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EMERGING

AFRICA?

B Y G L E N N Y A G O , J U A N M O N T O Y A , M A D A N I T A L L ,

C H R I S T I A N Y O K A , A N D T H O M A S M I M S

November 9, 1999

C A P I T A L A C C E S S I N D E X

Number 5



CAPITAL ACCESS INDEX:EMERGING

AFRICA?

By Glenn Yago, Juan Montoya,

Madani Tall, Christian Yoka, and Thomas Mims

November 9, 1999



apital Access Index: Emerging Africa? Milken Institute - November 9, 1999

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ACKNOWLEDGMENTS

Thanks to Aaron Pankratz and Lalita Ramesh for their help on this publica-tion.

Copyright © 1999 by the Milken Institute.

Milken Institute1250 Fourth StreetSanta Monica, California 90401-1353

For complete ordering information for this and all Milken Institute publica-tions, please see our Web site at www.milken-inst.org or contact us by email([email protected]), telephone (310.998.2600), or in writing.

The Milken Institute’s mission is to explore and explain the dynamics of world economic growth. Our goal is to provide understanding of and insightsinto the effects of economic, political, technological, and regulatory changeson the world economy and its societies as a basis for better public policy.



EXECUTIVE SUMMARY

For years, some have hailed Africa as a land of unexploitedopportunities for investors. International press coverage of famine,drought, and warfare — and economic fundamentals such asdependence on commodity exports — has led to dashed hopes andskepticism.

Yet, mostly unreported, pockets of stability and reform are beginning to lead to renewed hope for an economic recovery of thecontinent. Some economists believe that lower-income countries

should “catch up” and do better in the medium run as they close inon technological and other advances of industrialized nations.

Is Africa’s emergence finally at hand?

The Milken Institute examined 11 of the countries on the continentthat possess stock exchanges and ranked them in order of ease of access to domestic and international capital. The Index showsregional giant South Africa on top, followed closely byfundamentally sound Egypt and liberalizing Mauritius. Bringing upthe bottom of the list are stalled Kenya, internationally adventurous

Zimbabwe, and Zambia, which has been dependent upon crisis-ridden Asian markets.

Several major trends arise from the study:

Political and civil unrest (or the threat of such) remains the singlelargest concern for foreign investors.

African nations need and are trying to attract massive capitalinvestment in order to diversify their primary-sector-dominatedeconomies; local savings are insufficient for restructuring.

The degree of development of African stock exchanges varieswidely. Stock market development to some extent mirroredeconomic downturns in 1998 (see figures 1–6); excluding SouthAfrica, bourses posted modest gains of around 3.4 percent onaverage.

In 1998, natural disasters and terms of trade deterioration took theirtoll, and foreign portfolio investors frowned on the corruption and

Milken Institute - November 9, 1999 Capital Access Index: Emerging Afric

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Pockets of stabilityand reform arebeginning to lead torenewed hope for aneconomic recovery ofthe continent.

The Index showsSouth Africaon top, followed byEgypt and MauritiusBringing up thebottom are Kenya,

Zimbabwe, andZambia.

Political and civilunrest remainsthe single largestconcern for foreigninvestors.



problems with property rights enforcement which plague somecountries on the continent. Nevertheless, long-term benefits couldresult from current reforms such as the abolition of exchangecontrols and the lifting of investment restrictions. Signs of Africa’spotential recovery are indicated by the following:

In the last four years, three-quarters of countries in the regionposted positive growth.

Inflation rates have converged to manageable levels (Figure 7).

Real interest rates, while still volatile, have remained manageable(Figure 8).

Regionally focused mutual funds have begun to perform well.

Ghana’s bourse jumped 62.3 percent in dollar terms during 1998.

The role of foreign governments and organizations will continueto make a big difference. The United States passed the AfricaGrowth and Opportunity Act on July 16, 1999, earmarking over$2 billion for investment in the region. And the IMF’s strict termsof lending have prompted economic reforms, includingprivatization and liberalization.

Of course, only time will tell if these positive (and negative) trends

will continue in the long run. If markets are efficient, the greater risk of investing in Africa will be rewarded with greater returns.


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Long-term benefitscould result fromcurrent reforms such

as the abolition ofexchange controls andthe lifting ofinvestmentrestrictions.

In the last four years,

three-quarters ofcountries in theregion posted positivegrowth, and inflationrates have convergedto manageable levels.

Real interest rateshave remainedmanageable, andregionally focusedmutual funds havebegun to performwell.



MILKEN INSTITUTE CAPITAL ACCESS INDEXRanking of African Capital Markets

Country Rank Overall Quantitative Risk QualitativeScore Score Score Score

South Africa 1 100.0 100.0 91.7 96.9

Egypt 2 98.2 99.7 100.0 88.6

Mauritius 3 96.4 96.9 94.1 90.8

Botswana 4 87.2 87.2 90.8 100.0

Morocco 5 86.7 80.1 94.9 93.5

Côte d’ Ivoire 6 80.8 81.6 93.9 70.5

Ghana 7 77.9 73.7 91.2 78.8Nigeria 8 75.8 76.4 98.4 63.2

Kenya 9 69.8 65.5 88.5 69.5

Zimbabwe 10 66.7 65.8 49.3 70.3

Zambia 11 59.8 59.4 35.9 64.4

The Milken Institute Capital Access Index is a weighted index of 29 variables, dividedinto three categories: Quantitative, Qualitative and Risk

Quantitative Measures1. GDP per Capita

2. Government Spending/GDP3. Claims of Non-Financial Private Sector/GDP

4. Total Reserves/GDP

5. Average GDP Growth

6. Inflation Rate

7. Equity Market Cap/GDP

8. Firm Concentration Ratio

9. Equity Market Liquidity

10. Foreign Investment Ceiling

11. Short-Term Interest Rate

12. Corporate Income Tax13. Capital Gains Tax

14. Value Added Tax

15. Bank Assets/GDP

16. Bank Concentration Ratio

17. Foreign Direct Investment/GDP

18. Portfolio Investment Flows (Stock)/GDP

19. Portfolio Investment Flows (Bonds)/GDP20. Gini Index

Risk Measures

21. Currency Volatility

22. Foreign Exchange Parallel MarketPremium

Qualitative Measures

23. Risk of Expropriation

24. Risk of Contract Violation25. Rule of Law Principles

26. Corruption Perception Index

27. Composite ICRG Rating

28. Institutional Investor Credit Rating.

29. Euromoney Country Credit WorthinessRating

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CAPITAL ACCESS INDEX

For definitions of variables, please see the appendix.




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AFRICAN STOCK MARKETS

BY COUNTRY



I f our expectations, if our fondest dreams are not fulfilledthen we should all be reminded that the greatest glory inliving lies not in never falling but in rising up every time you fall.

— Nelson Mandela

INTRODUCTIONRealizing the urgent need for massive capital investment, African

authorities have been busy creating new stock exchanges andupgrading the existing ones in a race to attract funds. Africancountries have begun to court international institutional andcorporate investors alike as they attempt to diversify theircommodity-producing economies, which have been hard hit notonly by such natural fluctuations as El Niño and La Niña but also by fluctuations such as falling commodity prices.

Countries that had exchange controls abolished them, and thosewith investment restrictions either eliminated or eased them.However, problems persist. In many cases, countries are plagued

with corruption, social unrest, and political instability, which oftencause investors to think twice before committing their resources tothe region, even when lured by potentially high returns.

With the exception of securities listed in the Johannesburg Stock Exchange, the Asian crisis did not severely affect the value of moststocks in the region. While the weighted loss of all African stock exchanges in 1998 was -10 percent, excluding South Africa yields areturn rate of +3.4 percent. This dramatic difference is due to SouthAfrica’s 27.6 percent decline during the period — and to itsimportance in the region.

The slow growth of the other African bourses is due to the economicdownturns in 1998 suffered by their host economies. Naturaldisasters and the deterioration of the terms of trade for Africanproducts were the main causes for these downturns. While pricesfor the primary commodities exported by African countries wereunder pressure in international markets, the prices for Africanimports from developed countries tended to increase, as African


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African countrieshave begun to courtinternationalinstitutional andcorporate investors todiversify their

commodity-producineconomies.

Countries that hadexchange controlsabolished them, andthose with investmen

restrictions eliminateor eased them.

The slow growth ofAfrican bourses is duto the economicdownturns in 1998suffered by their hoseconomies. Despitethese, the averagereturn for the firsthalf of 1999 was 5.4percent.



countries demanded goods that were more technologicallyintensive. Despite these problems, the average return for all African


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Figure 1Egypt: EFG Stock Exchange Index (in US$)

Figure 2

Kenya: Nairobi Stock Exchange Index (in US$)

Sources:Milken Institute, Bloomberg, and Financial Times




markets for the first half of 1999 was 5.4 percent. Figures 1 through 6indicate the timeline events that have roiled African Markets.


