Dead Aid

Mauritius

THE EUROMONEY MAURITIUS CONFERENCE 2010

ACCESSING GROWTH MARKETS- THE ROLE OF GLOBAL BUSINESS CENTRES

30th March 2010

The Waldorf Hilton Hotel, London

Panel 1: The Global Growth Environment
This session was chaired by Christopher Garnett, Director, Euromoney Conferences and focused on the global growth environment. Speakers included Daniel Broby, Chief Investment Officer, Silk Invest; Richard Fairgrieve, Director, Global Emerging Markets, Blackfriars Asset Management; Slim Feriani, Chief Executive Officer, Advance Emerging Capital and Liam Halligan, Chief Economist, Prosperity Capital Management

Panel I proved to be an excellent platform to set the scene for the rest of the day. Panelists analysed the main risks that the global economy is currently going through and expressed their invaluable views on where they believed the global downturn currently stands.

According to Richard Fairgrieve, the world has not come out of the economic crisis yet. As investors, it is very important to see the world from its various horizons. It is important to split emerging markets from the rest of the world. Since emerging markets have the reserves, they will continue to grow at a faster pace. In previous years, emerging markets have grown by 4-5% while those of the West grew by only 2%.

According to Slim Feriani, major risks are still present in the developed and Western world. We live in a global village and there is currently lots of talk about decoupling. The reality is that if Western countries do not grow then the export engine of the emerging economies is going to be hit. The economic crisis has in some ways played a positive role for emerging markets as it has forced them to look inward and concentrate on their domestic and regional markets.

For Daniel Broby, the end of the game is what matters. During the crisis, the Mauritian tourism sector was hit by 10%. However, there had been a very pragmatic approach by the Government to tackle this crisis. For instance, hotels and services were upgraded to make the country more attractive. Slim Feriani pointed out that places like Istanbul and Turkey have had tangible progress as compared to what they were 10 years ago. Confidence and stability has helped the economies to grow.

The shift in the flow of capital and investment from the West to the East, the growing importance of emerging markets like India and China as well as the way major capital markets around the world are re-inventing themselves to take advantage of the new economic landscape were examined. Slim Feriani reiterated that as investment managers, they are cautious and conservative in their approach to invest. They have structures in Nigeria as well as in Mauritius. Mauritius is a stable country but not necessarily the most cost effective platform. There has been a major transformation in Africa. It is predicted that in 10 years from now, Nigeria will boom as long as politics and stability improves. However, the fact remains that while some African countries are progressing; some have gone backward, for example Zimbabwe.

For Daniel Broby, African economies such as Botswana and Mauritius have been successful as there has been a high correlation between democracy and success. It was further highlighted that for Global Business Centres to remain and enhance their competitiveness, factors like transparency, regulatory framework, consistency and extensive networks of bilateral agreements should be taken into consideration.

Reuters codes: Silk Invest

Silk - African Lions Fund A0RAC3X.DX LU0389403337.LUF
Silk - African Lions Fund A0RAC4X.DX LU0389403410.LUF
Silk - Arab Falcons Fund A0RAC6X.DX LU0389403683.LUF
Silk - Arab Falcons Fund A0RAC5X.DX LU0389403501.LUF
Silk - Arab Falcons Fund A0YETMX.DX LU0485224678.LUF
Silk - Arab Falcons Fund A0YETYX.DX LU0485223860.LUF
Silk - Road Income Fund A0X918X.DX LU0445778870.LUF

COMESA Investment Forum

The 3rd COMESA Investment Forum –at Sharm El Sheikh, Egypt, just closed on a positive note. There were over 800 delegates from 65 countries.

Earlier during the Forum, the former president of Botswana, one of the most successful African countries, said that Africa was bursting with business and investment opportunities and offered the best return on investment in the world.

Nassif Sawiris, Chairman and CEO of Orascom Development, called for a clearer legal environment if Africa is to attract more investment. He added that more transparency in contract enforcement was needed to reassure investors of the security of their ventures.

Video: The investment case for Africa

Daniel Broby, Silk Invest, "The Case for Investment in New Emerging Markets—Africa and the Middle East" from CFA Ireland on Vimeo.

Silk Arab Falcons fund one year performance +22.01%

Silk African lions fund one year performance +34.19%

Kenya cuts interest rate

Kenya's central bank unexpectedly cut its key interest rate by 25 basis points to 6.75 percent on Tuesday, saying downside risks to the economic recovery called for measures to support growth.

