The PHISS Company of China, an international leather trading and production giant, invested US$8.3m in 2015 in Ethiopia in its Friendship Tannery 83km from Addis Ababa.

Tecno, a Chinese mobile manufacturing company focused on Africa, sold 20m smartphones and 60 million feature phones in Africa in 2016. Tecno established a handset production plant in Ethiopia in 2013, employing local Ethiopians, thus decreasing the number of unemployed.

The Chinese have built most of the roads in Ethiopia, including the Addis Ababa–Djibouti railway project, telecommunications infrastructure, and the light rail system in Addis Ababa, all of which allow a landlocked Ethiopia to export its products to the rest of the world. African nations may consider adopting a model within their own macroeconomic strategic frameworks to initiate a chain reaction that could create millions of productive jobs. Ethiopia, like most African countries, had a relatively small or negligible manufacturing sector before engaging with China.

Industrialisation and securing investment for sectors that boost economic growth for African nations will not be a straightforward process. However, the potential of market entrants to serve as catalysts for the growth of new, competitive industries is undeniable, as demonstrated by China’s relationship with Ethiopia. The Ethiopian model can serve as a lesson for countries that are willing to take the risk of opening their markets to Chinese investment.

Botho Op-Ed for African Business Magazine: "Fresh opportunities for Africa in a multipolar world"

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There have been major shifts towards globalisation over the past two decades, largely fuelled by the advancement of information technology, which has increased the speed and reach of information and opened up new opportunities and markets for corporations.

The most palpable effect of this shift has been its influence in driving a new multipolar world order led by the rise of countries like China and India that are determined to challenge the global power status quo. Fuelled by their extensive resource bases and increasing political stability, most African countries have embraced globalisation. It is within this reality that Africa seeks to advance its agency.

Elsewhere, globalisation has caused angst. In the West, as companies have relocated abroad in search of cheaper labour, the wages of low-skilled workers have come under pressure.

This has led to a growing populism that is fuelling more protectionist policy agendas. Such insularity in the medium to long term is in fact good for Africa. Less intervention by Western powers could mean more opportunities for self-determination and consequently accelerated economic growth for the continent.

The trials of post-independence
In the post-independence period the great majority of African nations experienced violence and instability. As economic development waned they found themselves forced to turn to multinational institutions for assistance.

The World Bank and the International Monetary Fund (IMF) were set up as a result of the Bretton Woods conference in 1944 to promote economic development and international cooperation in the aftermath of the Second World War. The US holds approximately 17% of votes in the World Bank, while the rich nations of the G7 control more than 45%.

In contrast, the 48 countries that make up sub-Saharan Africa have less than 9% of the voting share between them. Voting parity, however, has been a minor problem where the Bretton Woods institutions are concerned.

Criticisms have generally centred around the very restrictive approaches they have adopted towards policy formation, resulting in detrimental economic effects on the countries seeking financial assistance. In the African case, the conditions attached to structural adjustment programmes (SAPs) have been a major source of controversy.

SAPs were imposed to ensure debt repayment amid economic restructuring. But their requirements that poorer countries reduce spending on core areas like education and health while concurrently prioritising debt repayment have been cited as factors that have undermined Africa’s growth.

However, Africa is now on a continent-wide growth trajectory. The number of armed conflicts in Africa has gradually declined from at least 30 at the end of the Cold War to below a dozen today; the number of successful coups fell by two-thirds in the same period. The result is a continent more secure and ripe for investment.

Until the late 90s Africa was the only region in the world where inflows of official development assistance (ODA) outstripped private capital inflows. In 1990 the makeup of external flows to sub-Saharan Africa was about 62% ODA, 31% foreign direct investment (FDI), and approximately 7% remittances. By 2012, ODA accounted for barely 22% of external flows to Africa.

The role of China
Though still powerful financial forces, the World Bank and the IMF are losing their influence. Developing nations, who saw little alternative in seeking financial refuge in these institutions, have started to go elsewhere, China being a primary location. Chinese investments in Africa have risen sharply in recent years, from $7bn in 2008 to $26bn in 2013.

By July 2016 Chinese investments had increased by 515% from full-year 2015 figures. Chinese investments come largely unencumbered with conditions. These seemingly open-ended arrangements have been controversial because some claim the relationships are emboldening corrupt and despotic leaders, and that Chinese investors are indifferent to the rule of law, in contrast with the way Western investors tend to steer clear of poor-governance environments.

However, a recent study by the Brookings Institution found that Chinese investment was spread across different the governance environments, with investments in countries with poor governance balanced out by those in ones with relatively good governance. China has opened opportunities for Africa in ways of massive infrastructural spend. Its increased footprint in Africa has shifted the emphasis from the development of political and social institutional spending to infrastructure development for economic facilitation.

Africa in a multipolar world
Africa is becoming the next frontier of economic opportunity for investors. In natural resources, Western corporations are no longer able to acquire large tracts of land for exploratory activities for little to no royalties.

Fiscal regimes have become sophisticated in capturing more rents for host governments and local regulations are making it more difficult for corporations to repatriate revenues, increasing local impact. Local content agendas across the continent are transforming the erstwhile resource curse. Governments are drafting legislation with the goal of increasing local skills, and participating in the provision of goods and services.

Increasing global insularity is having little impact in curbing Africa’s development agenda. Africa is in fact emerging as a relevant economic bloc in what is shaping up to be a diverse multipolar global environment. Although the overall status of the BRICS countries (Brazil, Russia, India, China and South Africa) remains questionable, individually they still represent some of the fastest-growing emerging economies, and the MINT countries, comprising Malaysia, Indonesia, Nigeria and Turkey, are also making their mark.

Paul Kagame, whose own transformation of Rwanda has provided a blueprint for many countries, has been tasked with overseeing institutional reform of the African Union. The transformations are designed to take advantage of the new opportunities, and drive unity and development across the continent.

Africa will not, however, exist in a vacuum. Its nations must be willing and able to transform with the changing tides. Such transformation should be grounded in a shrewd and effective leadership devoid of traditional ways of thinking.