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Figure 3

Mauritius: SEMDEX Stock Exchange Index (in US$)

Figure 4

Morocco: CFG25 Casablanca SE Index (in US$)

Sources: Milken Institute, Bloomberg, and Financial Times





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Figure 5South Africa: Johannesburg Stock Exchange Index (in US$)

Figure 6 Zimbabwe: Stock Exchange Industrial Index (in US$)





THE AFRICAN ECONOMYThe African economy is largely dependent on the exploitation of

natural resources like petroleum, diamonds, gold, cocoa, coffee, andtimber. Because these are commodity items that have little valueadded and show little to no differentiation from those of otherproducing countries, they are subject to price fluctuations fueled bysupply and demand as well as by speculation. Therefore, economicperformance in the region is dependent on the development of commodity prices in the international markets. Furthermore, sincethe production of many of these commodities, particularly thosethat come from agricultural activities, are subject to exogenousshocks such as floods and droughts, they also are subject to thenatural cyclical fluctuations in crop yields over time.

With the uncertainties created by these fluctuations in both pricesand yields, African authorities have difficulties forecasting budgets,let alone meeting them. Furthermore, because budget expendituresare for the most part fixed, and therefore do not varyproportionately with income, fiscal shortfalls can appear with verylittle notice. Under these circumstances, the stable growth of theseeconomies is far from guaranteed.

Recognizing the need to diversify their economies in order to reducethe effect of these uncertainties and to support a period of

sustainable long-term growth, African authorities have begun tocourt investors to finance new projects. However, average savings inthe region represents only about 17 percent of gross domesticproduct (GDP) — barely enough to support the level of investmentnecessary to sustain growth. The regional savings rate not only wasinferior to the averages seen in developed countries (24 percent) butalso was insufficient to finance investments crucial to rapid andsustained economic expansion. Therefore, African authorities haverealized the necessity of creating an environment attractive toforeign investors. With this goal in mind, they have implementedsuch macroeconomic reforms as eliminating foreign exchange

controls and cutting interest rates.

These reforms already have begun to pay off. During the past fouryears, 75 percent of African countries registered positive growthdespite 30 percent of them having been in recession at the beginningof the 1990s. Gross domestic product grew 3.7 percent in 1997, 5percent in 1996, and an average of 1.9 percent between 1990 and1995 in real terms. Furthermore, inflation rates for the African


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The African economyis largely dependenton the exploitation ofnatural resources,which aresubject to pricefluctuations.

With theuncertaintiescreated by thesefluctuations,authorities havedifficulties forecastinbudgets, let alonemeeting them.

Since the regionalsavings rate wasinsufficient to financinvestments crucial toeconomic expansion,authorities haverealized the necessityof creating anenvironmentattractive to foreigninvestors.



countries in our study have started to converge toward moremanageable levels (see Figure 7). For the most part, interest rateshave also remained at reasonable levels, in spite of being veryvolatile in some countries such as Zimbabwe and Zambia (seeFigure 8).


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Macroeconomic

reforms already havebegun to pay off.Inflation rates havestarted to convergetoward moremanageable levelsand interest rates haveremained reasonable,in spite of some

volatility.

Figure 8Volatile Interest Rates in Some African Countries Affect Investors

Figure 7 Inflation Rates are Converging Toward Manageable Levels



While growth remains fragile and the socioeconomic difficulties of the past 20 years are still far from being overcome, it is hoped thateconomic reforms and progress toward political stability might openencouraging avenues for investment on the continent.

Meanwhile, the U.S. government is actively formulating an Africanpolicy that encourages U.S. trade and investment in the region.President Clinton’s extended visit to Africa and the growing numberof reciprocal U.S.–African trade missions and diplomatic visits allattest to the higher profile of today’s Africa and seem to presage anexplosion of foreign investment there. On July 16, 1999, the U.S.government passed the Africa Growth and Opportunity Act(AGOA) which earmarked over $2 billion for investment in theregion.

In addition, the economic policy reforms undertaken in many of these countries with IMF assistance are beginning to produceresults. In accordance with standard IMF directives, these reformsincluded the transition toward more liberalized economies. Between1997 and 1998, the process of privatization accelerated, with SouthAfrica and Zambia expected to accomplish the most in the nearfuture. For instance, in April 1997, the South African governmentsold 30 percent of National Comp Telkom to ThurtanaCommunication, a group formed by SBC Com, Telkom Malaysia,and BHD.

CAPITAL MARKETSAfrican capital markets have developed unevenly. Countries likeSouth Africa and Egypt, which ranked numbers one and two,respectively, in the African Capital Access Index, have developedcapital markets that have enabled them to attract large amounts of foreign capital. (Together with Zimbabwe, these countries possessedstock exchanges since the last century. Egypt’s stock exchange wasfounded in 1883, South Africa’s in 1887, and Zimbabwe’s in 1896.)

But for the most part, stock markets in African countries have beenanything but active. Most of these exchanges have individualmarket capitalization of less than $3 billion (see Table 1). Somemarkets hold less than several hundred million dollars.

According to International Finance Corporation estimates, portfolioinvestment flows into the region have doubled every year since1991, reaching $2 billion in 1998.


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The U.S. governmentis activelyformulating anAfrican policy thatencourages U.S. tradeand investment in thregion.

In addition, theeconomic policyreforms undertakenin many of thesecountries with IMFassistance are

beginning to produceresults.

Portfolio investmentflows into the regionhave doubled everyyear since 1991,reaching $2 billionin 1998



However, in terms of portfolio investments, African equity marketsgenerally have attracted a different breed of investor. These marketshave not to date lured the so-called hot money, or highly volatileshort-term funds that many analysts have blamed for exaggerating

the peaks and troughs of equity investment elsewhere. Instead,many of the region’s stocks are in the hands of institutionalinvestors following a buy-and-hold strategy, including governmentsmaintaining minority holdings and those involved in management.While such investors offer some stability to share prices, thedownside is that the long-term view that informs their decisions hasexacerbated already low levels of liquidity. In fact, the extremelylow liquidity levels of most African stock exchanges — African

bourses are among world’s most illiquid — are often cited as amajor barrier to market expansion. (As shown in Table 1, seven of the 11 countries in the study had annual turnover ratios of less than

10 percent.) Yet, they can also act as a buffer against share pricevolatility.

In the longer term, as African markets attract a wider range of international investors and, crucially, as a domestic middle classemerges thus raising local demand for shares, African bourses willdeepen, become more liquid, and will be integrated more fully intoglobal capital markets. The continent’s stock exchanges will thus

become more vulnerable to the tide of capital flows.


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Many of the region’sstocks are in thehands of institutionalinvestors, which hasexacerbated alreadylow levels ofliquidity; Africanbourses are amongworld’s most illiquid.

In the longer term,African bourses willdeepen, become more

liquid, and will beintegrated more fullyinto global capitalmarkets, thusbecoming morevulnerable to the tideof capital flows.

Table 1Market Capitalization of the Main African Stock Exchanges



WHY AFRICA?Tangible signs of Africa’s emergence as an attractive investment site

are manifest in the returns of some of the U.S. investor fundsspecializing in African stocks. At the head of the pack is MorganStanley’s Africa Fund, which reported average annual returns of 10.3 percent during the last five years. Other Africa-focused fundsposted generally respectable returns as well, with the AfricaEmerging Markets Fund yielding an average 8.14 percent during thesame period. While these returns are not comparable to the S&P500’s 26 percent gain in the same period, they are far better than theaverage return of just 1 percent achieved by all other emergingmarkets. The financial turmoil in Asia does not appear to have hadany significant impact on African financial markets, and there are

even indications that Asian capital is increasingly finding its way toAfrica.

The Ghanaian market turned in a particularly spectacularperformance in 1998, climbing 63.1 percent in U.S. dollar terms(Table 2). Furthermore, during the same year, over half of the stockson the Ghana Stock Exchange registered more than a 50 percent gainand several stocks registered gains of over 100 percent. While sharesare still relatively cheap, liquidity remains low and a limitation onforeign holdings per company to 74 percent makes obtaining sharessomewhat difficult. However, the privatization process of three

state-owned enterprises which began in 1998 and continuesthroughout this year will help boost market liquidity.

New investors seeking to engage with the African stock marketsquickly discover that reliable information on Africa’s capital marketsis scarce or nonexistent. Investment capital is risk averse, so theavailability and depth of relevant information is crucial to thedecision to invest.