The direction and magnitude of movements of the CBR will send the appropriate signal that inflation is not the significant threat it once was.

African mining Indaba attracts 4,000 delegates

Clearly, Africa is the new investment destination. The African Mining Indaba started with optimism and around 4,000 delegates versus 3,800 last year. This is the first big mining conference to be held since the end of the global financial crisis,

Formal talks on day one all involved commodity forecasting, and delivered a steady stream of observations about rare metals, uranium, iron ore, gold and copper. Somewhat predictably most forecasts were optimistic about the outlook, though a clear message was that 2010 will be a year when supply issues dominate demand.

Silk Road Income Fund awarded ‘Golden Bull’

Silk Invest’s Luxembourg SICAV, the Silk Road Income Fund, has been awarded the ‘Golden Bull’ prize for innovation at the ‘Finanzen Nacht’ ceremony in Munich. Hailed by the German press as the “Oscar of the financial world”, the award is sponsored by Euro, Germany’s leading finance publication. The gala evening was attended by over 500 delegates.

The Silk Road Income Fund was launched in October 2009. It gives investors exposure to a range of frontier fixed income markets, previously inaccessible to mainstream European investors in the shape of a UCITS compliant fund.

The award winning hedge fund was launched to compliment Silk Invest’s equity offerings, namely the African Lions and Arab Falcons funds. As its name implies, the geographic remit of the fund is Africa, the Middle East and the Central Asia, leveraging of Silk Invest’s position as a market leader in these geographies

The Silk Road Income Fund aims to manage 60-80 holdings across 25 countries. The target portfolio is to achieve annual returns of 16.5% with a duration of 3.4 years and an average rating of “BB+”.

African Development Bank USD benchmark bond

The African Development Bank plans to sell three-year bonds denominated in U.S. dollars. The Tunisia-based lender has hired Daiwa Capital Markets, Deutsche Bank AG, Goldman Sachs and UBS AG to manage the sale. The sale is expected to be be benchmark in size, which typically means at least $500 million.

Zimbabwe forgets to withdraw Capital Gains Witholding Tax

When the revised Zimbabwe Stock Exchange transaction charges were announced in the 2010 national budget proposals, there was a general inference that the Capital Gains Withholding Tax would be withdrawn. This was previously 1% of sale proceeds in the case of marketable securities. For some unexplained reason the legislation covering the applicability of Capital Gains Withholding Tax on marketable securities has in fact not been changed and accordingly, the tax must continue to be levied. It therefore costs 1.73% to enter the market and 2.48% to exit. That's a total cost in and out of 4.21%. Not exactly a level that will encourage a flood of money into the country.

The new frontier of Investing

Click here for - Link to great article on frontier markets.

Frontier market settlement periods

Bahrain T+2 49% Foreign Investment Ceiling in general, 10% for a single entity

Bulgaria T+2 Foreign Investment Ceiling100% in general

Colombia T+3 to T+6 Foreign Investment Ceiling100% in general

Croatia T+3 Foreign Investment Ceiling 100% in general

Jordan T+2 Foreign Investment Ceiling 100% in general, with restrictions of 50% or 49% on certain sectors.

Oman T+3 Foreign Investment Ceiling Up to 70% with some further restrictions at
company level

Pakistan T+2 Foreign Investment Ceiling 100% in general

Romania T+3 Foreign Investment Ceiling 100% in general

Sri Lanka Sales T+4 Purchases T+3 Foreign Investment Ceiling 100% in general, with restrictions of 40% on certain sectors .

United Arab Emirates T+2 Foreign Investment Ceiling 49% in general, some individual companies may have different restrictions

Vietnam T+3 Foreign Investment Ceiling 49% in general, 30% for banks

The re-establishment of Morocco’s historic trading routes

All tariff barriers between Morocco and the EU will come down in 2012. The opportunity that this represents is immense; akin to a rebuilding of the silk routes of the past. Co-incidence with this, the kingdom has undertaken a number of strategic liberalizations and a revision of its legal framework that investors should now take notice of. This, combined with the modernization of its infrastructure and a new focus on upgrading the educational system, will result in medium term GDP growth of at least 5.5% annually. That is pretty impressive for a country that, only ten years ago, was considered as an undeveloped nation. Zin Bekkali, the Moroccan CEO of London based Silk Invest, believes that this can be translated into investment performance going forward. Indeed, that is why Silk Invest has placed its Maghreb hub office in Casablanca.

