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I Bless the Rains Down in Africa
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This week we are focusing on the East Africa region.
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Last Week Briefing:
China opened, then closed shortly after. Foreign visitors are banned.
The Tokyo Olympics are officially postponed.
The Saudis, Russians, and the Americans might have an oil deal!
An Introduction to Foreign Investing: ADRs
Part of my duty as your Emerging Market correspondent, I thought I should familiarize my readers with the technical/logistic side of investing in an emerging economy. As you may remember from last week’s letter, emerging markets are called what they are because they lack many of the features that developed markets celebrate. One of those features in particular would be properly functioning capital markets. Often times, foreign companies will list their securities (stocks, bonds, etc) on domestic exchanges as they seek to take advantage of America’s enormous trading volumes. Take for example Petrobras, the Brazilian state-owned petroleum giant. Petrobras is obviously domiciled in Brazil, although is listed on the NYSE through an ADR. ADR stands for American Depository Receipt and are created by domestic banks for the purpose of providing liquidity in foreign securities trading on domestic exchanges. Similarly, foreign companies won’t list their securities on their own domestic or neighboring exchanges because of restrictions or regulations set by the exchange. For instance, the Shanghai Stock Exchange, the largest exchange in mainland China, has domestic companies list their securities in either ‘A’ shares or ‘B’ shares. A Shares are limited to Chinese investors while B shares are reserved for foreign investment. Lastly, investors can create exposure to emerging markets in their portfolios by investing in ETFs and mutual funds with emerging market tilts. Be cautious when shopping for emerging market funds as many funds will masquerade as EM funds without an appropriate asset allocation to support it.
Coming to America: Can you name the five largest foreign companies listed on the NYSE through an ADR?
It wouldn’t be fair to discuss the modern Kenyan economy without first talking about its cultural and economic roots in colonialism. Perched on the eastern coast of Africa, Kenya’s favorable geography amalgamated the nation amongst the dynamics of Indian - European trade. Dating all the way back to the 15th century, European and Middle Eastern colonists, traders, and royal families have planted their stake in Kenya at the dismay of the native Kenyan people. As you may recall from your grammar school history classes, imperial European nations such as Portugal and Great Britain created vast fortunes from trading with the Eastern Hemisphere. In doing so, these explorers constantly sought new trade routes for faster travel or unsaturated markets. The Portuguese were the first European nation to plant their stake in Kenya as Vasco da Gama’s arrival in Mombasa in 1498 began the era known as The Scramble for Africa. Interestingly enough, Kenya’s ties to da Gama can be seen as you enter the country’s second largest port city of Malindi.
Nairobi National Park
Two centuries after the Portuguese arrived, an emigration of Omani Arabs exacerbated the exploitation of Kenya as the slave trade accelerated and the Omanis spurred conflicts with the European powers. Founded in 1888, The Imperial British East Africa Company (IBEAC) sought to establish British dominance over the region controlled by the Sultanate of Zanzibar, which extended along the Kenyan and Tanzanian coasts. The company had a short burn as they ultimately folded in 1892. Aggressive wagers on expansion backfired as large amounts of debt accumulated and an unfavorable business environment drove the British Empire to simply take control of Kenya through the East Africa Protectorate, headquartered in Mombasa. The British crown overhauled Mombasa’s trade prowess which ultimately catapulted it ahead of Malindi as the largest port on the East African coast. On top of that, the British built a massive rail system running from Mombasa to Kampala, the capital of present-day Uganda, to accommodate the massive trade volume. Ultimately, in 1920 the East Africa Protectorate was converted into British Kenya, an official crown colony of the British Empire. Kenya wouldn’t become an independent nation until 1963 as a result of the Kenya Independence Act. The Republic of Kenya, officially formed in 1964, tried to find an identity that tip-toed the line between Western capitalism and Eastern Communism and focused on a zeitgeist called African Socialism, closely intertwined with Pan-Africanism. The philosophy focused on unity amongst the East African nations and support for African laborers who have been cast aside in favor of British projects. That said, the demographics of Kenya are incredibly diverse to this day as the capital city of Nairobi has become a buzzing commercial hub for businesses and workers alike.
