Remarks by Citi EMEA CEO Bill Mills at the African Investment Summit

Good morning. I'd like to acknowledge Henry Bellingham, Parliamentary Under Secretary of State and Minister for Africa, Foreign and Commonwealth Office, Xavier Rolet, CEO of the London Stock Exchange and Vice Chairman of the World Federation of Exchanges, and all who are in attendance at this African Investment Summit today.

My name is Bill Mills, and I am the Regional CEO for Europe, Middle East and Africa for Citi. It is an honor for me to have the opportunity to address you at this summit. Our context for today is set against the fact that over the past 10 years, six of the world's 10-fastest growing economies were in sub-Saharan Africa. With the continent forecast to grow by over 5 percent, driven by strong global demand for commodity exports and an emerging African middle class, an increasing number of international investors have turned their attention to Africa.

Citi is pleased to sponsor the African Investment Summit and help bring together African business leaders, institutional investors, market participants, central banks and regulators – to discuss the role that international and African capital markets can play in financing Africa's growth.

The challenges facing Africa's capital markets are significant. However, Africa's long-term economic success is intrinsically linked to the successful development of its capital markets, and strengthening them is essential if Africa is to fulfill its vast potential.

Let's start with a macroeconomic summary. Africa's economic pulse has quickened, infusing the continent with a new commercial vibrancy. Real GDP rose 4.9 percent per year from 2000 through 2008, more than twice its pace in the 1980s and ‘90s. The region is forecast to grow at 6.5 percent between 2010 and 2020, and have the highest growth rates in the world for the period 2020 onwards. Telecom, banking and retail are flourishing. Construction is booming, and foreign investment is surging. While many of the African economies face serious challenges, Africa's collective GDP, at $1.6 trillion in 2010, is now roughly equal to Brazil's or Russia's. The continent currently constitutes roughly 4 percent of world GDP, but this is forecast to rise to 7 percent in 2030 and 12 percent by 2050, according to Citi Research.

GDP growth has been fuelled in large part due to:

• Improved business environment;
• Infrastructure investment; and
• Huge resource wealth—90 percent of the world's Phosphate reserves are in Africa, 88 percent of the Platinum reserves, 40 percent of the Gold reserves, and 10 percent of the Oil reserves.
• Foreign direct investment in Africa has increased from $9 billion in 2000 to $62 billion in 2008, almost as large as the flow into China, when measured relative to GDP.

While historically Africa's growth was linked to its commodity resources, this only explains a part of Africa's growth story. Natural resources directly accounted for just 24 percent of Africa's GDP growth from 2000 through 2008. The rest has come from other sectors including wholesale and retail, trade, transportation, telecommunications and manufacturing.

Africa's consumer facing sectors present the largest opportunity. The continent's households spent a combined $860 billion in 2008, more than those in Russia or India. This is projected to rise to $1.4 trillion over the next decade. Consumption will grow even faster in other categories as household incomes rise with the most rapid increases occurring in retail banking, telecom and housing. The growing proportion of working-age population will create a demographic dividend in the years ahead.

The continent is, however, dominated by a few countries – South Africa, Egypt, Nigeria, Algeria, Morocco and Angola, all of which made up 69 percent of Africa's total 2010 GDP. South Africa and Egypt are the largest economies at 22 percent and 14 percent respectively of Africa's GDP.

Nigeria is the continent's most populous state at roughly 158 million people and is forecast to be the sixth-largest economy in the world by 2050 (by GDP). According to work done by McKinsey, South Africa represents the largest banking opportunity, followed by Nigeria, Morocco and Algeria.

Given the prominence that the consumer market is set to play in the ongoing development of the continent, questions have been raised as to why the focus on capital markets. A stronger capital market will further stimulate economic growth in the region and enhance the growth trajectory.