With few exceptions, the Wall Street community has yet to begin tolook seriously at Africa, especially sub-Saharan Africa, as a place to

put money. The prevailing misconception and negative imagesconcerning Africa fostered by the news media are responsible formany an excellent investment opportunity being overlooked by theU.S. investment community. Lurking behind the sensationalheadlines focused on bloody conflicts that have infected parts of Africa are thriving enclaves of peace, steady economic growth, andhigh returns on investment. In many countries of the continent,


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Africa’s emergence

as an attractiveinvestment site ismanifest in thereturns of some of thU.S. investor fundsspecializing inAfrican stocks.

The Ghanaianmarket turned in aparticularlyspectacularperformance in 1998climbing 63.1 percent

in U.S. dollar terms.

Reliable informationon Africa’s capitalmarkets is scarce ornonexistentdespite its crucialimportance toinvestmentdecisions.



business, fueled by privatization, democracy, and capitalism, isroaring ahead as if to make up for lost time.

Although Africa’s foreign debt obligations remain high, seriousinternational efforts are finally under way to shrink them tomanageable size. In the United States, the Human Rights,Opportunity, Partnership and Empowerment (HOPE) for Africa Act being debated in Congress includes provisions to repurchase andcancel part of Africa’s $230 billion external debt.


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Lurking behindthe sensationalnegative headlines,there are thrivingenclaves ofpeace, steady

economic growth,and high returnson investment.

In many countriesof the continent,business, fueledby privatization,democracy, andcapitalism, isroaring ahead asif to make up forlost time.

Table 2US$ Returns of African Stock Exchanges as of June 30, 1999 (in Percentages)

*Weighted by market capitalization**Morgan Stanley Capital Index (MSCI).



PLAYING CATCH-UPEurope and South Africa have been the architects and key operators

of the African stock markets, and their financiers have made littleeffort to share strategic African capital market information and datawith their American counterparts. Now, with the economicunification of Europe a reality, non-European investors will beforced to become aware of and active in the African capital marketsor else be only peripheral players in it. The success of MorganStanley’s Africa Fund is an example of what can happen whenAmerican money managers get involved in the African capitalmarket.


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Europe and SouthAfrica have been the

architects and keyoperators of theAfrican stock marketNow, non-Europeaninvestors will beforced to becomeaware of the Africancapital markets or elsbe only peripheral

players in it.



THE CAPITAL ACCESS INDEX

Introduction to the Milken Institute’s Capital Access IndexThe Capital Access Index examines the availability of capital, thedistribution of wealth in society, and its impact on economic growth.In order to capture these relationships and indicate which countrieshave the institutional framework and macroeconomic policies thatare most likely to sustain economic growth, the regional CapitalAccess Index ranks the various countries in Africa. The Index isconstructed using 29 equally weighted variables, separated intothree categories: quantitative, qualitative, and risk variables.

The quantitative variables include equity market

capitalization/GDP, equity market liquidity, and severalmacroeconomic indicators. We believe that the broader and deeper acountry’s debt and equity markets are, the more entrepreneurialactivity will be financed and the higher the quality of priceinformation feeding back into the economy.

The second category, qualitative variables, comprises a set of subjective evaluations and ratings by different organizations thatmeasure corruption, risk of expropriation, and risk of contractviolation, among others. To the extent that private economicactivities can be performed in a transparent environment, true

entrepreneurial activity is more likely to evolve.

The last category, risk variables, measures indicators such ascurrency volatility and foreign exchange parallel-market premium.To the extent that volatility in foreign exchange or interest ratesexists, the ability of individuals and corporations to make economicforecasts is impaired. This inability leads them to shorten theirhorizon and makes them less willing to invest in long-term projects.In addition, the parallel-market premium is an indicator of theextent to which the economic environment could lead to a deviation between the official and parallel-market exchange rate, and is a

reflection of unsound macro policies.

Africa and the IndexNot surprisingly, South Africa ranked number one in the MilkenInstitute’s Capital Access Index. This country is host to the

Johannesburg Stock Exchange (JSE), the largest stock market on theAfrican continent, with a market capitalization three times larger


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The Capital AccessIndex examines the

availability ofcapital, thedistribution ofwealth in societyand its impact oneconomic growth.

The broader anddeeper a country’sdebt and equitymarkets are, the moreentrepreneurialactivity will befinanced and thehigher the quality ofprice information

feeding back into theeconomy.

To the extent thatprivate economicactivities can beperformed in atransparentenvironment, trueentrepreneurialactivity is more likelyto evolve.



than those of all the other African equity markets combined (seeFigure 9). As of year-end 1998, the JSE listed 668 companies, bothforeign and domestic. By African equity market standards, the JSEliquidity of 30.4 percent is high, closely followed by Egypt’s Cairo-Alexandria combined stock exchange (see Table 1). South Africa isalso host to a very large banking sector with total assets equivalentto 83 percent of the country’s GDP and a very low bank concentration ratio (0.34).

The existence of relatively well-developed financial markets,supported by a legal system that protects private investment, hasenabled South Africa to sustain economic growth. However, a causefor concern on the part of foreign investors is South Africa’s income

tax rate (40 percent) and foreign exchange rate volatility (0.16),which are high compared with the other countries in the study. Highinterest rates have been blamed for stifling domestic demand, whichcaused South Africa’s mining, construction, and manufacturingactivities to decline.

In contrast, Zambia and Zimbabwe fared worst in the study. Withhigh inflation (24.81 percent and 18.74 percent, respectively), highinterest rates (31.80 percent and 42.06 percent, respectively), high


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Not surprisingly,South Africaranked number one.As of year-end1998, the JSElisted 668companies, bothforeign and

domestic.

In contrast, Zambiaand Zimbabwe faredworst in the study.With high inflation,high interest rates,high currencyvolatility and highforeign exchangeparallel-marketpremiums, thesecountries have littlesecurity to offer.

Figure 9The Johannesburg Stock Exchange Accounts for the Lion’s Share

of Africa’s Stock Market Capitalization



currency volatility (0.31 and 0.59, respectively) and high foreignexchange parallel-market premiums (32.00 percent and 14.00percent, respectively), these countries have little security to offer topotential investors. Furthermore, Zimbabwe’s military involvementin the Democratic Republic of Congo ruined its relations with theIMF, leaving it without international donor support. This may provecostly as the possibility of a recession enters Zimbabwe’s horizon.

In general terms, it is interesting to note that the African bondmarket is, at most, very thin. For most countries, we can find noinformation at all regarding the existence of issued bonds. Thecombination of two factors inhibits a substantial bond market toflourish. First, high interest rates associated with a high level of volatility makes both potential issuers and investors unwilling toconsider medium- and long-term fixed income securities. Second,short-term lending rates in seven of the countries in the study wereabove 19 percent, with Zimbabwe boasting a high of 42.06 percent,closely followed by Ghana (37.00 percent) and Zambia (31.80percent). Even though these interest rates are a function of highinflation rates, which leave African real interest rates at levelscomparable with the rest of the world, high nominal rates put atremendous strain on cash flows and make many projectsimpossible to finance.

However, for most countries, the economic situation seems to be

improving. Annual inflation rates in seven out of the 11 countrieswere single digit. Morocco — in the low end — registered a rate of only 0.89 percent, and Ghana — in the high end — had a rate of 27.89 percent, which was closely followed by those of Zambia (24.81percent) and Zimbabwe (18.74 percent).

As African countries continue to focus on sound macroeconomicpolicies and improve the conditions that reduce the risk forinvestors, the continent should see growing pools of incominginvestment funds.

New DirectionsPrivate equity and structured finance opportunities have remainedlargely unexplored in Africa. Divestiture opportunities fromprivatization efforts and natural resource-based securitization are beginning to develop.

Creating value in Africa is possible by pursuing investmentopportunities resulting from corporate restructuring, realignment,


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The Africanbond market

is, at most,very thin.

For most countries,the economic

situation seems to beimproving. As theycontinue to focus onsound macroeconomicpolicies, they shouldsee growing pools ofincoming investmentfunds.

Creating value inAfrica is possible bypursuing investmentopportunitiesresulting fromcorporaterestructuring,realignment, andprivatizationprograms.



and privatization programs. If carefully selected and intensivelymanaged following acquisition, many companies can provide thepotential returns emerging-market investors require.

A characteristic common to divestitures is that the businessesoffered for sale have been neglected by senior corporatemanagement in the years preceding their sale or privatization.Special emphasis should be then placed on modifying the strategicdirection of the business, rationalizing its cost structure, andencouraging the resumption of growth through new productintroduction or add-on acquisitions. The introduction of thesecompanies on stock exchanges will create a new dynamic of growth,innovation, and wealth creation.

Further enhancements are expected to result from the securitizationof these countries’ debt, and also from mining, energy, andagricultural resources. Recently, Mobil closed a securitizedtransaction on oil revenues in Nigeria with Credit-Suisse FirstBoston as the lead investment banker in its operation.