Vasco da Gama Pillar in Malindi
With over 4 million people in the metro area (roughly the population of Los Angeles), Nairobi boasts the title of fifth largest city in Africa and largest city in East Africa. While Kenya’s era of independence has previously been littered with corruption and cronyism, the past decade has been underscored by an inflow of billions in foreign direct investment (FDI) and strong, steady GDP growth above 4.5%. Kenya Vision 2030 is the country’s latest effort towards becoming a global, economic powerhouse. The initiative kicked off in 2008 through President Mwai Kibaki’s concentration on industrializing the Kenyan economy and supporting domestic businesses. The proposal is tied around the three pillars…
Economic: The country of Kenya aims to achieve 10% average annual growth in GDP per year through 2030. This effort has proven to be futile so far, as GDP has only once hurdled that 10% goal since 2008. That said, Kenya’s GDP has been growing at a blistering pace, averaging over 5% this past decade.
Political: Kenya is far too familiar with the perils that can arise from a poorly operated government. This pillar is based upon creating a more transparent and people-centric government in hopes of providing more transparency to their constituents.
Social: This pillar aims to achieve social prosperity through social welfare projects. Infrastructure, education, healthcare are all ripe for industrialization and improvement.
Amongst other apocalyptic events occurring around the world today, Kenya is under siege from a vicious locust outbreak. While this seems mundane by nature (Bugs? really?), the locust pandemic in the region has the potential to jeopardize Kenya’s food supply as well as its exporting industries as they try to shrug off the ripple effects of COVID-19.
No, Not Like the Looney Tunes Character
Tasmania ≠ Tanzania.
As is the case with most East African nations, The United Republic of Tanzania shares both a sobering history and a rich culture with its neighbors. That is Tanzania, like Keyna, was the subject of Western colonialism up until their independence in the 1960’s. That is, Tanzania, like Kenya, was briefly held as a German colony during the age of New Imperialism and following the occupation of the Omani Arabs. Controlling what is now known as present day Rwanda, Burundi and Tanzania, German East Africa was formed as the Imperial German response to suppressing the revolts from the native Bantu people. The Germans remained in power up until the conclusion of World War I in which the British Empire was tasked with disassembling Germany’s grasp over the region. Tanzania (then known as Tanganyika) would ultimately receive its independence from the British in 1961 and form its republic the year after. Zanzibar would ultimately be granted independence in 1914 and would merge with Tanganyika, ultimately creating what we know today as Tanzania.
Julius Nyerere, colloquially known as the Father of Tanzania, introduced the philosophy of Ujamaa (“Family” translated from Swahili) during the rule of the British Empire. Nyerere’s philosophy shared many of the same sentiments that African Socialism sought to achieve such as promoting African welfare. That said, Nyerere’s nationalistic politics took a much more aggressive approach to central planning. In Nyerere’s Arusha Declaration, he states the role of government is to ensure economic justice which meant controlling output and the means of production. Nyerere’s Tanzania had closely aligned itself with Mao Zedong’s regime in China, sharing similarities in governance and politics. Ultimately, the country’s centralized economy would backfire upon itself as high oil prices, unfavorable exchange rates and a rigid business environment made Tanzania a poor trade partner. Fast forward to 1986 where the World Bank reports unimpressive performance from state-owned enterprises, or Parastatals as they were known as in Tanzania. In fact, the report found that in West Africa, over 60% of SOE’s were unprofitable while nearly 40% held negative net worths. The IMF used this data to propose a relief package to rescue Tanzania’s hyperinflation and trade deficit in exchange for divestiture of Tanzania’s parastatals. Fast forward another thirty years or so and over three-hundred of Tanzania’s four-hundred-plus parastatals have been divested while profits and capital expenditures for newly privatized companies have doubled.
