World Growth Now Depends On Africa

While the Eurozone lurches from crisis to crisis, Africa has been registering record growth levels and has now become the prime focus of investors looking for areas of solid growth to invest in. Africa, until recently on the fringes of world economic activity, has suddenly become the centre.

The global economy is suffering from a collective crisis of confidence. Worries over the sovereign debt crisis in the Eurozone and greater uncertainty over the economic health of the US, combined with high energy prices and policy indecision in the major G7 economies have led to fears of a ‘double-dip’ recession. The IMF in its latest World Economic Outlook (October 2011) warned: “The global economy is in a dangerous new phase. Global activity has weakened and become more uneven, confidence has fallen sharply recently and downside risks are growing.”

Encouragingly, sub-Saharan Africa (SSA) has rebounded fastest than from any previous external shocks to become the world’s second-fastest growing region (after Developing Asia). The International Monetary Fund forecasts real GDP growth of 5.2% in 2011, rising to almost 6% in 2012 – just shy of the pre-crisis average growth level.

“Africa has taught the world a lesson in macroeconomic reform and stability,” said Obiageli Ezekwesili, World Bank Vice-President for the Africa Region. She urged strategic investors seeking the right market amid the financial storm in advanced countries to “rediscover Africa”, where several decades of robust growth appear a likely scenario for this resource-rich region.

The resilience of the majority of the African countries to the 2009 global downturn reflected their structural reform efforts and improving macro-fundamentals. Throughout the continent, fiscal soundness and monetary discipline are increasing. Debt as a share of exports has fallen dramatically, to levels comparable to those of other developing regions, and sovereign credit ratings in most African countries enjoy a stable to positive outlook. Analysts, investors and the media are increasingly able to single out countries in SSA with good track records and prospects that inspire investor confidence.

Growing maturity

Africa’s sustained growth has been supported by rising external inflows (capital and investment, particularly in recent years from Asian sources), strong commodity prices, political stability, an improving business environment and higher investment in infrastructure and education. There is a shared consensus that wealth creation will come only from the private sector and increased integration with the global economy.

Renaissance Capital, the Russian-owned investment bank, argues, “Africa can therefore no longer be written off as a backwater in the global economy. It predicts Africa’s GDP could reach $3.3 trillion by 2016, if the region as a whole grows by 10%/year. Twenty-six of the 44 SSA economies are expected to record 6%+ growth in 2012, , compared with feeble growth prospects in the Euro Area.

Asset managers are looking for countries that inspire investor confidence at a time when Western markets are gripped in a downward spiral. Obiageli Ezekwesili said private capital is flowing to Africa, “because the continent has become a friendlier and more profitable market, about which investors and development partners are all bullish.”

In fact, returns in Africa are among some of the best in the world, as confirmed by Professor Paul Collier of Oxford University. His painstaking research found return on capital for over 950 African firms to be on average 11% higher than in Latin America and Asia, and 70% more profitable than similar Chinese firms.

Global executives cannot afford to ignore this fact. Africa continues to offer numerous opportunities to investors in the post-crisis world. While minerals, particularly oil/gas, will most likely attract the bulk of foreign direct investment in the medium term, other sectors with growth potential include renewable energy, financial services, ITC, pharmaceuticals and agro-production.

New linkages
While the commodity boom played a role, growth in many SSA economies is being driven largely by buoyant domestic demand coupled with export diversification into higher–value added production and into rapidly expanding emerging markets.

Over the past decade, Africa has succeeded in diversifying its main export markets and sources of private capital flows. The region’s new trading partners (notably Brazil, Russia, India and China – BRIC) are continuing to show robust demand for Africa’s primary commodities and greater appetite to invest across the African continent. The emerging and developing economies should have record growth in the 6– 6.5% range in 2012, according to the IMF.

