Somalia
Mogadishu, Somaila-April 29, 3013: Fishermen at the port of Mogadishun in Somalia.

Investing in Somalia might seem like a particularly crazy idea, after all the country is a byword for state failure and chaos. Civil war, piracy and terrorism have bedevilled the country for nearly 30 years and over time it has fragmented into several separate de facto states such as Somaliland and Puntland. Somalia has also recently become a base for the Al-Shaabab terrorist group who have launched attacks across Somalia and Kenya in an attempt to strike fear into the local populace.

Tragically the spectre of drought and famine has also returned to the region, threatening already fragile parts of the country with severe hunger. While presence of an African Union peacekeeping force has helped stabilise the country, but there remains the risk it could slide back into full scale civil war.

Despite these problems there are good reasons to be optimistic, relative normality has returned too much of the country, overseas businesses are increasingly active and Somalia’s extensive diaspora are returning to do business or resettle as an economic recovery gathers pace.

The Somali economy – don’t bother with GDP figures

There are statistics for the Somali economy, but they should be treated with caution, as the ability of the authorities to collect economic information is limited at best, instead it is more instructive to monitor the activities of businesses and watch for signals both positive as indicators of economic health. Inward investment, new housing developments and people voting with their feet to resettle in Somalia are more indicative of progress than GDP growth figures.

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Export wise things are fairly basic and underline Somalia’s dependence on agriculture; Somalia sells cows, goats and camels to the Middle East along with small but significant amounts of the biblical Frankincense and Myrrh, both resins used in perfume. The collapse of the economy in 1990s led to dollarization – the use of the US dollar alongside the Somali Shilling which ensures financial stability in the absence of well functioning conventional banking system.

Istanbul spreads its wings

One country that has seen the potential in Somalia is Turkey. Turkish President Erdogan has been heavily criticised in the West, but in Somalia he remains popular thanks to a highly visible program of aid to the country worth $400 million over a decade, this has included hospital building and a scholarship program for Somali students. A high profile visit by Erdogan along with an increasing number of Turkish firms who are willing to do business in the country has helped cement strong ties between the two nations. Favori – a Turkish firm helped to build Aden Adde international airport in Mogadishu while Albarayak Group will run Mogadishu’s seaport. Trade between the two nations has also soared as Turkish goods find their way into the country.

A Somali oil boom?

Another company that has seen the potential in Somalia is Spectrum, a Norwegian specialist seismic surveying outfit. Spectrum agreed with the Somali government to conduct seismic surveys off the coast of the country in order to assess the potential for hydrocarbons, and there are rumours it could become a oil hotspot. In a few years ago any commercial activity would have been done under the shadow of the feared pirates which lurked off the Somali coast preying on cargo vessels, as portrayed in the Hollywood movie Captain Philips. Thanks to sustained international naval efforts, piracy in the region has largely fallen off the radar as an issue.

Another early mover has been Coca Cola which has opened two production plants in the country, retaining the firm’s reputation of being able to operate just about anywhere on the planet.

The social impact of investment

Investing in a country recovering from conflict will reduce the chances of it returning to war, so any funds placed in the country can have a huge social and political impact. Early investors in a post conflict country will encounter fewer competitors and will gain the so called first mover advantage. A small amount of finance can go a long way in Somalia, thanks to relatively low costs and the country’s relative poverty.

The extensive Somalia diaspora have long provided direct financial transfers home and are now becoming more involved in setting up businesses in the country, it is estimated that remittances of around $1.4 billion are funnelled into Somalia each year. A Somali stock exchange has been established with the hope of reigniting capital markets, although its activity appears to be rather limited at the present.

While investing in the Somali stock market might seem madness – other nascent frontier markets have seen significant gains from similar early investments. James Passin of Firebird Management invested in the Mongolian stock market when it was just a room of computers, soon after that the country enjoyed a commodity boom and the shares rocketed in value.

The world’s most unlikely real estate boom?

Mogadishu the Somali capital has enjoyed a property boom in recent years as normality has returned, demand has outstripped supply as people return looking for bargains and prices for both sales and rentals have spiralled ever higher. New houses and developments have sprung up to help meet demand and you can still buy a modern six bed bedroom villa for around US$115,000 on the outskirts of the city or close to the beach.

Potential buyers will be naturally concerned with property rights (or lack of them), the country lacks an up to date property registry thanks to the war and years of chaos. Instead the property vendor’s identity is verified by local elders and then authorised by public notaries. Not a perfect system by any means, a real estate association has sprung up to help push for land registry and work with the government to ensure there is adequate mapping and provision of amenities. Naturally buyers should proceed with extreme caution when considering Somalia property and ensure that they conduct plenty of research and talk to as many people as possible before investing.

Somalia is not for the fainthearted investor, but if the country avoids a return to civil war any investments made in the country could reflect the rebound in its fortunes and those who got in early will see the greatest gains.

 

Merlin Linehan has worked in development finance within Eastern Europe and Asia, and spends much of his time investigating the risks and opportunities that are created from the ongoing expansion of Chinese businesses that invest overseas in emerging markets.

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