Efficient capital markets are important as they:

• Accelerate economic growth by providing lower cost and varied capital raising opportunities via equity, debt and derivative products, whilst stimulating liquidity.
• Encourage savings by providing investors with additional financial instruments that may better meet their risk preferences and liquidity needs, potentially leading to a higher savings rate.
• Open up markets to international investors which should reduce capital costs.
• Help companies become less dependent on bank financing, reducing the risk of a credit crunch as well as freeing up banks lending capacity.
• Help promote illiquid long-term projects by providing liquidity to investors.

By developing its capital markets, Africa will be able to create jobs, support a culture of entrepreneurship and hopefully, help alleviate poverty.

Currently capital markets are skewed towards South Africa, Egypt, Morocco and Nigeria. South Africa represents almost 80 percent of the region's stock-exchange market cap and more than 50 percent of the government and corporate issued bonds.

Excluding South Africa, African Equity Market capitalizations are behind the rest of the world when we compare the ratio of market capitalization to the GDP of each country. This illustrates the fact that there is significant potential for market expansion opportunities in Africa.

To help support this, investor demand has been systematically increasing. The events in North Africa and recent volatility regarding European Sovereign crises have significantly tested investors. However, there is still growing interest in Africa.

New funds created in 2011 include:

• Temasek and Oppenheimer family establish $300 million African private equity fund.
• Helios Investment Partners raises $900 million for new fund targeting Africa.
• Carlyle Group is launching an Africa-focused buy-out and growth fund, understood to be sized at $750 million.
• Vital Capital Investments has attracted $250 million at the first closing of its Africa-focused agriculture and real estate fund, Vital Capital Fund I.

Despite increasing interest, the volume of private equity capital is still relatively low, which has resulted in African M&A activity being largely driven by corporate deals. On the Equity front, there has been a good issuance recently with a growing pipeline for the balance of 2011 and 2012.

So, what can be done to strengthen the capital markets in Africa? In my opinion there are a number of measures that could be implemented to strengthen capital markets in Africa.

Some include:

• Develop well-functioning capital markets regulatory, compliance and risk-monitoring systems: Empirical evidence has shown that a well-functioning stock market, along with well-designed institutions and regulatory systems, fosters economic growth. Improvement in regulatory and economic environment in some African countries has led to improvements in the liquidity and capitalization of their stock markets.
• Enforce disclosure rules, accounting standards and enforceability of contracts: To improve transparency and boost investor confidence.
• Increase privatization of state-owned entities: Privatizations could provide promise for private equity as well as helping with increasing the number of listed shares on exchanges should the IPO option be chosen.
• Move to automated systems across all markets: It is important for African stock exchanges to promptly adapt to automation and electronic systems. Automation not only minimizes inefficiencies associated with manual systems it also reduces the costs of transacting, increases trading activity, liquidity in the stock markets and speeds up operations.
• Demutualize the stock exchanges to improve governance from separate ownership: Demutualization has become a global trend. In Africa, demutualization can help deter undue government influence. In certain stock markets where demutualization occurred, there was a noted improvement in liquidity and foreign investment.
• Increased focus on pension fund reforms: Often investor participation is directly or indirectly through pension plans, insurance policies, mutual funds, etc. Reform for these vehicles will assist in increasing institutional demand for investments and improve the savings rates across the region.
• Introduce measures that enable growth from informal sectors into stock and bond markets: Provide incentives and assistance to grow the large number of small, medium and micro enterprises (SMME's) to, at some stage, list on the stock exchanges or be considered for private equity investments.
• Attract capital flows and encourage foreign participation: Africa has been attracting positive attention driven particularly by improved regulatory, good economic fundamentals and empowering private initiative.
• Develop a comprehensive capital market database to foster investment analysis and academic research: Enable the capital markets to adopt best research practices that will lead to increased investor attention to the region.
• Increase education of the public regarding the benefits of investing in capital markets: To increase retail investing on stock markets and also assist in increasing the number of unlisted companies that look to stock and bond markets for growth.

I would like to end by saying the growth of Africa's capital market will not just benefit the continent but also the world. Despite the challenges, we should all be engaged in making this a reality.

Thank you.