Tanzania’s GDP grew an average of 6-7% over this past decade supported by a strong inflow of FDI and large infrastructure expenditure. The country has made bounds in its efforts to reduce poverty, although still checking in at an astounding 26%. The country’s dereliction towards private ownership of land has created an ecosystem for the Tanzanian economy that is antithetical to a prosperous, industrialized economy. Not to mention, the Tanzanian government’s hesitation to develop beyond an agriculture economy has been a burden on per capita economic growth. Although you can’t fault them, Tanzania’s agricultural industry accounts for about 65% of the workforce and a third of its GDP. To this day, Tanzania has maintained a strong trade relationship with the Chinese as they are their largest import partner and third largest export partner. Tanzania, like most other global economies, will be hoping these trade relationships can withstand the turbulence effects of COVID-19.
Over / Under: How many recorded languages are spoken in Tanzania?
(Line is set at 10.5 - Answer at the bottom.)
From Chatham to…
Depending on who you ask, the southern neighbor of Tanzania may not be entirely classified as “East Africa”. While geography may argue differently, Zambia is often considered South African given its culture and governance is more closely intertwined with its southern contemporaries. On top of that, Zambia was once occupied by the British South Africa (BSA) Company (opposed to the aforementioned British East Africa Company.) Like the countries mentioned earlier, the presence of foreign enterprise ultimately lead to imperial colonization as the country suffered years of exploitation and abuse from European colonists before ultimately forming their republic in 1964. The enormous foreign mining industry was the lure that sparked the emigration to what was known back then as North-Eastern Rhodesia, now present day Zambia. The BSA Company acquired the rights to over 10,000 square miles of copper mine from the native Lozi people. The subsequent 50 years were underscored by oppressive systems of debt bondage as hungry laborers flocked to the area for job opportunities.
A copper mine in Zambia
Following Zambian independence, the government made a concentrated effort to maintain the country’s competitive advantage in the mining industry by purchasing majority shares in foreign mineral companies via the Mulungushi Reforms of 1968. The ownership and operations of these companies would be carried out by a multitude of state-owned entities managed under one omnibus parastatal: the Zambian Industrial and Mining Company (ZIMCO). Zambia’s commitment to the copper trade proved to be costly as the 1970’s saw a plunge in the price of the commodity. Despite guidance from the IMF, the country continued to inject state-centric stimulus into the economy to no avail, thus driving debt levels sky high. The 1990’s were decorated with riots and uprisings as the Zambian citizens began to lose faith in their one party government who ran their centrally-planned economy. In 2000, ZIMCO was once again privatized following thirty years of diminishing copper output. Zambia’s copper dependence still remains a concern to economists and world leaders alike. As of 2017, copper still comprised about 85% of Zambia’s exports.
Victoria Falls on the Zambezi River
Despite their abundance of minerals and resources, Zambia remains as one of the world’s poorest countries with over sixty percent of the population living below the poverty line. Why feature them, you ask? Zambia’s prospects for growth would tell you a much more promising story when taking a deeper dive into its composition.
Urbanization: Zambia’s population is increasingly growing more urbanized. As of 2019, nearly 45% of the total population lived in an urban community, compared to the 40% aggregate across Africa. The UN projects that 58% of Zambia’s population will be urbanized by 2050.
GDP Growth: Due to rising oil prices and liberalized capital markets, the Zambian economy has grown an average of 5.8% (per GDP) from 2008-2018.
Renewable Energy: Zambia celebrates self-sufficient sources of energy and may be facing an energy surplus due to advancement in technology. Although there are unexploited coal quarries, the lion’s share of Zambia’s energy production is produced through hydropower.
All of that said, Zambia’s recently found itself back in the news over issues in their sovereign debt. As of 4/4/20, Zambia’s 10-year government bond yields a whopping 36% as China, Zambia’s largest sovereign debt holder, seeks a restructuring concession given a poor global trade climate. Frontier market investors will keep a keen eye on how Zambia’s mining-heavy economy will suffice with investors seeking safe haven assets.
