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New perspectives on frontier markets and their evolution


Frontier markets have been in the news lately: they are the centres of attraction in the world of investment. Funds are pouring into them as investors search for higher returns across the globe. In Nigeria, for instance, foreign investment rose 37.5 percent to $16.81 billion, up from $12.2 billion the year before.

These rising funds flow will continue into these markets as the attractiveness lasts. As at Monday, April 1, 2019, returns on different asset classes favoured the frontiers. Bond yield on the benchmark 10-year bond for Nigeria stood at 14.24 percent; Kenya 12.25 percent, and Egypt 16.6 percent.

Compare these with returns in the more mature markets in America, Europe and elsewhere. USA on the same day had a yield of 2.4 percent for a 10-year bond; Germany, the largest economy in Europe, had -0.047 percent; China (3.13%). These lower rates are driven by the economic realities of these countries, including their stable outlooks and comparatively lower risks.

Long before the concept of frontier markets entered into the lexicon of the financial markets, its significance had been acknowledged in the Nigerian economy, as “undeveloped” as the economy was then. Farmers knew it and some of them operated on the concept to their advantage in terms of yields. Frontier markets evoke images of remote or far-flung, difficult-to-reach centres of economic activity with reference to a certain point, usually the known location.

Perhaps we can best explain the concept of Frontier Markets from the description given of Unoka by the priestess of Agbala in Chinua Achebe’s book, Things Fall Apart:

You Unoka are known in all the clan for the weakness of your matchet and your hoe. When your neighbours go out with their axe to cut down virgin forests, you sow your yams on exhausted farms that take no labour to clear. They cross seven rivers to make their farms; you stay at home and offer sacrifices to a reluctant soil. Go home and work like a man.

Okoye was also a musician. He played on the ogene. But he was not a failure like Unoka. He had a large barn full of yams and he had three wives. And now he was going to take the Idemili title, the third highest in the land.

Frontier regions have always held great prospects for those brave enough to venture in there. We see this in the continued struggle by foreign investors for the untapped markets in Africa, be it in commodities or telecommunications, infrastructure, consumer goods, or the financial sectors.

Nigeria has benefited and continues to benefit from the rush for the African market, appropriately dubbed the last frontier market. This is a region previously shunned by investors who found comfort in the low but stable returns of the ageing markets of the West. The savvy international investors can no longer ignore the attractive business opportunities in Africa.

Just as the world has generally progressed through the extension of what economists call the Production Possibilities Curve (PPC), so it is in the world of business. The PPC graphically illustrates the expansion of man’s reach to attainments previously considered unthinkable. Each advance in science and technology pushes the curve further to the right, as the possibilities open to man increase. Each discovery in management or economics broadens the knowledge space, ushering humanity to higher levels of possibilities in the way we make use of resources to achieve greater results.

It was the same in traditional societies. When you saw a man with barns bursting with yams, you would know how farther afield he had ventured from the easy-to-clear, fallow grounds. Clearing the thick bush there and preparing the farm would cost a lot in terms of manpower, and time and money. And this is quite in consonance with the positive correlation between risk and reward in the business world. Those who take the risk get the reward.

However, the above perception needs to be put in context. First, it does not mean blind forage into uncharted waters. Good investors do not necessarily invest because the risk is high, or, as some analysts say, their “appetite for risk’’ is high. Somehow, this is a professional jargon within the investment community that tends to confuse the average reader.

Rather, they invest even in such risky circumstances because they are able to identify, analyse and quantify such risks, so they know exactly what they are up against. So, those who take the risks based on knowledge of the environment and its riskiness get the reward. This is the underlying reason for the positive correlation between risk and reward.

But there is an irony in the high-interest rate environment prevalent in the frontier and emerging markets. Investments pour in because of high rates of return. Yet governments in the countries are increasingly looking outside for funds, hence their rising preference for Eurobonds, which attract relatively lower costs, as a means of raising funds.

The high rewards begin to flatten as more and more investors, armed with information about the local markets, join the fray, as economic theory tells us. But for now, the rewards are still high here in Africa, available for those with deep enough pockets and resource to unearth the secrets.

The recognition of the existence of markets in what is now euphemistically called Emerging Markets or Frontier Markets came through battles that challenged the centre-periphery dichotomy similar to what prevailed in the global media.

Antoine van Agtmael, an author, has a fascinating story on the emergence of what has come to be known as Emerging Markets. But his first encounter was in 1974, with a boss at Bankers Trust Company in New York, who told him quite bluntly: “There are no markets out of the United States.”

He recounts in his book, The Emerging Markets Century: How A New Breed of World-Class Companies is Overtaking the World.

Back in 1974, the perception then was that there were no markets outside the United States, in the technical sense that in most other societies then, there were no institutions or structures that carried out the functions of markets as we know them today. Remember that outside the US and perhaps Western Europe then, every other part of the world was either under communist rule (which formed the Second World), or were simply classified as the Third World.

Agtmael goes on to describe in his book how, while working for the International Finance Corporation, he came to give a name to markets in the countries and regions that were said to be without markets. After a tour of some countries in the developing world, he came to the conclusion that there were indeed markets in those places. The markets were at their inchoate stages: they were emerging from the rudiments, hence the title, Emerging Markets. This is the appellation by which financial markets in these regions have been known since then.

In Africa and Latin America, for instance, similar reasons accounted for the long delay in the development of markets. For long, many of the countries in these regions were run by military juntas whose leaders had no regard for basic rules of governance. Rules could be made and changed arbitrarily; policies were based not on sound principles but on the whims of military leaders who knew very little about how economies work. Markets were non-existent in the true sense of it because prices, including exchange rates, were fixed or controlled by the state. So, in that state of affairs, Africa was indeed a risky place to do business, but opportunities with potentially high rates of reward abounded.

The opportunities exist in the form of unmet needs of large populations that have grown over time. In telecommunications sector, for instance, Nigerians had been starved of telephone and related services under the inefficient monopoly of the Nigerian Telecommunication Limited. That system died in 2001 when the administration of President Olusegun Obasanjo liberalised the sector and introduced the mobile phone system.

Lack of such knowledge about Africa and the continent’s economies was in part responsible for the delay of foreign investors’ entry to take advantage of the glaring opportunities.


Vincent Nwanma

Nwanma, a Knight-Bagehot Fellow and World Bank Scholar, is Deputy News Editor at BusinessDay 


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