Between 1990 and 2010, the share of Africa’s exports to advanced economies dropped from 78% to 52%, whilst the share of imports from those countries also fell from 73% to 43%. By 2010, the share of trade with the dynamic emerging markets (notably Brazil, India and China) reached approximately 3%, 6%, and 17% respectively, rising from negligible shares in the 1990s.

China overtook the US as Africa’s biggest partner, with two-way trade worth some $120bn in 2010, up steeply from $5.6bn in 1999. This diversification of global trade provides significant benefits, for example, access to cheaper/more appropriate technologies, lower cost of inputs and consumption goods, as well as boosting growth prospects by reducing volatility in exports and output.

A report issued by the Africa Progress Panel referred to Africa’s emergence as a “new economic frontier”, and noted that economic engagement with China, the Far and Middle East, South Asia and Latin America was “having a substantial development impact on Africa”.

Although a large share of foreign direct investment (FDI) goes to extractive industries, emerging partners are actively investing in basic infrastructure, agriculture, tourism, manufacturing and financial services – thus building up local capacity. Chinese and Indian FDI stocks in Africa are estimated at $60-$70bn and $30-$35bn respectively.

The euro contagions

Growth, however, could be hit by a recession in Europe, although to a varying extent across the region. A renewed global crisis could undermine prospects for exports, remittances, official aid and FDI. Moreover, foreign borrowing would probably become more expensive. The IMF advises: “Policies need to tread a fine line between addressing the challenges posed by strong growth and preparing to ward off the potentially adverse effects of another global downturn. At the same time, sub-Saharan Africa needs to continue to invest in growth and employment, which are critical for sustained poverty reduction.”

For oil- and mineral-rich countries, high commodity prices are supporting growth, the terms of trade and forex reserves. Oil exporters, led by Angola and Nigeria, are expected to grow by 7% in 2012 – above the regional average.

The outlook is less bullish for some middle-income countries, including South Africa, which is more exposed to the recent global financial turmoil. The middle-income countries are expected to grow (at best) by 4% in 2012. Sustained global financial volatility or increases in risk aversion would also impact a few frontier markets – Nigeria, Ghana, Kenya, Botswana and Mauritius.

Despite diversification of trading partners over the decade, Europe still accounts for almost 40% of Africa’s non-oil exports. Consequently, any worsening of the Eurozone crisis would hurt manufacturers and the services industry (notably tourism). Simulations suggest that for every additional 1% of fiscal consolidation in the Eurozone and a 2.5% reduction in investment due to risk aversion, global GDP would fall by 0.6% and SSA’s GDP would drop by 0.1%.

Fortunately, however, for most African countries, the share of their exports to the so-called periphery EU members (Greece, Ireland, Portugal, Spain and Italy) is less than 10%, thus minimising their current exposure.

Despite the rapid gains of the past decade, poverty remains pervasive in Africa. In far too many places, higher growth has not yet translated into increased job creation, social protection or a higher quality of life. Achieving more ‘inclusive’ growth, tackling skills shortages, infrastructure bottlenecks and reducing state bureaucracy are the pre-eminent challenges.

Fifteen SSA countries are landlocked, and African transport costs are up to four times higher than those in the developed world. The size of the infrastructure gap that must be closed if Africa is to realise the Millennium Development Goals (MDGs) is estimated at more than $180bn. Infrastructure spending currently amounts to $45bn per annum – equivalent to over 5% of SSA total GDP.

In the next decade, three major blocs are likely to dominate the world: the Atlantic (comprising the US and Europe); Asia-Pacific; and the South (comprising Africa and Latin America). Galloping debts will continue to weigh on the Atlantic, and Asia’s stellar growth will eventually peak, before declining – thus tilting global economic power towards the southern hemisphere.

Lord Nicholas Stern, chair of the Grantham Research Institute on Climate Change and the Environment, believes: “The futures of the rich world and Africa are ever more closely intertwined.”
Africa, until recently on the fringes of world economic activity, has suddenly become the centre.