REGIONAL REPORT: AFRICA
Africa is already one of the world’s economic hot zones—but things are about to get a lot more interesting.
Sub-Saharan Africa’s economic lions are pulling the continent into an unprecedented era of wealth creation and prosperity that is offering new opportunities for foreign capital. With year-on-year growth of between 7% and 9%, Ghana, Angola, Mozambique, Zambia and Ethiopia have already played a pivotal role in helping Africa’s economy triple in size since 2000.
But the same again is expected to happen in the next 15 years, as half the continent’s population migrates to urban centers and its middle class overtakes that of India. “We see sub-Saharan Africa following the same growth trajectory of India with a 20-year lag, or developing Asia with a 30-year lag,” says Charles Robertson, emerging markets specialist with Renaissance Capital, a leading Russian investment bank. “Like the IMF, we expect five- to six-percent growth this decade, accelerating to seven- to ten-percent in subsequent decades.”
These rates of growth are expected to outstrip not only Europe—which is stuck in a 3% rut—but also such Asian tigers as Malaysia and Vietnam. By 2050, Africa’s GDP could equal that of the US and the EU combined, according to Renaissance Capital, with some of its economic superstars enjoying per capita incomes similar to Germany today.
These predictions may seem excessively optimistic, but they are based on two converging and complementary forces hitting Africa like a herd of stampeding elephants: accelerated exploitation of the continent’s vast natural resources, and global demographic trends that hugely favor it over the rest of the world.
Mavundla, Standard Bank: Demand for natural energy resources, such as biofuels, hydroelectric power, solar and wind energy, have become focal areas of investment in Africa.
Africa’s oil production alone has surpassed 10 million barrels per day, equal to Russia or Saudi Arabia. Some six million barrels are pumped out in sub-Saharan Africa, generating annual revenue of $235 billion, or about 20% of GDP.
Africa’s population is young and getting younger, while Europe and Asia are moving in the opposite direction. This demographic shift is being amplified by improvements in education and healthcare, particularly among Africa’s Big Five economic stars: Ghana, Angola, Mozambique, Zambia and Ethiopia. The result is a more productive workforce and, for the first time in sub-Saharan Africa’s history, the emergence of a sustainable middle class.
RISE OF THE MIDDLE CLASS
“The production of oil in Angola and Ghana, coal from Mozambique, copper from Zambia, and agricultural output from Ethiopia contributed to stellar growth in the last decade,” says Khethiwe Mavundla, fixed-income and currency strategist for sub-Saharan Africa at Standard Bank Research in Johannesburg, South Africa. “The rising tide of growth has also seen greater access to jobs and rising per capita incomes. This has contributed to an increase in private consumption, which has underpinned growth.”
Clearly commodity price rises—largely driven by China’s expansion from a $1 trillion economy in 2000 to $8 trillion by 2012—helped underpin Africa’s improving fortunes. “Oil exports direct to China helps explain Angola’s very strong performance,” says Renaissance Capital’s Robertson. “But Africa’s second-largest country by population, Ethiopia, has boomed, even though it exports few commodities and no energy at all.”
That’s because Ethiopia is riding a decade-long wave of investment-driven growth financed mainly by a government that recognizes that infrastructure development can transform an economy.
Office towers, hotels and apartment buildings are springing up all over Addis Ababa, with domestic contractors working alongside foreign-owned construction companies from China and Turkey in what is perhaps the continent’s biggest construction boom.
In addition to creating jobs for Ethiopia’s 91 million people, the country’s government hopes this infrastructure renewal will attract further investment and help industrialize the economy so Ethiopia can become a middle-income nation by 2025.
“The quality of leadership and governance issues remain a cause for concern in many countries.”
~ Samir Gadio, Standard Bank
Robertson, Renaissance Capital: We see sub-Saharan Africa following the same growth trajectory of India with a 20-year lag, or developing Asia with a 30-year lag.
“Ethiopia is beginning to attract textiles manufacture,” notes Robertson. “Also telecoms have done extremely well.” The latter is true not only for Ethiopia but across Africa, where wireless network operators have done far better than was expected 10 or 15 years ago, when it was believed the continent was too poor to afford mobile telephony.
Further south, Mozambique has implemented a number of pro-business reforms that have slashed the time it takes to start a new business from over 150 days in 2004 to less than 20 days today.
One reason Mozambique and other African lions have cut back on bureaucratic red tape is that they want to encourage foreign direct investment (FDI) and trade in less-developed sectors such as consumer goods, agriculture and renewable energy.
“Demand for natural energy resources such as biofuels, hydroelectric power, solar and wind energy have increased significantly over the years and have become focal areas of investment in Africa,” says Standard Bank’s Mavundla. For example, Ethiopia, Angola and Ghana boast a variety of agricultural crops, such as sugar cane, palm oil and soybeans, that can be used in the production of such biofuels as ethanol and biodiesel. Similarly, Zambia—home of the majestic Victoria Falls—is focused on hydropower projects with the aim of bridging the gap between the supply and demand for electricity.
However, sub-Saharan Africa’s economic future is not all blue skies and smooth sailing. There are downside risks associated with the continent’s accelerated development and the opportunities this presents for outsiders.
“Elevated growth has in a number of cases led to serious macroeconomic imbalances as aggregate demand puts pressure on imports and exacerbates current-account deficits,” says Samir Gadio, emerging markets strategist at Standard Bank in London. “On top of this, the quality of leadership and governance issues remain a cause for concern in many countries.”
Still, for many investors and market watchers the upside potential of sub-Saharan Africa overshadows the dangers. “What a continental-sized economy like China shows us is that when a country or region arrives on the scene, its impact on the world can rapidly move from nearly zero to profound in a little more than a decade,” says emerging markets specialist Robertson.
The smart money is betting that Africa can at least in part track the meteoric rise of China over the past 15 years.
Morocco Plays Its Hand
Morocco has one big advantage over its neighbors in North Africa. The Arab Spring that in recent years toppled governments in Tunisia, Libya and Egypt did not invade its borders or turn the country’s economy on its head.
“Morocco has established itself as the main recipient of foreign direct investment in northern Africa,” says Elisa Parisi-Capone, a sovereign risk analyst at Moody’s Investors Service in New York.
Thanks in part to recent changes to the country’s constitution that bolstered political stability, Morocco was the recipient of $2.8 billion and $3.5 billion of FDI in 2012 and 2013, respectively. At the same time, its tourism sector has been booming with a record number of arrivals.
GDP growth was a respectable 4.4% last year, inflation is under control, and the financial sector remains well capitalized.
However, a few worrisome signs are gathering on the country’s economic horizon. “Morocco’s economic performance remains exposed to volatility in agriculture, which is being held back by weak investment activity and subdued demand from Morocco’s main trading partners in the eurozone,” says Parisi-Capone.
Energy subsidies and increased social spending in response to the Arab Spring, moreover, caused Morocco’s deficit to balloon to 7.3% of GDP in 2012. It has since cut back on subsidies. Its projected deficit target is 4.9% for 2014, though Moody’s expects 5.1%.
“The removal of these subsidies, although necessary, could leave the government to face unrest in its domestic market,” says Khethiwe Mavundla, Africa strategist at Standard Bank Research in Johannesburg.