Why Kenya remains attractive to investors

Kenya has in recent years topped the list of African countries that are most attractive to foreign investment.

But with elections coming later this year and an increasingly unstable global economic outlook, the country’s risk profile has increased.

The Business Daily spoke to Citibank’s head of investment banking for Africa, Miguel Azevedo, on the country’s investment outlook and the state of investment markets. Here are the excerpts:

What does the deal pipeline look like given the instability in global markets?

The global events may have an impact, but I don’t expect it to be significant because at the end of the day the interest in Africa, East Africa and Kenya is primarily coming from private money. I see a lot of interest in Africa.

There are challenges, mainly in West Africa where economies are more commodity-driven and are still coming out of the abrupt fall in commodity prices.

In East Africa things are not so extreme, and the region is a net beneficiary of lower commodity prices.

Many of the factors that brought the investors in the first place such as demographics, growing urbanisation, bigger consumer class, and massive gap in infrastructure, remain in place. To have a deal you need supply and demand.

Investors around the world have a lot of capital which needs a place to go. On average growth is here in Kenya and East Africa in general, therefore investors will keep coming.

Recently we advised a Japanese company, Kansai Paints, when they bought Sadolin paints in Kenya. They came in because there is no growth in Japan…they are not building a lot of new houses there to grow their company.

Besides, the population there is not growing, making it imperative that companies find growth opportunities elsewhere.

Is political risk in Kenya transmitting into the investment space?

Risks are not necessarily bad. Without risk the return is zero as has been the case with German government bonds, which have a negative interest rate.

People can live with risk so long as they price it accordingly. I do not see political risk in Kenya as a major issue.

Investors are giving it a low probability. When you have elections, by definition there is always a moment of pause…three to six months before elections things begin to slow down.

It could happen here. Kenya is seen as a very stable society, with good structures, active civil society and a free press, that gives investors confidence.

Which are the sectors that are most attractive to foreign investment in Kenya this year?

Sectors that are related to the mass market are where opportunities will be found, in the short term. That is where multinational companies and financial investors will be looking for exposure.

They see mass market investments expanding faster. Consumer-driven sectors are hotter in Kenya at the moment, and they include financial services — insurance, banking and mobile payments.

Having said that I must add that there will be plenty of investors, who will be willing to put money in capital-intensive infrastructure — those who think long term.

We are told that infrastructure investment is a good thing. But is Kenya overdoing it taking into account the size of the economy and the debt load it is chocking up to finance the projects?

I don’t think Kenya is overdoing infrastructure investment. Infrastructure is expensive, and the State has a leading role in its development. That has been the case everywhere in the world, and it would not be different here.

It is a capital-intensive business with massive upfront investment, where you are building an asset that will last for a long time.

There is a bit of faith required in determining what the impact will be...and whether it will pay back the investment. Take Thika Road, for instance. The increase in value and construction that happened because of it must have paid back the investment into the economy a few times.

Investment is critical for Africa, where there is a deficit of infrastructure. One of the gains you expect to make with better infrastructure is productivity improvement.

What is your outlook for Kenya’s capital markets?

In the fixed income segment, there is nothing outstanding happening in the domestic debt market. The foreign debt market is very receptive of Kenya’s fund-raising needs and the country should find it easy to issue more debt.

Kenya is seen as a stable and diversified economy, not dependent on a particular commodity, which makes the risk profile attractive.

On the equities side, investors have suffered quite a bit in Africa in general over the last 18 months, especially in dollar terms because there were some big devaluations.

The sentiment now is still not great, as a lot of people lost money. Investors are, however, always looking forward.

They are able to see that the devaluations have already happened, and it is the right time to come in. We see increasing interest, although not at historical levels.

It takes time though…therefore 2017 will likely not be a booming year. It will be a year of consolidation and getting out of the trough.

You were involved in the deal that saw French firm Danone buy a stake in Brookside Dairy. Can you shed more light on that deal?
Maybe not. I cannot comment on that deal.

Has Sadolin finalised its deal with Kansai?

Not yet. It has been announced but not closed yet. They are now going through competition authority approvals, among others. It should close sometime mid this year.