Fab Five: The “Big Five” was a term coined in the 1800’s for the five most challenging animals for hunters to hunt. All five of them can be found in Zambia: Can you name them all? Answer at the bottom.
Hot N’ Cold
The Rwandan - Ugandan conflict is a reminder of the risk and instability that has obstructed African growth since the 20th century. Often flip-flopping between friend and foe, the East African neighbors have seen a string of conflicts since the conclusion of Congolese Civil War. Since then, the two countries have been accused of supporting different militant rebel groups and waging proxy wars in the Democratic Republic of the Congo. Rwandan President Paul Kagame has specifically accused the Ugandan government of supporting rebel groups in the Congo whose sole intent is to topple his regime. The two groups, the Rwandan National Congress (RNC) and the Democratic Forces of the Liberation of Rwanda (DPLF) have historically been tied to ideologies supported by those who executed the horrific Rwandan Genocide which killed 800,000 people. A quaint nation landlocked amongst Tanzania, Uganda, and the Democratic Republic of the Congo, Rwanda was ranked #2 on the 2020 Index of Economic Freedom among Sub-Saharan African nations and #33 across the globe. Rwanda’s landlocked geography has isolated the country among a hotbed of political instability although critics argue that President Kagame has overextended his reach.
Trucks halted at the closed border between Uganda and Rwanda
In November of 2019, Rwandan security guards shot and killed two Ugandan civilians accused of smuggling tobacco across the border. This was shortly following the Rwandan government’s decision to close the border and issue a travel ban on its northern neighbor in early February of the same year. On the other side, the Ugandan government has been accusing cops of being Rwandan spies and arraigning them in military courts. While Uganda has denied all allegations of supporting anti-Kagame rebel groups, President Yoweri Museveni has admitted to meeting with heads of the RNC.
This conflict has cratered the growth of these frontier economies as border closures and travel restrictions jeopardize millions of dollars in cross-border trade. In 2018, Uganda had exported the equivalent of $250 million worth of goods to Rwanda. Come 2019 and that number is estimated to fall short of $175 million. Thousands of small businesses are caught in the crosshairs as they rely upon the international traffic between the neighboring countries. In August of 2019, Kagame and Museveni agreed to meet and bury the hatchet for the sake of one another’s respective countries, although that agreement has yet to come to fruition. Just last week, Rwandan border officials halted an Ugandan cargo truck destined for Burundi, citing security concerns. Lastly, the effects of COVID-19 has allowed the Rwandan government to baselessly deport hundreds of Ugandan ex-pats under the guise of national security. World leaders are unconfident that the August peace agreement will hold amid even more global instability.
Contraband: In 2008, Rwanda placed a ban on what common consumer item?
What I’m Reading/Watching:
Watching (show): Tiger King on Netflix. You’ll hate absolutely everyone in the show, but goodness gracious is it entertaining.
Watching (movie): Sonic the Hedgehog: I was a big fan simply because I grew up LOVING Sonic the Hedgehog. Don’t expect a Scorsese or a Hitchcock. It’s just a fun movie.
Reading (book): David & Goliath by Malcolm Gladwell. Gladwell offers a different perspective on how we interpret underdogs.
Reading (article): Taiwan is Beating the Coronavirus: WSJ — China’s handling of the coronavirus is not the first time they’ve fumbled a deadly pandemic.
Coming to America: 1. Alibaba Holdings Ltd., $502B ; 2. Taiwan Semiconductor Manufacturing Co., $244B ; 3. Novartis AG, $189B ; 4. Toyota Motors, $163B ; 5. China Mobile, $160B
Over / Under: OVER: Tanzania’s official language is Swahili but there are 120 languages spoken in the country.
Fab Five: Lions, Leopards, Elephants, Buffalo, and Rhinos. The term carries a different connotation nowadays as the Big Five represents the five animals tourists should hope to see when for when safari-ing through Zambia.
Contraband: In 2008, Rwanda placed a ban on plastic bags. This has subsequently created a lucrative black market for plastic bags. Anyone caught using polythene will be risking 12 months in jail or a hefty fine.