A similar deal was the structured finance operation of Merrill Lynchon bauxite from Guinea, a transaction that was sold to theinternational investment community through Merrill’s MercuryFund.

The nascent American depository receipt (ADR) market representsanother opportunity. There are about 100 African companies tradingon U.S. stock exchanges using ADRs. Of that number, only four arenon-South African: Ashanti Goldfields of Ghana (now on the NYSE),Botswana RST Ltd. (trades on the pink sheets), Mangura CopperMines, Ltd., and United Bank of Africa (UBA), one of the fourlargest banks in Nigeria, which recently became listed on theLondon Stock Exchange. Furthermore, UBA has secured theapproval of the Securities and Exchange Commission to have itsshares listed in the United States. Financial technology, includingADRs, needs to be implemented across the continent in order to

(directly and indirectly) add liquidity to the capital markets.


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Further enhancement

are expected toresult from thesecuritizationof these countries’debt, and also frommining, energy, andagricultural resources

The nascent ADRmarket representsanother opportunityand, with other

financial technologiecan indirectly addliquidity to the capitamarkets.



uantitative Measures1) GDP per Capita. GDP divided by mid-year popu-ation. Source: World Bank 1999.

2) Government Spending/GDP. Source: IMF 1999.

3) Claims of Non-Financial Private Sector GDP.ource: IMF 1999.

4) Total Reserves/GDP. Total reserves minus gold.ource: IMF 1999.

5) Average GDP Growth. Average GDP growth from993 to 1997. Source: IMF 1999.

6) Inflation Rate. Annual inflation. Source: Worldank 1999.

7) Equity Market Cap/GDP. Sum of market capital-zation of all firms listed on domestic stock exchanges,

here each firm’s market capitalization is its sharerice at the end of the year times the number of sharesutstanding. Sources: IFC 1999 and IMF 1999 (GDPata).

8) Firm Concentration Ratio. Market capitalization of 0 largest listed companies in the stock market divid-d by total market capitalization. Source: Irish 1998.

9) Equity Market Liquidity. The dollar volume of hares traded divided by equity market capitalization.ource: IFC 1999.

10) Foreign Investment Ceiling. The maximum per-entage of ownership allowed in any particular com-any. Sources: IFC 1999; Irish 1998.

11) Short-Term Interest Rate. The short-term interestate ranged from the three-month offer rate or dis-ount rate or prime rate, depending on country.

ources: IFC 1999; Datastream.

12) Corporate Income Tax. Highest income tax ratepplied in the country. Sources: Holmes et al. 1999; IFC999; Ernst and Young Country Guides.

13) Capital Gains Tax. The tax on capital gains.ources: Laffer Associates, Alexis de Tocquevillenstitute; Irish et al. 1998.

(14) Value Added Tax. Source: Holmes et al. 1999;Ernst and Young Country Guides.

(15) Bank Assets/GDP. The total assets of all commer-cial banks in the country. Source: Gladstone &Barrington; IMF 1999.

(16) Bank Concentration Ratio. Source: Gladstone &Barrington.

(17) Foreign Direct Investment/GDP. Net inflows of investment to acquire a lasting management interest(10 percent or more of voting stock) in an enterpriseoperating in an economy other than that of the

investor, relative to the host economy’s GDP. Sources:World Bank 1999; IMF 1999.

(18) Portfolio Investment Flows (Stock)/GDP. Netflows of non-debt-creating portfolio equity flows (thesum of country funds, depository receipts, and directpurchases of shares by foreign investors) relative tothe size of the host economy, as measured by its GDP.Sources: World Bank 1999; IMF 1999.

(19) Portfolio Investment Flows (Bonds)/GDP. Netflows of bond issues purchased by foreign investorsrelative to the size of the host economy, as measured by its GDP. Sources: World Bank 1999; IMF 1999.

(20) Gini Index. Measures the extent to which the dis-tribution of income among individuals or householdswithin an economy deviates from a perfectly equaldistribution. An index of zero represents perfectequality while an index of 100 measures perfectinequality. Source: World Bank 1999.

Risk Measures(21) Currency volatility. Standard deviation of data

from June 1995 to present divided by the mean of alldata points on exchange rates. Source: Datastream.

(22) Foreign Exchange Parallel Market Premium: Thepercentage difference between the official exchangerate and the parallel market rate.

Qualitative Measures(23) Risk of Expropriation. The likelihood that one’s


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PPENDIX: DEFINITIONS OF VARIABLES



property might be expropriated (10 = best, 1 = worst).Sources: Gwartney and Lawson 1998; PRS Group 1998.

(24) Risk of Contract Violation. The degree to which“foreign businesses, contractors, and consultants facethe risk of a modification in a contract taking the formof repudiation, postponement, or scaling down.” (10 = best, 1 = worst). Sources: Gwartney and Lawson 1998;PRS Group 1998.

(25) Rule of Law Principles. The degree to which thecitizens of a country are willing to accept the estab-lished institutions to make and implement laws andadjudicate disputes. Nations are given a higher scorefor the rule of law component when “sound politicalinstitutions, a strong courts system, and provisions foran orderly succession of power” are present. Lower

scores indicate “a tradition of depending on physicalforce or illegal means to settle claims” (10 = best, 1 =

worst). Sources: Gwartney and Lawson 1998, PRSGroup 1998.

(26) Corruption Perception Index. Based on surveyresults on perceptions of corruption from local andforeign business executives. (10 = least corrupt, 1 =most corrupt) Source: Transparency International andGoettingen University 1999.

(27) Composite ICRG Credit Rating. An overallindex, ranging from 0 to 100, based on 22 componentof risk. Source: PRS Group 1998.

(28) Institutional Investor Credit Rating. Ranks from0 to 100 the chances of a country’s default. Source:World Bank 1999.

(29) Euromoney Country Credit Worthiness Rating.Ranks from 0 to 100 the riskiness of investing in aneconomy. Source: World Bank 1999.


21



EFERENCES

loomberg Online. www.bloomberg.com

atastream Online. www.datastream.com

ladston & Barrington, Washington, DC.

wartney, Jim, and Robert Lawson. 1998. Economic Freedom of the World Interim Report: 1998/1999. Vancouver, BC:he Fraser Institute. http://www.freetheworld.com

olmes, Kirm R., Bryan T. Johnson, and Melanie Kirkpatrick. 1999. 1999 Index of Economic Freedom. Washington,C: The Heritage Foundation.

nternational Finance Corporation (IFC). 1999. Emerging Stock Market Factbook 1999. Washington, DC: IFC.

nternational Monetary Fund (IMF). 1999. International Financial Statistics. Washington, DC: IMF. August.

rish, Robert, et al., eds. 1998. The Salomon Smith Barney Guide to World Equity Markets 1998. London: Euromoneyublications PLC.

RS Group. 1998. International Country Risk Guide. East Syracuse, NY: PFS Group. Originally published in Worldank. 1999. The World Development Indicators 1999. Washington, DC: World Bank.

ransparency International and Goettingen University. 1999. The Corruption Perception Index. July.ttp://www.transparency.de/documents/cip/index.html

orld Bank. 1999. The World Development Indicators 1999. Washington, DC: World Bank.


22



BOTSWANAEconomic Summary and Outlook

Driven primarily by the diamond-producing activities of its miningsector, Botswana’s real GDP growth is one of the most robust in theAfrican region. The mining sector accounted for roughly 33 percentof the country’s GDP in 1996 and more than 74 percent of its exportsin 1997. Furthermore, its contribution to the country’s real GDP isexpected to continue to grow. However, in light of the economic

slowdown of its main markets, namely the EU and Japan, the U.S.dollar value of diamond exports fell by an estimated 32 percentduring 1998 to US$1.4 billion. Increasing levels of diamond outputcoupled with decreasing exports have led to inventory stockpiling.The outlook for 1999 is not favorable, as significant economicexpansion in Japan is unlikely to materialize.

The reduced level of exports was responsible for a decrease ingovernment revenues, which were not sufficient to cover 1998’sincreasing expenditures, resulting in a fiscal deficit equivalent to anestimated 6.6 percent of GDP for the period 1998-99. One of the

primary drivers of the increasing expenditures was a general wageincrease averaging 25 percent in 1998. Regardless of this, civilservants continue to pressure the government for an additionalwage increase. The fiscal deficit and the increased internalconsumption fueled by higher wages were to blame for an increasein the inflation rate.

The government must continue to take actions that lead todiversification of the economy. The expansion of infrastructure tosupport tourist activities should allow the country to decrease theimportance of diamond exports as a source of revenue. Significantsteps toward privatization already have been taken. The eliminationof foreign exchange controls and foreign investment ceilings aremoves that support the country’s intentions to become aninternational financial service center. Another pressing issue that thegovernment must deal with is the high unemployment rate, whichwill require higher levels of private capital formation thanheretofore achieved.