Bekkali points out that the Moroccan investment theme is one of convergence. The open sky agreement with the EU is the most talked about convergence between the EU and Morocco. This is because it represents cross border transportation and that brings the geographies closer together. Domestically, however, even equally important improvements have been made in infrastructure. These improvements have been made both in the road and the rail system. In the 1990’s 40km of train track were laid per year. This year that figure will be 160km. By 2011 the distance covered by new track will be 320km.

Hesham Saad, the lead manager of the Silk Falcons fund, points out that although Morocco has a diversified economy it is a net importer of oil. As a result, it has to focus on its biggest asset, its geographic positioning. This is historically where the country has been most successful. The country now appreciates this and the new vision is to become a strategic hub for the region, particularly in services. This is why the ports, railways and roads are the focus of so much attention. USD 16bn a year is now being spent on infrastructure. The port of Tangiers is the largest such project. After only three years in operation, Morocco’s position as a shipping destination has improved from 76th to 30th place.
In addition to the convergence programs with the EU, Morocco has numerous free trade agreements with amongst others the US. Equally interesting is its commercial and cultural links with many of the Arab countries. At the corporate level, Moroccan companies are expanding into Sub Saharan Africa, leveraging the country’s status as a hub. Maroc Telecom and Attijariwafa bank are clear leaders in this trend. The telecom operator is expanding through Africa buying majority stakes in telecom companies in Mauritania, Burkina Faso, Gabon and Mali and prospecting in other African countries. While Attijariwafa bank, Morocco largest private bank, and the seventh largest bank in Africa in terms of total assets, has been very active in Africa acquiring majority stakes in major banks in Tunisia, Senegal, Gabon, Cameroun, Ivory Coast, Mali and Congo. This should enable Attijariwafa Bank to become a leading regional bank in both North Africa and Africa as a whole and contribute to local economic development.

Daniel Broby, Chief Investment Officer at Silk Invest notes that in the past, Morocco has been accused of a lack of transparency and a less than level playing field. He claims this is now changing. He points, for example, to the fact that the English language is now being jointly used with French for public tenders. Broby also says IFRS is now mandatory for listed companies (in a country where 30% of companies used to fail to produce international annual reports).

Corruption is being addressed by a powerful government commission. Taib Fassi-Fihri, the Minister for Foreign affairs and Co-operation, points out that the country is benchmarking its ‘openness’ policy on EU regulations and norms. Still, all is not perfect. More has to be done to improve justice, upgrade corporate to best practice and to simplify procedures at the government level. The point, however, is that the political will exists to do this within the country’s democratic framework.

Wages are 8 – 10 times less the European levels and the labour force is very young. As a result, the country is particularly suited to added value industries. Tourism is obvious but agriculture and outsourced manufacturing are clearly areas which will grow strongly going forward.

According to Silk Invest, revenue per capita has doubled over the last ten years. As a result, increasingly, growth is also being driven by internal demand. The country has low and stable inflation around 1.2%, a balanced budget and has reduced government debt substantially. Foreign exchange reserves now represent 7.4 months of imports.

The financial sector was one of the first to be modernised. Following the centrally co—ordinated reforms, it is now both dynamic and robust. Ismail Douiri, Vice President of the Moroccan Banking Association, said that Moroccan banks had “resilience due to the careful regulation in which we operate, thereby avoiding the first phase of contagion.“ The minimum solvency ratio was increased from 8% to 10% one year before the credit crisis began. Banking loans have increased fourfold in ten years. The capital backing this was largely raised in the local institutional market.

Abdeltif Stitou, Silk Invest’s Chief Operating Officer and also a Moroccan, point out that the capital markets are developing at a rapid rate. There has been a historically strong link between the state and the private sector. Thanks to new tax breaks the number of listed companies will likely double by 2015. Karim Hajji, Managing director of the Casablanca Stock Exchange, points out that the capital markets in Morocco are the oldest in Africa. The current stock exchange goes back 80 years and now has a market capitalization of $85bn.

Valuations in the Moroccan market reflect a fair amount of the growth ahead. The market has been a laggard in 2009, actually falling by 3% (as at 9th November) against a world where most markets have risen. That said, Zin Bekkali notes that over the last ten years returns have averaged 15% per annum. His company’s Silk Arab Falcons fund allocates 8.5% to Morocco and the Silk African Lions fund allocates 9.3%.

