May 14, 2013 Sujeev Shakya

Fragile to Frontier: Nepal’s journey from being a fragile country to a frontier market has begun

Today I am here in Washington, DC getting ready to speak at the session on Beyond Frontier Markets at the Global Private Equity Conference, the biggest event in the world for private equity players in emerging markets. And as I prepare to discuss how Nepal, along with countries like Cambodia, Sierra Leone, Haiti, Sri Lanka and other nations, will be places for investors to invest in, I look forward to answering questions as to why this is not a practical joke, thoughts keep rushing.

Investors in the developed world are trying to figure out the next set of countries to look at for investment. Developed markets are not growing and East Europe has its own problems to resolve. The BRICS countries—Brazil, Russia, India, China and South Africa— are not as easy as people like to think, especially if only have a few million dollars to invest. The Middle East with its political systems and fundamental human rights issues makes people skeptical. Africa is the new flavor, but which part of Africa? Now if you take the remaining 200 odd countries and start eliminating them, Nepal does stand a chance.

Globally, it has been observed that countries that are fragile emerge as new frontiers of investment, whether after the World Wars or other regional conflict zones. There is a popular saying amongst the investment community— you should invest before the blood in the street dries up. Once the blood dries up, there will be many players that come in. Like traders many centuries back to investors in the last century, those who have been able to identify countries, evaluate the risk and invest are the ones who have benefited the most. When the initial batch of investors went to Vietnam or Uganda, fund managers were made fun of, but they made some good money. Now we have investor groups looking at countries as diverse as Liberia to Afghanistan to Iraq. Ruchir Sharma, the author of bestseller Breakout Nations, describes and argues about how new investment destinations will emerge. He argues the case for the Czech Republic, Poland, Sri Lanka, the Philippines, Nigeria and other countries that investors have written off.

For Nepal, the biggest issue that has remained is that ‘poverty brokers’ continue to portray Nepal as a poor country so that there is good ‘aid business’. In the absence of good homegrown analysis of Nepali business and economy, the impression about Nepal has been based on the hundreds of thousands of ‘cut and paste’ reports that are written by ‘parachute consultants’ who continue to paint a bleak picture of Nepal. Interpretations of the numbers are more important than the numbers itself. An eight percent GDP growth for Nepal in the 1990s is equal to three percent GDP growth today in real terms. Remittances and proceeds from sale of assets that represent bulk of Nepali economic activities do not get captured in the GDP. The garment market within Nepal is bigger than its exports. The domestic tourism market is bigger than earnings from limited foreign tourists. Today, mid to high range restaurants in Kathmandu make more money from Nepali clientele than expatriates and tourists combined. Five star hotels survive on local banquets, hosting weddings and social functions rather than international conferences. In our quest to get the next mission to decide on the next pro-poor project, no one has had time to see the positive trends.

Economists have always been good at arguing what has worked and what has not by writing papers probably a couple of years after events have taken place and quoting data that may be decades old. If economic analysts were the ones who understood the markets, they would be a much richer lot. From time immemorial, it has been a bunch of creative traders and maverick investors who have continued to find new destinations for investment. In Nepal, a bank like Standard Chartered or a multinational like Unilever or Surya Nepal, that brought in a couple of million dollars 25 years back, have their companies valued in the hundreds of millions now. In no country could you have taken away multi-folds of your investments. Professionalism and separation of the investor and the management have kept them going.

Nepal has the right ingredients to move from Fragile to Frontier (F2P) markets. First, it has a big population, the 40th largest in the world—more than one half of Australia—with a bustling national capital of about four million people. With half the population under 25, it will continue to consume more as Nepali consumption patterns are more similar to Southeast Asia than South Asia. Second, communication connectivity, linking farms to markets and positive trends in education and health will create more urban centers in rural areas. If one was to drive through east Nepal, eight-hut settlements in the 1980s have turned into bustling townships with vibrant economic activities. Third, we are seeing more young people return to Nepal from education and exposure abroad getting into entrepreneurship. They will drive the change.

Nepal can become an investment destination for four distinct types of investors. First, high-net individuals, who have a soft corner for Nepal, will move from supporting NGOs to encouraging social entrepreneurship. Samriddha Pahad is such an initiative. Second, foundations in Europe who have small funds that are just making a couple of percent a year are in search of newer destinations to increase returns on endowments. Many investors I personally met in the last year belong to this category. Third, there are a new breed of investor-advisors who are looking at would-be frontier markets. They are the ones who are structuring funds in Afghanistan, Nigeria and Iraq. Nepal, they tell us, has a better zip code than most other fragile nations. Finally, the new rich that are emerging in the hinterlands of India who cannot go to Delhi, Mumbai or Kolkata with just Indian five or 10 crores ($1-2 million) will find Nepal an attractive destination. These investments are already happening informally. We only have to see how they can come in through official routes.

Nepal’s journey from a fragile country to a frontier market has begun and it will be interesting to write an analysis of how that happened ten years from now.

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