23

COUNTRY BRIEFS

Rank 4 S c o re 87.2



Quantitative Perf o rm a n c e

Botswana’s performance in the quantitative measures was aboveaverage, with 87.2 points. It had a combination of very good

indicators with very bad ones. Its GDP per capita of US$3,290 wassecond only to Mauritius. It also had an impressive total reserve toGDP ratio of 116.33 percent, which was the highest of all thecountries, with Egypt a distant second at 24.68 percent. On the otherhand, Botswana’s financial sector is, by comparison, weak. It has thethird-lowest equity market capitalization-to-GDP ratio (12.96percent) and the fourth-lowest bank assets-to-GDP ratio (25.24percent). At 27.34 percent, its government spending-to-GDP ratiowas the highest of all the countries in the study.

Risk PerformanceIn terms of risk indicators, Botswana’s score was 90.80. BecauseBotswana, like many other emerging markets, has a rather highdegree of foreign exchange volatility (0.15), it ranked eighth in thiscategory.

Qualitative PerformanceBotswana ranked first in this category, and received a score of 100. Itis regarded as one of the most transparent countries on the Africancontinent and has strong institutions. As indicated by many of thecomponents in this category, business people perceive Botswana asone of the most transparent countries among those surveyed.


24



CÔTE D’IVOIREEconomic Summary and Outlook

Côte d’Ivoire’s economy has been on an upward trend since themid-1990s. Its average GDP growth is the highest in the Index, andits interest rate is the lowest. At the same time, the country’sinflation rate for 1998 fell to 4.7 percent, well below the averagereflected in the Index.

Côte d’Ivoire’s economy continues to be pushed by exports. Since1996, exports have exceeded imports almost by a factor of 2, whichhas lead to a current account surplus for the past two years. Cocoais the main agricultural crop of Côte d’Ivoire, comprising over one-third of its total exports. Unfortunately, the drop in world prices forthe country’s top three exports (cocoa, oil, and coffee) led to adecrease in its total exports last year. Production for cocoa andcoffee has now slowed. This will have a profound impact on theeconomy, since exports make up over 42 percent of Côte d’Ivoire’sGDP. Thus, the current account will move back into a deficit by theend of this year. The situation will also begin to adversely affect realGDP growth, which has averaged over 6 percent for the past threeyears. The government will attempt to maintain growth at about 5percent for the next few years through an increase in spending.

The IMF early this year criticized the government’s handling of finances. The IMF was concerned about the reliability of thecountry’s federal data, its reform efforts, its large expenditures, andits slow movement toward privatization. In accordance with theIMF report, Côte d’Ivoire announced lower-than-expected revenuesfor 1998, and has begun internal audits of various ministries. It willsee a budget deficit again this year.

Côte d’Ivoire recently became host to a new regional stock exchange. The bourse, which includes listings from Benin, BurkinaFaso, Mali, Niger, Senegal, and Togo, has not lived up to

expectations since it opened in 1998. Hopes are high that it willperform better after a satellite trading system is implemented.

Quantitative PerformanceCôte d’ Ivoire ranked sixth in the Milken Institute Capital AccessIndex. In terms of its quantitative performance, Côte d’ Ivoire scored81.6 points, slightly over the average 80.6 in this category. In spite of


25

Rank 6 S c o re 80.



having the highest five-year average GDP growth among countriesin the study, Côte d’ Ivoire’s GDP per capita ($719.25) is just abovethe average ($667) for the whole continent. This owes to theimportant contribution of commodity products such as cocoa, coffee,and petroleum (32.5 percent for 1996) to its gross domestic product.These products not only are low in value, but also are labor-intensive.

In terms of capital markets, the country’s financial institutions arerelatively small when compared to the other countries in the study.Its equity market capitalization-to-GDP ratio is only 12.30 percent, just slightly above the lowest number (12.22 percent), registered byNigeria. Market capitalization is also constrained by one of thelowest liquidity levels, 2.34 percent. In regards to its bank asset-to-GDP ratio, Côte d’ Ivoire’s 29.46 percent is closer to the averageamong the study countries.

Despite these difficulties, Côte d’ Ivoire enjoys one of the lowestinflation levels (5.61 percent) among countries and has the benefit of a very stable and low interest rate (6.25 percent).

Risk PerformanceCôte d’ Ivoire’s risk performance was well above average with 93.9points. The country has one of the lowest indexes of currency

volatility (0.09) in the study, as well as a parallel currency marketpremium of only 2 percent — the average for the countries in thestudy.

Qualitative PerformanceThe qualitative performance score for Côte d’ Ivoire was only 70.5points, well below the average score of 80.6. This is primarily areflection of the perceived risk of investing and conducting businessin the country. Among the primary problems that affect Côte d’Ivoire’s reputation are corruption, risk of expropriation, and risk of

contract violation. These problems could be the primary factorsinfluencing the lack of liquidity suffered by the capital markets.


26



EGYPTEconomic Summary and Outlook

Egypt makes itself attractive to foreign investors with an overallsound economy. It lays claim to the second-lowest inflation rate at4.63 percent and the third-lowest interest rate at 13.02 percent in theCapital Access Index. Privatization programs are moving forwardquickly, opening up new avenues of investment in the country. TheUN Conference on Trade and Development has confirmed this byprojecting a rise in foreign direct investment. Tight monetary policykept inflation below 5 percent last year while tax rates and the stock market remained stable. This has allowed real GDP growth to stayabove 5 percent since 1996, averaging 5.7 percent last year. Growth

should accelerate to almost 7 percent by 2000.A possible new trade pact with the EU is part of an overall tradeliberalization program envisioned by Egypt. This agreement would

be the precursor to the Euro-Mediterranean free-trade area, whichhas a 2010 target date. The current proposed pact would prove

beneficial to the petroleum sector of Egypt’s economy. Oil is Egypt’slargest export, accounting for one-fourth of all exports, while the EUis the recipient of one-third of all exports from Egypt. Progress heremay hinge on the political success of the backers of this and otherprivatization issues. The cabinet has also set high growth rates for

non-oil sectors of the economy in an attempt to provide more stablefuture growth. However, Egypt, along with South Africa, is home tothe highest corporate income tax rate in the Index at 40 percent. Thegovernment needs to reduce its bureaucracy, stabilize its regulatoryenvironment, and lower its corporate taxes if it is to secure futureinvestment.

Egypt’s budget will not meet its targeted revenue this year, leaving adeficit of almost 1.5 percent of GDP. Its current account deficit rosedramatically in 1998 to 3.7 percent of GDP from just 0.9 percent theyear before. Much of this can be attributed to the fall in oil prices.

This caused the value of Egypt’s oil exports to fall by fully 50percent in 1997. Higher oil prices in the near future should help toreduce the current account deficit to below 3 percent by 2000.Import restrictions should also limit the growth of the deficit.Inflation may begin to rise slightly to about 4.5 percent by 2000. Thepound will remain pegged to the dollar over that time period.


27

Rank 2 S c o re 98.



Quantitative PerformanceEgypt ranked second in the Capital Access Index with a total scoreof 98.2 points. The country has a large banking sector with total

assets exceeding its GDP. However, and even though its equitymarkets are the second largest on the continent, accounting for morethan 10 percent of the region’s total market capitalization, the

banking sector’s size relative to the country’s GDP is small whencompared with the equity markets of other study countries. In termsof liquidity, the Cairo-Alexandria combined equity markets are thesecond most liquid in the region (22.30 percent).

Egypt also offers low interest rates (13.02 percent) and is subject to anormal inflation rate (4.63 percent). These conditions, in addition toother factors, give incentives to potential investors to allocate funds

to Egypt’s capital markets.

Risk PerformanceDue to having the lowest currency volatility of all countries in thestudy as well as no parallel foreign currency-market premium,Egypt’s score in this category is 100. The stability of its currency isone of the main factors contributing to the Egyptian stock exchanges’ ability to attract institutional investors.

Qualitative PerformanceEgypt’s score in the qualitative category was just above average(88.6). Given its perceived level of corruption, and in spite of havinglow risks of expropriation and contract violation, Egypt’s creditratings are just above average, indicating some flaws in thecountry’s institutions.


28



GHANA

Economic Summary and OutlookGhana faces many challenges in its attempt to create a soundeconomic environment. Many of the reforms needed to attractinvestors are dependent on political changes. Privatization, forinstance, will be slowed due to governmental opposition.Additionally, improvement in many macroeconomic variables also isnecessary for significant progress to be made. Ghana’s inflation rateaverage is the highest in the Index. The rate for 1998 was just under20 percent, but that figure is expected to rise again this year. TheGhanaian interest rate also remains very high, second only toZimbabwe’s. The Bank of Ghana did cut its discount rate from 45

percent to 32 percent at the end of last year, however.

