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Africa: “Forgotten continent” is the world’s new growth engine (Executive Summary)

EXECUTIVE SUMMARY

  • Hong Kong companies considering export market diversification can take in the economically attractive landscape of what was once dubbed the “forgotten continent”. Africa is now the world’s new growth engine, with vast market potential. Compared to Egypt, which is the gateway to Northern Africa that has been economically stymied by the Arab Spring, Sub-Saharan African (SSA) gateways like Kenya and Nigeria are good launch pads to Eastern and Western Africa.
  • Nigeria is the second largest economy in SSA, trailing South Africa, the gateway to the Southern African region. It has also surpassed Egypt to become the largest Next-11 country in Africa. Nigeria’s immense resources endowment, huge young workforce, strategic coastal location and progressive economic liberalisation, combine to raise its economic prospects, making it a “BRIC-like” candidate in Africa with the potential to rival some of the G7 countries in upcoming decades.
  • Despite being Africa’s largest oil producer, Nigeria no longer relies on the oil sector as its prime economic driver after years of diversification. The boom of the non-oil sector has spawned an expanding middle-income class, thereby touching off new waves of consumerism and generating business opportunities.
  • Nigeria is the third largest African market for Hong Kong’s exports, and it holds good promise for Hong Kong’s exports by potentially offering a consumer market comparable to South Africa. To successfully tap into this booming market, Hong Kong companies need to have a better handle on Nigeria’s consumer characteristics.
  • Despite a slower global economy amid the Eurozone problems, Ghana surprised the world by growing 14.4% in 2011, adding oil production to its economic portfolio alongside robust gold revenues and a record cocoa harvest. Increasing economic ties with China, plus sturdy growth, are seen to create opportunities for Hong Kong companies looking for market diversification.
  • With Ghana’s economy gaining momentum, demand for imported capital goods and consumer goods is set to soar. In light of the increasing economic ties between Ghana and China, Hong Kong companies can grab a slice of the growing trade flow by offering products which can be differentiated from low-price items from the mainland.
  • Riding on its fairly mature sea and air connections, Kenya is not only the largest economy in East Africa, but a true regional launch pad. Kenya’s accommodating trade regime, in tandem with its steady growth and English-speaking environment, will become increasingly a darling to Hong Kong traders in search of lucrative emerging markets.
  • While Kenya has a relatively modern retail sector, Hong Kong companies should take note that they cannot be everything to all Kenyans. Kenya holds the greatest promise for suppliers of electronics and electrical products, as well as textiles and garments. To stand out from the crowd of price-competitive Chinese mainland and Indian competitors, Hong Kong companies will have to provide well differentiated products and solutions with reliable quality and after-sales services. To turn potential into reality, a closer look at Kenya’s distribution channels and import regulations will increase the odds of winning.
  • For Hong Kong companies contemplating dipping their toes into the SSA market via such regional gateways as Nigeria and Kenya, they should take heed of potential challenges in relation to limited purchasing power, rudimentary retail landscape and a sizeable informal market. Other challenges associated with trading or investing in Africa, as in other emerging markets, can be better tackled by working closely with a local partner, be it an agent, importer, buyer, retailer or any investment partner, after undertaking prior due diligence checks.

Contrasting with what was once dubbed the “forgotten continent”, Africa is now the world’s new growth engine with vast market potential. The IMF shows that the African economy expanded by 6% in 2011, with five of the world’s 20 fastest-growing economies. Indeed, six of the 10 fastest-growing economies in the world from 2001 to 2010 hailed from Africa: Angola, Nigeria, Ethiopia, Chad, Mozambique and Rwanda, with annual average GDP growth of around 8%.

Hong Kong companies wishing to diversify from the somewhat less attractive developed world may consider Africa in light of the economically attractive landscape there. Identifying the right markets in Africa, however, may not be an easy and straightforward task. A convenient step to embark on such an identification exercise is to eliminate those with populations of below 10 million, and focus on their income levels, growth momentum, foreign investment inflows and absorption of Hong Kong exports. Add to these the market, business and political risks. In view of the Arab Spring which has swept the Northern African region since early 2011, the economically stymied Egypt is quickly excluded from the list.