Youssef Lahlou, a portfolio manager at Silk Invest based in Casablanca, points out that “the Moroccan Stock Exchange should benefit from a return of international investors looking to diversify their holdings in the MENA region”. He invests in companies relatively sheltered from the impact of the financial crisis. In Lahlou’s opinion the real estate sector is one of the most interesting in Morocco. With a shortage of 1.5 million housing units especially in the low-income and the mid-range segments, companies operating in this sector (especially Addoha and Alliance) are set to reap the fruits of the accelerating demand. This should also benefit companies in the cement and Iron and Steel sectors.

The Silk Invest funds are also positioned to benefit from the financial sector. Moroccan Banks such as Attijariwafa bank and BCP will continue to growth rapidly, with more than 100 branches opening yearly. They will continue to develop their activity in sub-Saharan Africa. The region has helped Morocco promote growth and reach economic stability, allowing it to average over the past five years a growth rate in excess of 6%.

According to Youseff Lahou another success story out of Morocco is Maroc Telecom (the country’s largest Market Capitalization stock). The group, present in several Sub-Saharan countries, has been able to sustain strong annual earnings growth, over the last few years, thanks to an improvement in the Group’s operating performance, solid sales growth, primarily due to an increase in subscriber numbers which reached 14.5 million in 2008 against 8.2 million in 2005 (i.e. an increase of 77%) and a much tighter control over operating costs.

In conclusion, Morocco looks set to be one of the winners in the post credit crisis world. The next ten years will see a rapid convergence with Southern Europe. The Silk route is being re-invented and companies close to the capital markets, those in the emergent sectors, look set to enjoy above average growth.

Algeria takes big leap backwards

Algeria has created an investment fund to nationalize subsidiaries of foreign groups who would decide to leave the country. Fifteen years after having liberalized its economy, Algeria is taking a step backwards. Algeria has stiffened conditions for foreign investment and for transfer of capitals, and appears ready to nationalize certain foreign companies. The Egyptian group Orascom, whose Algerian subsidiary Djezzy, has been targeted. Algiers notified Orascom of a tax adjustment of nearly USD600 million for the years 2005, 2006 and 2007. The Egyptian group is accused of having transferred hundreds of millions of dollars in dividends.

Besides Orascom, other foreign groups, particularly French ones, could be affected by partial or total nationalization moves, such as French banks Société Générale and BNP Paribas as well as Renault and Peugeot.

Shortage of currency in Malawi

A shortage of foreign currency in Malawi is beginning to undermine the fixedexchange rate policy that has been in place for more than two years.The kwacha has weakened slightly against the dollar. On the black market, the currency is trading at 190.

The shortage of foreign currency means Telekom Networks Malawi, the country’s second largest mobile phone operator, has halted expansion of its network because it was unable to import equipment.

Oil in Kenya?

Now they are even exploring for oil in Kenya. Africa Oil Corp's Bogal-1 oil exploration well operated by China owned CNOOC spudded on October 28, 2009. The well is expected to reach total depth of 5,500 meters within approximately 6 months.

Block 9 covers an area of 27,778 square kilometers in the centre of the Anza Basin. The Anza Basin is a NW-SE trending rift basin along trend with the prolific Mesozoic play of southern Sudan. The basin is over 580 kilometers long and 150 kilometers wide with a potential prospective area in excess of 50,000 square kilometers. Experts believe they may have proven the existence of natural gas and possibly oil.

Angola to open up new oil exporation

Angola plans to start exploring for onshore oil in the enclave of Cabinda sometime next month, according to state-owned oil company Sonangol. Sonangol will first carry out seismic studies in the regions of Necuto and Buco Zau to determine the existence of oil. Sonangol recently partnered with Esso to study the possibility of exploring for oil in the basin of River Kwanza, where studies had shown the existence of about 6mn barrels of oil. Earlier in the year, Sonangol said it was considering exploration in the Cassanje and Okavango river basins. Prior to the Angolan civil war, which began in 1975, Angola pumped around 80,000 bpd from the Kwanza river basin, but the war ultimately forced a halt in production.

Angola to

Angola plans to start exploring for onshore oil in the enclave of Cabinda sometime next month, according to state-owned oil company Sonangol. Sonangol will first carry out seismic studies in the regions of Necuto and Buco Zau to determine the existence of oil. Sonangol recently partnered with Esso to study the possibility of exploring for oil in the basin of River Kwanza, where studies had shown the existence of about 6mn barrels of oil. Earlier in the year, Sonangol said it was considering exploration in the Cassanje and Okavango river basins. Prior to the Angolan civil war, which began in 1975, Angola pumped around 80,000 bpd from the Kwanza river basin, but the war ultimately forced a halt in production.