Interestingly, Ghana averages the third-highest GDP growth of the11 countries. Although growth in 1998 was less than 2 percent,growth could average 5 percent for the next two years. Still, GDPper capita ranks as the second lowest in the index.

While the federal government continues to run a fiscal deficit, thatdeficit as a percentage of GDP should fall from 6.3 percent in 1998 to5.2 percent this year. A value added tax was added this year in anattempt to increase revenue collection. Ghana’s current account

deficit should also fall this year as exports rise. Gold and cocoacomprise most of the country’s exports. Cocoa prices have fallen thisyear, which should lead to a slight drop in the agricultural growthrate by 2000. The current account deficit would then again begin torise.

Fortunately for Ghana, it maintains its good standing with the IMF,making it a great beneficiary of international donor funding. Itsstock market is also booming. It grew 63 percent last year,outperforming all other sub-Saharan stock markets.

Quantitative PerformanceThe country’s score (73.7) in this category is below average, as it has

both a high inflation rate (27.89 percent) and high interest rates (37percent). Furthermore, its GDP per capita is only $375.36, which issubstantially lower than the African continent’s average ($667.00).

In terms of its financial institutions, the market capitalization-to-GDP ratio of Ghana’s stock exchange is just 18.09 percent.


29

Rank 7 S c o re 77.



Furthermore, like its other African counterparts, Ghana’s stock exchange suffers from a very low liquidity level (4.80 percent). Thesize of the country’s banking sector relative to its economic activityas measured by its GDP is also among the lowest of the countries inthe study. Finally, foreign investment in local companies is limited to74 percent.

Risk PerformanceGhana’s risk performance was above average, with 91.2 points. Inspite of having a low — by African country standards — parallelcurrency market premium (1 percent), the foreign exchange ratevolatility is very high (0.17).

Qualitative PerformanceThe country’s score (78.8) in this category is slightly below average(80.6). Of particular relevance is its high level of corruption, even byAfrican standards. In addition, the country’s credit ratings areamong the lowest of the 11 countries in the study. In terms of itslegal institutions, Ghana is generally perceived well by business-people. Its scores on variables measuring risk of expropriation, risk of contract violation, and rule of law principles are almost as goodas the best countries in the study.


30



KENYA

Economic Summary and OutlookKenya ranks ninth overall with a score of 69.8. In the past two years,its real GDP growth has averaged about 2 percent and shouldincrease modestly to around 3 percent by 2000. Kenya’s growth willcontinue to be limited, however, by a deteriorating infrastructureand lack of efficient transportation.

Agriculture comprises nearly 29 percent of Kenya’s GDP. Inaddition, Kenya boasts the largest exportation of tea in the world.This year, however, a lack of rain has damaged Kenya’s agriculturaloutput. Its export crops will be hit especially hard. Kenya’s coffee

output, for instance, has fallen by 30 percent over the past year. Thisand other export industries face strict marketing regulations. Untilthey obtain the freedom that the tea industry has to set their ownmarkets they will continue to suffer declining foreign revenue.

Kenya’s current account deficit will continue to decrease in 1999.The nation’s poor economic performance has caused Kenya’simports to fall more than its exports. Inflation will begin to fall overthe next few years. The average inflation for 1998 was 7 percent, andthis number should fall to 5 percent by 2000. This will occursimultaneously with falling interest rates and a tight money supply.

Kenya’s government should balance its budget for 1999 throughincreased revenue collection.

Quantitative PerformanceKenya ranked 10th in the quantitative section. Interestingly, Kenya’stax structure is one of the most business-friendly of the 11 countriesstudied. Its corporate income tax is the second lowest in the Index,and half of the countries have higher capital gains and value addedtaxes than Kenya. Unfortunately, these benefits are not reaped bythe average Kenyan. Kenya has the lowest GDP per capita in the

Index. This is also reflected in the Gini wealth distribution index,which ranks ahead of only South Africa. Overall, four countrieshave lower average GDP growth rates than Kenya. Kenya will needto do more to attract outside investment, however. Its foreign directinvestment as a percentage of GDP ranks last in the Index and isonly one-fifth that of Zimbabwe, the next-lowest recipient of foreigninvestment.


3

Rank 9 S c o re 69.



Risk Perf o rm a n c e

In terms of currency volatility, Kenya has offered relatively stableconditions of late — only two countries in the Index have less.

While this may sound inviting, Kenya’s black market premium is just the opposite: at 6 percent, only two countries have higherpremiums than Kenya.

Qualitative PerformanceKenya’s qualitative performance left only two countries in the Indexwith lower rankings in this category. This is not due to the risks of expropriation or of contract violation, where Kenya’s scores wereaverage. Instead, the ranking reflected Kenya’s poor credit ratings.Its international and institutional investor ratings both were fourth

worst among the countries studied. Most important, though, is thegreat perception of corruption that exists in Kenya. Kenya wasscored as more corrupt than any other Index country but Nigeria.


32



MAURITIUS

Economic Summary and OutlookMauritius ranks third overall with a score of 96.4. With a smallpopulation of only 1.16 million people, this island nation offers aninviting economic environment for investment. This is reflected inthe nation’s low unemployment rate of 5.8 percent. However, a lack of confidence in the ruling Labour Party government and itsinability to calm ethnic violence and rioting has created concernsabout political instability.

Severe weather patterns such as El Niño have caused Mauritius’sagricultural sector to forecast a 20 percent contraction this year.

Mauritius’s agriculture comprised over 8 percent of the country’sGDP in 1997, making it roughly one-third the size of itsmanufacturing sector. While the agricultural downturn will directlyweaken the nation’s growth, the indirect impact it will have on itsmanufacturing sector will cause the greatest damage. Real GDPgrowth is projected to fall from 5.3 percent in 1998 to 3.5 percent in1999. Tourism to the small island nation should fare better,maintaining a growth rate of 6 percent.

Mauritius’s total exports boomed in 1998, with a 17.6 percentgrowth rate — much higher than the 1997 rate of only 4.3 percent.

Exports are as important to this nation’s economy as privateconsumption. Both components together account for 64 percent of total GDP. Mauritius’ Export-Processing Zone recorded a rise inexports of 13.1 percent in 1998. Exports from Mauritius’ FreeportZone, whose value is two-and-a-half times smaller than the Export-Processing Zone, rose by a dramatic 88.1 percent last year. Thedamaged agricultural crop will slow export growth for 1999,however. The large sugar crop, which comprises one-fourth of allexports, is officially forecast to drop by over 37 percent in 1999. Withimports already outweighing exports, Mauritius’ current accountdeficit is therefore expected to rise from $63 million in 1998 to $94million by 2000. A growing trade with the other member nations of two regional trade organizations will increase local exports in thelong run.

Quantitative PerformanceMauritius’s strong economy led to its third-place ranking in thequantitative section. Mauritius boasts the highest GDP per capita of


33

Rank 6 S c o re 80.



the 11 African nations in the Index. Its growth rate is also strong,standing as the second highest in the Index at 4.85 percent.Mauritius’s relatively low average inflation rate of 6.83 percent alsoserves to invite investors into this small nation. Its tax structureoffers below-average rates, providing additional businessopportunities. Its equity market also is strong: Mauritius’s equitymarket capitalization-to-GDP ratio is the second highest of Indexcountries, while its bond flows relative to GDP are the highest of allIndex nations. Its stable performance over the past several yearsmakes Mauritius an attractive place in which to do business.

Risk PerformanceMauritius gives investors little to worry about, granting it a number

four ranking in this category. The country’s black market premiumis the same as that of South Africa at just 1 percent. Its currencyvolatility is in the middle of the pack, with five nations havinggreater volatility.

Qualitative PerformanceQualitatively, Mauritius also ranks fourth. Minimal risk of expropriation or contract violation exists for investors here.Similarly, its corruption perception index has the third-highestranking among the 11 nations. Mauritius’ credit ratings are also very

strong, with its Institutional Investor credit rating exceeding that of all the other countries in the Index. This tiny country therefore offerslarge opportunities for secure returns on investment.

Furthermore, according to Sumil Benimadhu, Chief Executive of theStock Exchange of Mauritius, opportunities to buy low-cost stocksexist. Many stocks currently are trading at price-to-earnings ratios of 8, compared with a historical average of about 12.


34



MOROCCOEconomic Summary and Outlook

Morocco ranks fifth overall with a score of 86.7. Morocco’s economygrew a substantial 6.1 percent in 1998. This follows a year of negative GDP growth. Large rains have calmed fears of a droughtfor 1999. The expected large harvest should offset sluggishness inthe manufacturing sector.

