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Rising or Falling: Mixed Messages from Africa's Economic Frontline

Some 10 years ago, received wisdom had it that Africa had shrugged off its image as the 'hopeless continent', with investors entranced by the prospects of this economic final frontier. Now, though, many seem to be hedging their bets.

Photo: On the edge: Africa’s precarious economic development could yet see it head into the abyss. (Shutterstock.com)
On the edge: Africa's precarious economic development could yet see it head into the abyss.
Photo: On the edge: Africa’s precarious economic development could yet see it head into the abyss. (Shutterstock.com)
On the edge: Africa's precarious economic development could yet see it head into the abyss.

Less than two decades ago, The Economist magazine wrote Africa off as 'the hopeless continent' – a headline that appeared on the cover of its May 2000 edition, together with the image of a child soldier. At the time, the message was clear – this is a continent that is irretrievably mired in conflict, economic stagnation and abject poverty.

Some 11 years later, the same publication coined the term 'Africa rising', its acknowledgment that a remarkable shift had occurred in the continent's fortunes. Today, though, you might be forgiven for thinking that the Africa rising narrative has run its course. Tough economic conditions – most notably, the global slump in commodity prices, which crippled oil-dependent Nigeria and ore-rich South Africa – together with a host of detrimental political environments, seem to indicate that Africa's trajectory is, once again, distinctly downwards.

The mood has, apparently, undergone a dramatic change since 2010, a year that saw investors scrabbling to stake their claims in Africa. A combination of poor infrastructure and political turmoil, driven by a string of leaders desperate to cling to power, means that many African countries are, once again, struggling with economic woes, high unemployment and rising poverty levels.

In many ways, the state of the continent's two largest economies says it all – Nigeria's GDP growth is stagnant at about 0.1%, while South Africa has officially been in recession since June. On top of that, the economies of many of the continent's other resource-dependent countries also collapsed following the fall in commodity prices, a development largely precipitated by slowing demand from China.

Africa, though, is large and diverse and it would be wrong to consider its 54 constituent nations as part of some homogeneous entity. Despite the sense that Africa is stalling, rather than rising, there remain a number of regional bright spots. Indeed, several African countries have recorded growth rates that are among the highest in the world, making each one of them a tempting prospect for investors.

One such bright spot is East Africa, with the region's overall economy set to grow by 5% over the next two years. Its undoubted hub is Kenya, an economic powerhouse dubbed Africa's Silicon Valley on the strength of its emerging manufacturing, agricultural and technology sectors. Tellingly, the region is also seen as the gateway to Africa, a development that has led China to invest heavily in the local infrastructure.

According to McKinsey & Company, the New York-headquartered management consultancy, even if you take South Africa and Nigeria out of the equation, sub-Saharan Africa still notched up a robust 4.4% of growth between 2010 and 2015. Indeed, a number of countries, such as Kenya, Tanzania, Rwanda and Côte d'Ivoire – in many ways, the unsung hero of West Africa – are enjoying even higher growth rates. As a result, few demurred when the recent World Economic Forum on Africa labelled instances of this phenomenon as "regional clusters of manufacturing excellence".

As part of the International Monetary Fund's (IMF) World Economic Outlook for 2017, the organisation drew up a table of Africa's 10 fastest-growing economies. As with China in the early 2000s, the countries that top this table have all benefitted from a significant increase in the size of their middle-class population, a demographic with considerable disposable income. Looking to the future, McKinsey is now predicting that household spending across Africa will rise by 3.8% a year, a development largely driven by the expanding middle classes.

Photo: The World Economic Forum on Africa: Identifying regional clusters of manufacturing excellence.
The World Economic Forum on Africa: Identifying regional clusters of manufacturing excellence.
Photo: The World Economic Forum on Africa: Identifying regional clusters of manufacturing excellence.
The World Economic Forum on Africa: Identifying regional clusters of manufacturing excellence.

In 2016, commodity prices also began to pick up, with the sector now expected to once again become a key contributor to economic growth. For this to be sustained, however, structural reform is needed in many African countries, including tangible measures on the part of governments to drive growth, reduce unemployment, improve the governance of state institutions and tackle infrastructure deficits. According to the World Bank, Africa needs US$90 billion in infrastructure investment every year for the next 10 years in order to deliver sustainable economic growth.