In comparison, the Sub-Saharan Africa (SSA) appears as a rather different proposition. Among the 44 SSA countries, a neat grouping with accelerating economic growth and rising per capita incomes would arise, consisting of South Africa, Nigeria, Ghana and Kenya, along with a sprinkling of other countries (see the graph below). As a more developed SSA country and a member of the BRICS grouping since 2010, South Africa rises above many African countries because of its more mature and sophisticated economic structure and many Hong Kong companies have already established business connections with their counterparts in South Africa. While an average Hong Kong company may not be familiar with Nigeria, Ghana or Kenya, one only needs to travel briefly to Lagos in Nigeria, Accra in Ghana and Nairobi in Kenya, as we did, to get a sense of the rising wealth now becoming a familiar hallmark of these East and West African cities.

 

Chart: Mapping the market potential of selected SSA countries

Nigeria, Ghana and Kenya are evidently the strategic engines for a developmental sweep that is changing the whole investment scenario in Central, Eastern and Western Africa. It would not be surprising that these “African lions” are helping reinvent Africa as a new growth engine for the global economy over coming decades, as those “Asian tigers” of the 1990s so emphatically demonstrated in East Asia.

Enhanced African prospects

African countries are far from being homogenous, with a deep diversity of economic development, population, geography and resources, not to mention variations in political regime, ethnicity and religion. It is true that the poverty, famine and warfare that plagued some African countries a decade or two ago, are still in evidence across some parts of Africa. However, positive changes have been in evidence on the whole, with political stability notably a contributing factor to sustained economic development, as seen in East Africa’s Rwanda that’s expected to grow 8% this year. That is in deep contrast to severe ethnic tensions and genocide in 1994.

However, a combination of developments has steered the course of many African countries, giving rise to greater economic achievements. These factors include regional integration, rising intra-Africa trade, globalisation, free trade with developed countries and closer BRIC ties. Add to these a booming commodities trade, rising inward investment, urbanisation, demographic dividends and an expanding middle class. There have also been technological advances and productivity gains.

Although 60% of Africans still live below the poverty line, spending less than US$2 a day, the African Development Bank reported that one-tenth (around 100 million) spent more than US$10 a day in 2010. It is estimated that around 60 million Africans have an income of US$3,000 a year, with the number hitting 100 million in 2015. Demand for goods from Asia continues to be keen, including machinery, raw materials, parts and components and consumer goods. As for Hong Kong’s trade with Africa, it expanded 8% to reach US$2.5 billion in 2011, with South Africa, Egypt and Nigeria being the top three markets.

The “African diamond”

Over the past decade, Egypt, South Africa, Kenya and Nigeria, which comprise the “African diamond”, have all risen to be respective gateways to Africa’s northern, southern, eastern and western regions. In particular, Nigeria is a case in point. Thanks to the oil boom and ongoing diversification into both manufacturing and services, it is fast becoming a market and regional hub for consumer products. Ghana is another model economy, one of the world’s fastest-growing countries in 2011, after opening up its offshore Jubilee oil field.

As Africa’s most populated country, Nigeria is the third largest African market for Hong Kong’s exports. It bought 43% more from Hong Kong in 2011 compared with 2010, and holds good promise for Hong Kong’s exports by potentially offering a consumer market comparable to South Africa. To successfully tap into this booming market, Hong Kong companies need to have a better handle on Nigeria’s consumer characteristics, distribution channels and import regulations. Meanwhile, 92% of the goods sourced from Hong Kong were of Chinese mainland origin, consisting mainly of telecom, electrical and garment products as well as watches and clocks. Hong Kong companies targeting Nigeria, or similarly in Ghana and Kenya, will have to supply well differentiated products and solutions with reliable quality and after-sales services.

While the ancient “Silk Road on the Sea” would take Chinese goods as far as the east coast of Africa, the emergence of contemporary gateways to Africa like Kenya and Nigeria gives more options to Hong Kong companies which aspire to set their sights on the unfolding business potential in Central, Eastern and Western Africa.

Content provided by Picture: HKTDC Research
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