The central bank this year will again lower interest rates in anattempt to encourage investment. This is expected to allow privateconsumption to grow by an average of 4.9 percent for the next twoyears.

Exports account for 33 percent of Morocco’s GDP. As Asia recoversfrom its slump, exports should continue to play a large role infurther economic growth. Morocco also has strengthened its tradeties with France and China. Reform in the State Phosphates Officewill ensure growth in this important industry. Phosphate sales thisyear will comprise about 30 percent of Morocco’s total exports.

The strong agricultural sector, increasing private consumption, andincreasing exports will help the economy continue to grow by about4 percent for the next few years.

Unemployment continues to hamper full growth. About 35 percentof Moroccans under 25 years old are unemployed. Inflation willremain low, though, at between 2 percent to 3 percent for the nextthree years.

Great hope for foreign investment in Morocco lies in privatization of key sectors. The privatization of utilities would bring an enormousinflux of equity into the nation and spark the Casablanca Stock Exchange. However, privatization attempts have run into difficultyin the parliament, slowing fund flows into Morocco.

Quantitative PerformanceMorocco’s score of 80.1 in the quantitative section was the sixth bestof the Index countries. Its performance is boosted by the lowestinflation rate among the countries at 0.89 percent. Foreign investorsare welcome here, as is reflected by the highest foreign directinvestment as a percentage of GDP at 3.85 percent. Moroccans enjoythe second-lowest interest rate among Index countries. Morocco’s


35

Rank 5 S c o re 86.



total qualitative score was driven to the middle of the pack,however, due to average scores elsewhere and its poor showing inthe following key areas. Its 35 percent capital gains tax rate was tiedwith Côte d’ Ivoire’s and was second highest in the Index, behindonly Egypt. Morocco also had the third-worst ranking on thevariable measuring percentage of government spending to GDP. Itslow average GDP growth (fourth lowest on the Index) could causeMorocco’s position to slip in the future.

Risk PerformanceMorocco scored very well in the risk category of the Index, earningit the third-highest rank. This was due to its relatively low currencyvolatility, which was also the third lowest among Index countries.

Meanwhile, Morocco’s black market premium does not serve as alarge disincentive for investors, as it hovers near the middle of thepack at 2 percent.

Qualitative PerformanceMorocco aided its overall rank with a third-place ranking in thequalitative section. Investors should feel secure here in terms of thepossibility of contract violation. The country scored the highest inthe variable measuring its rule-of-law principles. A number tworanking in the international credit rating category helped secure its

position.


36



NIGERIAEconomic Summary and Outlook

Nigeria ranks eighth overall with a score of 75.8. It has recentlyundergone a successful transition of leadership from a militarygovernment to an elected president, bringing to an end 15 years of military rule. The new president must face an ethnically dividedcountry with regional interests. Militant ethnic groups in the norththreaten to destroy oil production installations there if they are notsatisfied with the government’s antipoverty efforts. Petroleum is byfar the largest export from Nigeria and is also the largest componentof its GDP. These militant groups last year destroyed about one-fourth of the nation’s entire output of petroleum.

The new administration also enters into a government with ongoingconflicts about the future of privatization plans for the country. Thepresident will most likely attempt to use the federal government asthe main source of economic stimulus for Nigeria. Theadministration’s desire to spend federal money on new programsand loosen the money supply should lead to large increases in theinflation rate. That figure could reach about 30 percent by the end of this year. The IMF would like to see more rapid privatization andgeneral reform of political corruption if it is to secure donor fundsfor Nigeria. These foreign funds would relieve Nigeria of much of

its foreign debt.

A shortage of energy supplies in the nation’s production activitieswill slow Nigeria’s economic growth to 1.1 percent this year. Thecontinued deterioration of Nigeria’s manufacturing sector will alsocontribute to this slowdown. Lack of investment in this sector hasled to a greater reliance on imports of manufactured goods.Increasing imports and decreasing exports have also led to a $3.5

billion current account deficit. Expected increases in the world priceof oil should lift growth back up to about 2.5 percent by 2000. Shellalso has plans to develop four major offshore oil fields in Nigeria.

This, coupled with new oil finds by Texaco, would provide asignificant boost to the petroleum industry. These changes shouldserve to lessen the current account deficit by the year 2000.

Nigeria’s agricultural sector performed very well in the past fewyears due to good weather. This success is insignificant, however,when compared to the country’s reliance on oil. Meanwhile, theNigerian Stock Market continues the fall it has endured since mid-1997.


37

Rank 8 S c o re 75.



Quantitative Perf o rm a n c e

Nigeria scores just below average in the quantitative section, with arank of seven. Its poor rankings in most variables account for this

position. Its place was salvaged, though, with very strong scores intax structure variables. Nigeria has the lowest value-added tax rate,holding it at just 5 percent. It is also tied with four other countriesthat collect no capital gains tax. This, along with the second-lowestcorporate income tax rate, makes Nigeria’s tax structure among the best in the Index. Nigeria also boasts the lowest governmentspending to GDP ratio, along with the fourth-highest score in totalreserves as a percentage of GDP. But while it may look like anattractive place to invest, its overall economy is still struggling.Nigeria’s average GDP growth is the third lowest among Indexcountries.

Risk PerformanceNigeria offers very little risk to foreign investors, ranking secondamong all Index countries in this category. This is accomplishedwith the lowest possible current black market premium (0 percent).Nigeria’s currency volatility is second lowest among the studynations; only Egypt’s is lower.

Qualitative PerformanceNigeria’s overall ranking is damaged with a last place ranking in thequalitative section of the Index. With a history of suspect militaryrule, Nigeria posted the worst scores in the corruption perceptionindex, the Institutional Investor credit rating, and the Euromoneycountry credit worthiness rating. Nigeria also performed poorly inthe remaining qualitative variables. It has the third-worstinternational credit rating and is tied for second worst in terms of itsrisk of expropriation. The incoming civilian government shouldprovide hope for future stability.


38



SOUTH AFRICAEconomic Summary and Outlook

South Africa ranks first overall in the Index. South African businesses got a boost when the new government reduced thecorporate income tax rate five points, down to 30 percent. The 12percent dividend tax was left unchanged, though, leaving the newtotal tax rate of 42 percent as a deterrent to foreign investors. Theadministration further declared that it is ready to accelerate theprocess of privatization of public entities. This should help tointroduce large amounts of foreign investment into the country.

Due to a recession in late 1998, South Africa experienced a GDPgrowth last year of 0.1 percent. While this is far from its averagegrowth rate of 2.46 percent, this year should bring much of thesame. As Nelson Mandela leaves office, the incoming president willmaintain tight fiscal policy. Still, the federal government willcontinue to run a budget deficit of around 3.7 percent of GDP. Thisdeficit led to a poor international investment rating for South Africa,which has caused many investors to steer away from the country.

The central bank has used monetary policy to encourage growthrecently by expanding the money supply. The new reserve bank governor has hinted that he may begin to target inflation as his main

goal. The target range could be between 1 percent and 5 percent.The rate last year was 6.9 percent. The bank has also begun to cutinterest rates by 4.5 points since their height when the recession

began. These high rates had stifled domestic demand. This fall indemand caused South Africa’s mining, construction, andmanufacturing sectors all to decline, with agriculture falling bynearly 20 percent in 1998. The new lower rates should increaseconsumer spending. As the business cycle takes its course, theeconomy is expected to jump-start back up to a rate of growth of over 3 percent by 2000. One domestic bank, however, warned thatthe lack of Y2K readiness could lessen that growth rate to nearly

half of what is expected.

Early this year, South Africa signed a free-trade agreement with theEU which includes 90 percent of all trade between the two entities.Twenty-seven percent of South Africa’s exports travel to the EU,while 43 percent of its imports come from that area. Since exportsaccount for almost one-third of total GDP, such a deal affects a largeportion of the economy. Export growth should lessen the current


39

Rank 1 S c o re 100



account deficit temporarily, with rising imports increasing the deficitagain in 2000. The rand has remained strong. It should depreciateonly slightly by 2000.

Quantitative PerformanceSouth Africa led all countries in the Index in quantitativeperformance. Much of this performance can be attributed to thetremendous amount of activity in its stock market. South Africa hasthe highest equity market capitalization as a percentage of GDP byfar, at over 189 percent. Its portfolio investment flows in both stocksand bonds are very active. It also has the highest score for the non-financial private sector-to-GDP variable. Even with these rankings,the average South African may not see the wealth that is being

generated by the rest of the economy, as the country has the lowestranking in the Gini income distribution index. South Africa has thesecond-worst average GDP growth in the Index at 2.46 percent. Itstotal reserves as a percentage of GDP are also the second lowestamong the nations.