Table: 10 Fastest-growing Economies in Africa, Real GDP Growth, 2017
Table: 10 Fastest-growing Economies in Africa, Real GDP Growth, 2017

Regional Investment Opportunities

Given its status as a marketplace that is home to more than one billion people, many investors are now looking at how best to benefit from Sub-Saharan Africa's economic potential, despite the downturn suffered by several of its constituent countries. For many, it is similar to the situation that saw investors enamoured with China back in the early 2000s.

Assessing the likely prospects of the region, Mthuli Ncube, Head of Research for the Quantum Global Group, the Angola-based investment-management specialist that compiles the annual Africa Investment Index, said: "With its population of more than one billion people and its rapidly growing middle class, Africa clearly offers significant opportunities for those looking to invest in the continent's non-commodities sectors, such as financial services, construction and manufacturing. Structural reforms and greater private-sector involvement, however, are crucial if Africa's true potential is ever to be unlocked."

For investors, the good news is that many African economies are now taking the necessary steps to ensure the required reforms are implemented, while also looking to make their regulatory environment more transparent. According to the 2016 Quantum index, the most recent available, Botswana is the most attractive economy in terms of investments flowing into Africa. Overall, the country scores highly across a number of different criteria, including credit ratings, current-account ratio, import cover, the stability of its political environment and the overall ease of doing business.

Ranked second on the list was Morocco, a testament to its solid economic growth, strategic location and conducive business environment. Egypt, meanwhile, was ranked third, largely on account of its growing urban population. South Africa came in fourth, singled out for its large population and ease of doing business, while Zambia was ranked fifth. The research also showed that, collectively, these top five African investment destinations attracted $13.6 billion in FDI last year.

Table: Most and Least Attractive Investment Destinations in Africa
Table: Most and Least Attractive Investment Destinations in Africa

At present, China is Africa's largest economic partner, with the level of Chinese investments across the continent having risen sharply over recent years. According to a new study by McKinsey, conducted across the eight countries that generate two-thirds of sub-Saharan Africa's GDP, more than 10,000 Chinese firms now operate in Africa, a figure four times the previous estimate. Analysing the scale of China's involvement, the study concludes: "The China-Africa relationship has ramped up over the past decade, with trade growing at around 20% per annum, while FDI has increased even more rapidly, with an annual growth rate of some 40%."

The report also showed that a third of all Chinese firms investing in Africa are active in the manufacturing sector, while a quarter have a focus on services and a fifth on trade, construction or real estate. In terms of infrastructure development, China is now involved in about 50% of Africa's major international engineering, procurement and construction projects.

Seeing this involvement as set to grow, Kartik Jayaram, a Senior Partner with McKinsey and the co-author of the report, said: "Chinese engagement with Africa will only increase. By 2025, Chinese firms in Africa could have combined revenue of $440 billion, compared with just $180 billion today. They will also be involved in a wider range of industries, including technology, agriculture and transport/logistics."

Not every analysis of Africa's future economic prospects, however, has come out quite so rosy. According to the latest Africa Attractiveness report, an annual review of the investment environment across the continent produced by EY, the London-headquartered professional-services giant, heightened geopolitical uncertainty and 'multispeed' growth led to a year-on-year FDI decline in 2016.

Outlining the implications of this, Ajen Sita, the Johannesburg-based Chief Executive of EY's African operation, said: "This mixed picture is not a big surprise to us. Investor sentiment towards Africa has been undermined of late by heightened geopolitical uncertainty and higher levels of risk aversion.

Photo: Africa: Seeking $90 billion in infrastructure investment every year for the next 10 years.
Africa: Seeking $90 billion in infrastructure investment every year for the next 10 years.
Photo: Africa: Seeking $90 billion in infrastructure investment every year for the next 10 years.
Africa: Seeking $90 billion in infrastructure investment every year for the next 10 years.

"In spite of this, however, Asia-Pacific investors seem to have remained bullish about Africa. Most notably, Chinese FDI into Africa has increased dramatically, making the country the single-largest contributor to FDI capital and increased employment in 2016."

Mark Ronan, Special Correspondent, Cape Town

Content provided by Picture: HKTDC Research
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