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EUROPE NEEDS AFRICA ­­

Companies that endured the African Ebola crisis were able to share their experiences and tips with FMO clients during an early stage of the coronavirus pandemic. This initiative by the development bank aims to support its clients during these difficult times. There is no avoiding the fact that emerging markets will be hit hard by the current crisis, which is poised to exacerbate global inequality.

The coronavirus spread in Africa seems, at least for the time being, to be less extensive than feared. The emphasis here is on “seems”—many countries are hardly conducting any testing. The relatively young population does appear to be slowing the rate of infection compared to in other parts of the world. Still, the impact on the continent is enormous. Lockdowns mean that millions of people whose day-to-day livelihoods depend on the informal economy are going without income. And, consequently, without food. Countries that depend largely on one sector (for example, tourism, oil or other raw materials) are the most affected, leading to a massive capital flight. As early as March, international investors withdrew nearly 78 billion dollars from emerging markets, an outflow of capital nearly twice as large as that of the 2008 economic crisis. This is a bewildering trend. Western companies and investors are keenly aware of Africa’s enormous potential. Yet, when faced with a crisis, it seems they are quick to back away.

As early as March, international investors withdrew nearly 78 billion dollars from emerging markets, an outflow of capital nearly twice as large as that of the 2008 economic crisis.

The continent’s risk profile is traditionally seen as high, which is understandable in part. Investors encounter constant practical challenges, and there are political risks. It is not the place for companies looking to maximize their profits next quarter. But for those with a long-term vision, the prospects are strong. FMO has already been proving this true for a long time. Over the last ten years, its portfolio of high-risk investments in emerging economies has been yielding an average of 7 per cent per year, with 2020 being the exception due to the current crisis.

There is generally an unfavourable perception of high-risk investing in Africa. Lack of knowledge leads to a lack of appreciation. Media attention tends to focus on the continent’s troubles, not on how much things are improving, or on the resourcefulness and creativity of the many young entrepreneurs taking on enormous risks. People still tend to feel we need to “help Africa”. The reality is that Europe desperately needs Africa—for its large tracts of agricultural land, its young workforce, and its sales markets. Currently, FMO is working together with The Confederation of Netherlands Industry and Employers (known as VNO-NCW) to improve the way they get the message across to their members.

For a medium-sized enterprise, the question is not whether to invest in Africa, but when. Are you going to wait and be one of the last, or will you take your place at the front of the line? Companies should be leading the way; of course, in compliance with the social and environmental standards that must be factored into these types of investments. When one looks at the companies already there— the flower growers, agrarian businesses, breweries like Heineken and Bavaria—it’s clear what they have in common: a family-like structure. These kinds of companies seem to dare to think further ahead in time.

Lack of knowledge leads to a lack of appreciation. Media attention tends to focus on the continent’s troubles, not on how much things are improving, or on the resourcefulness and creativity of the many young entrepreneurs taking on enormous risks.

Supporting FMO clients during the pandemic

Of FMO’s roughly 800 clients, 272 are located in Africa. Most of them are managing to weather the crisis. Twenty to thirty clients out of FMO’s entire portfolio have asked for more time to pay back their loans, to strengthen their direct liquidity, or increase their buffers.

However, the world is still in the early days of this crisis. The effects may continue to be felt for a very long time. When it comes to FMO’s focus areas—energy, agribusiness and banking—many projects are currently still moving ahead. But there are big questions. For instance, will the customers of a new wind energy park ultimately be able to pay? And what will extremely low oil prices mean for renewable energy? Another issue may be the supply of parts, which come from all over the world. If the supply chain stops, everything will come to a halt. In the case of the agrarian sector, there is reason to be concerned about logistics. If the harvests are unsuccessful, that has immediate consequences for the population and for exports. Food prices are already increasing, although there is no shortage yet. Among FMO’s microfinance clients, entrepreneurs are often the most important. FMO remains committed to supporting them. But the liquidity of this type of client can vary from a few months to only a few days. That can mean dealing with some hard blows, but the true implications remain to be seen.

For FMO, going several months without identifying new clients is manageable. There is no avoiding the fact that the crisis will affect this year’s output and yields.

It is time to adopt models that factor in major risks; only then will we be able to start taking effective action

Moving forward on sustainability

The coronavirus notwithstanding, FMO believes climate change and inequality are the two most important issues facing humanity. Global concern for climate change has grown in recent years, but it may be too little too late. Until recently, unrest as a consequence of global inequality was far lower on the international agenda. This is starting to change, as can be seen public reaction to the uprisings in Latin America and the suburbs of London and Paris, as well as to instances of racial violence in the United States. However, there are still 600 million people living without electricity in Africa. That is a ticking time bomb, from an immigration perspective as well. One perplexing issue is that the financial world still works with decades-old valuation models, which do not factor in climate change or inequality. Dutch banks grant mortgages without taking into account whether a house lies above or below sea level. Worldwide, the financial system is operating according to the same type of thinking. It is time to adopt models that factor in major risks; only then will we be able to start taking effective action.

More focus needed on developing economies

Oxfam International has published a report stating that 500 million people who recently escaped poverty could fall back into it. Developing countries’ debts are now becoming unsustainable, as they see their exports cease, or because their debt is in dollars and their own currency is falling in value. More effort is needed if this is to be prevented. Certainly, there are a few initiatives underway. The Dutch Minister for Foreign Trade and Development Cooperation, Sigrid Kaag, has set up a fund of 100 million. IMF and the World Bank are busy creating their emergency plans. But all of this is still patchwork. Two years ago, Angela Merkel launched the idea of a Marshall Plan for developing countries, geared towards the countries facing the greatest challenges in Africa, Asia and South America. FMO believes that kind of plan is needed now more than ever.

This article was orginally published in the Dutch magazine P+

How well do you know the African continent?

Future-minded is a special publication of FMO, the Dutch entrepreneurial development bank, to mark its 50th anniversary. Editors | FMO N.V. Creation & design | Studio Duel Photography | Opmeer Contact | For questions please contact communications@fmo.nl This email address is not for acquisition purposes.

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