Risk PerformanceWhile South Africa’s financial sector is strong, there is some risk involved in investment there. This risk gives South Africa a rankingof six in this category. This position is due mostly to its relatively

volatile currency, which is fourth most volatile among Indexcountries. Its black market premium is very low, however, at just 1percent.

Qualitative PerformanceSouth Africa ranks second in this category, helping secure its overallranking. This score is due to its ties for the highest scores in terms of risk of either expropriation or contract violation. There also is a verylow perception of corruption, giving South Africa second place inthat variable. Its credit ratings are among the best, placing it among

the top performers in the Index. All this makes the country anattractive place to invest. Political stability, even with a newpresident, should help South Africa maintain its strong qualitativeperformance.


40



ZAMBIAEconomic Summary and Outlook

Zambia ranks last overall with a score of 59.79. It entered 1999 witha real GDP growth of -2 percent. The economy does show signs of improvement, however. Favorable outlooks are held for the nation’smining and agricultural sectors. Real GDP growth is expected toreach 3 percent in 1999 and 4.7 percent in 2000. Inflation should fallto 13.6 percent by 2000.

Zambia relies heavily on its copper exports as a source of economicstability. Its exports of copper are almost three times greater than itsnext most important export, cobalt. Unfortunately, Zambia’s maindestination of exports is Japan. With the East Asian economic crisisstill lingering, Zambia’s copper mining industry did not fare verywell in 1998 and its outlook appears much the same this year.Zambia’s imports have thus begun to outpace its exports. This hasleft Zambia with an increasing current account deficit. The deficitwas six times greater in 1998, at -$341 million, than it was in 1994.Some of its mines have recently been privatized and sold toforeigners, however. Asian imports should also begin to pick up aseconomic activity there begins to increase. These changes shouldstimulate copper exports by 2000 and help lessen the currentaccount deficit.

The government of Zambia should meet its budget revenueexpectations this year. A full one-third of this revenue will comefrom foreign donors. One large reason for this aid is thegovernment’s positive efforts to privatize its mining industry. Itspresident has also won favor in the international community forattempting to halt the war in the Democratic Republic of Congo.Still, the government may default on some of the loans it had takento import food in 1998. This would hurt its ability to borrow,causing a food shortage in Zambia this year. Taxes on imports of agricultural equipment have thus been suspended for two years in

an effort to stimulate agricultural growth.

Quantitative PerformanceZambia’s poor quantitative performance led to a last-place rankingin this category. It has the lowest average GDP growth of the Indexnations at 2.2 percent, with the third-worst GDP per capita. Much of the existing market wealth in Zambia remains in the hands of a


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Rank 11 S c o re 59.



small number of firms. Thus, Zambia has the worst firmconcentration ratio among Index countries. Its equity market alsoperforms very poorly, with the worst equity market liquidityranking in the Index. Its taxes are among the highest, and Zambiansface the third-highest interest rate at 31.80 percent. They must alsodeal with the second-highest inflation rate in the Index, at nearly 25percent.

Risk PerformanceZambia also scored the worst in terms of risk. The existing environ-ment in Zambia causes many investors to shy away from thecountry. This environment includes the highest black marketpremium score in the Index at 32 percent. Its currency is also the

second most volatile among countries studied.

Qualitative PerformancePoor credit and an insecure legal framework give Zambia thesecond-lowest ranking in the qualitative section. Zambia posts thesecond-worst rankings in both its international and InstitutionalInvestor credit ratings. Its rule of law is, along with a few othercountries, the lowest in the Index. Unenforced laws lead to aninsecure investing environment. This has created in Zambia thehighest risk of contract violation among Index countries. Still,

Zambia has managed to rank among the middle of the pack in thecorruption perception index.


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ZIMBABWEEconomic Summary and Outlook

Zimbabwe ranks 10th overall in the Index, with a score of 66.73. Itseconomic outlook for the near future looks dim. Zimbabwe’smilitary involvement in the Democratic Republic of Congo hasruined its relations with the IMF. This has left Zimbabwe withoutinternational donor support. With real GDP growth of only 1.6percent in 1998 and the possibility of a recession on the horizon, thissupport is dearly needed.

As elections approach in 2000, the ruling government may considerimplementing a command economy to gain control of the situation.It has already reestablished exchange rate controls and mayintroduce full wage and price controls as well as seek to controlaccess to foreign exchange.

Not much hope can be placed in Zimbabwe’s agriculture or miningsectors either. Tobacco is the nation’s largest export, and sales thisyear have been sluggish. Large rains have also threatened othermain agricultural crops like cotton and maize. Economic growth forthis year should thus reach only 0.5 percent.

With the cost of imported goods rising quickly, domestic industry

may lead to somewhat greater growth by 2000. With its constantlydevaluing currency, exports should increase in the next few years,diminishing Zimbabwe’s current account deficit. Without IMFassistance, however, the fiscal deficit will continue to rise rapidly.The devaluation of its currency also caused external debt toskyrocket, rising by 64 percent in 1998.

The Zimbabwe Stock Exchange has performed surprisingly well inthe past year. Its index has increased almost 40 percent sinceSeptember 1998. This does not account for inflation, however,leaving many foreign investors still leery about Zimbabwe.

Quantitative PerformanceZimbabwe ranks ninth in the quantitative section with an overallpoor economic performance. While its GDP per capita ranks fourthlowest, as does its government spending-to-GDP ratio, many otherfactors rank next to last. These include its firm concentration ratio,its corporate income tax and value added tax, and its foreign directinvestment-to-GDP ratio. This last variable is a direct result of the


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Rank 10 S c o re 66.



fact that Zimbabwe, along with Kenya, offers the lowest foreigninvestment ceiling, at just 40 percent, of the countries in the Index.The controlling government has also paved the way for the highestinterest rate in the index — over 42 percent. Total reserves make up just 2.25 percent of GDP, the lowest percentage in the Index. Theexisting wealth in Zimbabwe is not distributed very equally, and thecountry ranks second lowest in its firm concentration ratio and thirdlowest in its civilian wealth distribution index. Citizens of Zimbabwe must also deal with the third-highest inflation rate in theIndex, 18.74 percent.

Risk PerformanceZimbabwe is ahead of only Zambia in the risk rankings. Investors

must beware in this country — home to the most volatile currencyin Index countries. Zimbabwe also has the second-highest black market premium for its currency at 14 percent.

Qualitative PerformanceZimbabwe ranks ninth in the qualitative category. While itsInstitutional Investor credit rating ranks in the middle of thecountries, its international credit rating is the worst in the Index.Foreign and domestic investors must beware of the high risks of contract violation and expropriation, where Zimbabwe ranks second

to last. Much of this is due to its tie for the worst ranking in thevariable measuring rule-of-law principle. All of this works togetherto create an unstable, unattractive investment environment. Thegovernment’s ruling party will see to it that little change is made tothe status quo.


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ABOUT THE AUTHORS

Glenn Yago is Director of Capital Studies at the Milken Institute.He specializes in financial innovations, financial institutions, andcapital markets, and has extensively analyzed public policy and its

relation to high-yield markets, initial public offerings, industrial andtransportation concerns, and public-and private-sector employment.

The author of three books including Junk Bonds: How High YieldSecurities Restructured Corporate America, Yago’s work has beenwidely published in edited volumes and in scholarly journals suchas the Journal of Applied Corporate Finance, Urban Affairs Quarterly,and Journal of Contemporary Studies. He most recently co-authoredthe Milken Institute Policy Brief, “Mainstreamning MinorityBusiness: Financing Domestic Emerging Markets.” The MilkenInstitute Capital Access Index appears quarterly in Forbes Global

magazine.

Juan Montoya is a Research Analyst at the Milken Institute. Prior to joining the Institute, he was General Manager at MFD Textiles and aFinancial Analyst at Mitsui de Venezuela. He received a BSBAdegree from Universidad Católica Andrés Bello, Venezuela, and anMBA from Babson College.

Madani Tall is a Managing Director of Gladstone & Barrington. Heis a specialist in restructuring and realignment of programs, havingadvised the governments of several nations, including that of

Guinea-Bissau, the Republic of Guinea, and the Republic of Niger,as well as the Regional Stock Exchange for West Africa. His master’sdegree is from Institute des Etude Politiques, France.

Christian Yoka is a Managing Director of Gladstone & Barrington.Prior to his work there, he was Senior Consultant with ExaInternational - France, where he was responsible for the sub-SaharanAfrica banking and finance department. He holds an M.A. in


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business and tax loan from the University of Sorbonne and an LLMfrom Boston University.

Thomas Mims is Managing Director of Emerging Africa, Ltd.,

which he established in 1993 in response to the growing interest insub-Saharan stock exchanges. He has worked in Africa as a financialand marketing consultant for 20 years and writes extensively onAfrica economic topics.


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