Companies in frontier markets are showing their resilience

by Jake Cusack, Marília dos Reis Martins and Edmund Le Brun

N o economy has been left unharmed by the coronavirus crisis, but the challenges are particularly stark in frontier markets, where the social and economic gains achieved in the past few years are at risk of being wiped out by record-high capital outflows¹, a collapse in global trade² and dwindling remittances³. With many frontier market economies lacking the fiscal resources to offset these shocks, governments are poorly placed to commit future tax revenues to relief measures in urgent demand today.

Despite these mounting adversities, we are seeing many companies in frontier markets demonstrate strong resilience and adaptability. Born in uncertain operating environments in normal times, these businesses have built strong and flexible backbones. For them, the pandemic is an additional speed bump on an already bumpy road.

“To be honest, coronavirus is the lowest of my worries,” says Yadgar Merani, founder of Lezzoo, an Iraqi start-up that pioneered online 3rd party delivery services in Iraqi-Kurdistan. Covid-19 landed in Iraq amid political turmoil following the Prime Minister’s abrupt resignation and a faltering economy facing record-low oil prices.

Despite this backdrop, Lezzoo is currently closing a US$1M seed round. The company has learned to innovate with lean resources from the beginning — even developing its own proprietary mapping and routing system. Their familiarity with challenging situations meant that when coronavirus hit and the company saw revenues from restaurant deliveries wiped out overnight as the government closed down commercial kitchens, the company did not panic; they got to work. Lezzoo quickly added new features to their app, including the delivery of essential goods such as water and gas, and struck a partnership to deliver groceries from the French supermarket chain Carrefour. As a result, sales of groceries grew by five times from pre-lockdown levels, and with restaurant kitchens now open again, average restaurant order sizes have increased 25% compared to January figures.

Lezzoo, a tech-enabled delivery company in Iraq, responded quickly to the challenges brought by Covid-19, providing PPE equipment to its staff and adding essential goods to their app. © Grei Agency

Adapting at Speed

In many ways, Lezzoo shares the traits found in other successful start-ups in frontier markets. In contrast to the Silicon Valley taste for break-neck growth, success in these markets often means prioritizing sustainability and business model flexibility.

In Kenya, the coding accelerator Moringa School offers a prime example of this. Within a week of Kenya’s government closing all schools, Moringa had managed to move all staff and students online, retaining 88% of the student body. Their three-year plan has become their three-month plan, as they have moved from a tech-enabled offline program to tech-centered online learning.

In Kyrgyzstan, as coronavirus began wreaking havoc across Europe, the organic dried fruit and nut producer SunPlanet received its two largest-ever orders from supermarket chains in Europe as consumers rushed to buy non-perishable foods. With Kyrgyzstan itself under lockdown, SunPlanet had to rapidly adapt its supply chain to meet the spike in demand: within days, the firm started to directly collect nuts and fruits from farmers across different villages. Now, for the first time, SunPlanet’s walnuts and prunes are being sold across 3,000 supermarkets in Germany.

Notably, frontier market governments have also adapted quickly, and, so far, the effects of coronavirus seem less in some countries than elsewhere. Ghana, for example, achieved 100,000 tests more quickly than similar-sized developed countries, in part by using Zipline’s contactless drone-delivery services to transport test samples. In Nigeria, the Lagos State government has seized the opportunity that the crisis presented to forge closer partnerships with solar home system companies, many of whom are providing “working from home” bundles for those who need a reliable source of electricity to power computers and the internet during working hours. As Lumos Nigeria CEO, Peju Adebajo, says, “People lack the constant and reliable power required to work from home, so there’s an opportunity for solar home companies to fill that gap as an essential service to companies.”

Doing well by doing good

As in more developed markets, businesses have been playing a crucial role in both accelerating transport and stepping up production of healthcare-related goods. Fulfillment Bridge, a Tunisian-based logistics provider, has tailored an existing solution to create a dedicated shipping line for PPE products. By limiting certain shipments to PPEs alone and working with local custom clearance partners in North America, UK, EU and Australia, the company managed to fast track the custom clearance process from the norm of a few days to less than 24 hours. In the last two weeks, the company has shipped more than 200,000 face masks from China and onboarded six PPE providers.

CEO and Sales Team of Fulfillment Bridge (photo pre-covid)

Manufacturing companies have similarly shown agility in repurposing production lines to respond to rising demand for critical healthcare supplies. In less than two weeks, Kosovo-based 3D printer manufacturing company Formon developed a low-cost open-source ventilator prototype. The emergency ventilator, named VentCore, costs less than a standard hospital ventilator, can be produced in batches of 500 per day, and will soon be distributed to the Kosovar Ministry of Health. In Moldova, Vasconi, a company producing knitwear, quickly pivoted to produce masks for hospitals and local authorities. In markets where public sector responses are constrained by strained budgets, these spontaneous responses by businesses are a vital part of the effort to stem the impact of Covid-19.

Going digital

Businesses are adapting to longer-term trends as well as meeting short-term demands. One trend prompted by countrywide lockdowns is the accelerated pace of the digitization of services. In African countries, a number of fintech start-ups are adopting measures to ensure a further reduction in the handling of cash, key to the containment of the pandemic. The Nigerian mobile payments company PAGA, for instance, has reduced its fees to encourage cash-free money transfers and is providing business customers with a free customised web page they can circulate to facilitate digital payments. Similarly, in Kenya, Safaricom’s mobile-money service M-Pesa has waived its fees for smaller sized transactions to encourage uptake.

For remittance companies, even though total flows will likely decline in the short term, the longer-term expectation is that the constraints on informal remittance channels such as cross border buses and taxis will lead to an increase in customers looking for other options. Working off this assumption, Mukuru, the leading remittance provider in Southern Africa, has been able to ensure service continuity during the lockdown periods with a smooth shift to call center support provided by workers from home.

Resilience only goes so far

Many companies in frontier markets are demonstrating adaptation and resilience in the face of coronavirus. But help is still needed. Liquidity crunches brought by less predictable revenue streams and more risk-averse investors on the one hand and unaffected costs and repayment obligations on the other are likely to affect an increasing number of businesses, regardless of individual adaptability and innovation. There is, therefore, a vital need for multilateral organisations, development finance institutions and philanthropic organisations to step in and support businesses that have already proven their resilience in vulnerable economies, where local governments simply cannot. Without decisive intervention, years of economic progress risk being wiped out in the world’s most fragile economies.

Jake Cusack, Marília dos Reis Martins, and Edmund Le Brun are colleagues at CrossBoundary, a frontier market investment advisory firm. They are based in London, Nairobi, and Dubai, respectively.

(1) The Institute of International Finance estimates a US$83.3bn capital flight from Emerging Markets securities in March alone.
(2) World trade is expected to fall by between 13% and 32% in 2020.
(3) Global remittances are projected by the World Bank to decline by around 20% in 2020.

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