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Sub-Saharan Africa: A New Economic Frontier

investing_in_Sub_Saharan_AfricaEconomist Moin Siddiqi makes the case for investing in emerging opportunities in Sub-Saharan Africa

The economic map of this ‘resource-rich’ continent is changing drastically and global businesses should take note of new opportunities. ‘The region aspires to move past the image of extreme poverty and conflict with which it has long been associated and to show that it is not only open for business but also actually in business’, said Ngozi Okonjo-Iweala, Nigeria’s economic czar and former Managing Director of the World Bank. Analysts are increasingly able to single out countries in sub-Saharan Africa (SSA) with good track records and prospects that inspire investor confidence, such as those globalisation researcher Steven Radelet has dubbed part of ‘emerging Africa.’

Following the global downturn of 2008-09, SSA has rebounded faster than from any previous external shock to become the world’s second fastest growing region (after developing Asia). The IMF forecasts real GDP growth of 5.8 per cent in 2012 – just shy of the pre-crisis average growth level. The resilience of a majority of African countries in the face of the Eurozone debt crisis reflects the success of their structural reform efforts and strong fundamentals. Throughout the continent fiscal soundness and monetary discipline are increasing. On average, foreign debt and budget deficits were reduced by one-quarter and two-thirds, respectively, in the past decade. Therefore, sovereign credit ratings in most countries enjoy a stable to positive outlook.  ‘Africa has taught the world a lesson in macroeconomic reform and stability,’ says Obiageli Ezekwesili, World Bank Vice-President for the Africa Region.

Africa is expected to host more than half of the world’s top 10 fastest growing economies of 2012 (Sierra Leone, Angola, Liberia, Cote d’Ivoire, Ghana, and Mozambique) according to the IMF. In fact, 10 of the African Union’s 54 states have a GDP per capita higher than China. Today, Africa’s collective GDP, at US$1.6 trillion, is equal to Brazil. Renaissance Capital, the investment bank, projects economic output could reach US$3.3 trillion by 2016, if the region as a whole grows by 10 per cent per annum. Citibank’s projections show that Africa’s share of the world’s output will rise from 4 per cent in 2010 to 7 per cent by 2030 and 12 per cent in 2050.

Soaring commodity prices have boosted GDP since 2000; however, underlying growth is broad-based, as research by the McKinsey Global Institute indicates. Their findings show that natural resources account for about a third of regional expansion, while two-thirds is derived from diverse sectors like wholesale, retail, transportation, telecommunications and manufacturing. Concurrently, productivity has risen thanks to greater use of modern technologies and economies of scale. These productivity gains are evident across countries and business sectors.


There is a shared conviction among the current generation of political leaders that the private sector and greater integration with the global economy will help sustain growth. Africa offers numerous opportunities in the post-crisis world.

Donald Kaberuka, President of the African Development Bank (AfDB), believes that ‘Africa is ready to optimise its potential. Opportunities abound and the time is ripe.’ Foreign direct investment (FDI) has totalled US$320 billion over 2006-10, up from US$117 billion in the preceding five-year period, based on UNCTAD data.

While minerals should attract larger chunks of FDI, other sectors with growth potential include infrastructure (power and transport), banking, manufacturing, ICT, tourism, and agro-production. These sectors have registered rapid growth in the past five years, largely because of rising urban population. An insatiable demand for food and natural resources makes the region attractive for Greenfield investment. Africa sits on roughly three-fifths of the world’s uncultivated arable land and has high probability for new hydrocarbon and mineral finds. It boasts an abundance of riches: 12 per cent of global oil reserves, 50 per cent of gold, 60 per cent of diamonds, up to 90 per cent of platinum and 74 per cent of chrome. Fertile soil in Africa is sought by strategic investors to the tune of hundreds of thousands of hectares.

Investing in Africa is profitable compared to other regions, according to Professor Paul Collier of Oxford University. His painstaking research found return on capital for over 950 African enterprises to be on average 11 per cent higher than in Latin America and Asia, and 70 per cent more profitable than similar Chinese firms. Global executives cannot afford to ignore this fact. Ms Obiageli Ezekwesili explained that 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. ’ Since 2005 Africa has received more FDI than official aid. But to sustain private inflows, regional governments need to strengthen governance and legal frameworks, build financial markets, invest in human capital, upgrade physical infrastructure, and deepen regional integration.

Domestic forces

Social and demographic changes such as urbanisation, the burgeoning middle class and an expanding workforce are also creating new growth momentum. One of Africa’s most valuable assets is younger people with two-thirds of all Africans aged under-25. The UN predicts that by 2050, Africa could be home to one-fifth of the world’s young people. Providing efficient higher education is a major priority for national policy across the continent – with an emphasis on science and technology, as well as on vocational training. Equally critical is improving healthcare: a healthy labour force is key to raising productivity. By 2040, the size of the continent’s workforce (projected at 1.1 billion) will exceed both China and India. This large workforce could become a significant source of rising global consumption.

Africa already has more middle-class households (defined as those with incomes of US$20,000) than India. The AfDB estimates – based on current economic trends – that the middle class will continue to grow from 34 per cent of Africa’s population in 2010 to 42 per cent by 2060, when the total population is expected to peak at 2.7 billion. The UN projects the proportion of Africa’s population living in urban cities could swell from 300 million to over one billion between 2005 and 2050. Urbanisation is spurring the construction of more roads, buildings, power and water systems. By 2030, Africa’s top 18 cities could have a combined spending power of US$1.3 trillion.

The Euro Contagion

Africa is not immune to turmoil in the Eurozone because Europe accounts for large shares of SSA’s exports, remittances, official aid and FDI. A ‘double-dip’ recession in Europe would hit manufacturers (especially in South Africa) and the tourism industry. Moreover, foreign borrowing would probably become more expensive. Simulations suggest that for every additional 1 per cent of fiscal consolidation in the Eurozone and a 2.5 percentage point reduction in investment due to increased risk aversion, global GDP would fall by 0.6 per cent and SSA’s GDP would drop by 0.1 per cent. The IMF advised: ‘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.’

Over the past decade, Africa fortunately has forged strong ties with Brazil, Russia, India and China: in 2012 growth among the BRIC countries is expected to average 6 per cent compared to a paltry 1.1 per cent in  the Eurozone. These new trading partners are continuing to show robust demand for primary commodities and a voracious appetite to invest across the African continent. By 2030, BRIC-Africa trade, currently US$150 billion per year, is projected to reach US$4 trillion a year.

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.’ This diversification of global trade provides the region with significant benefits, such as access to cheaper/more appropriate technologies, lower cost of inputs and consumption goods, as well as boosting long-term growth prospects by reducing volatility in exports and output.

Pre-eminent Challenges

Despite the tangible progress in Africa, more must be done to achieve ‘inclusive’ growth, attract higher FDI inflows and put Africa on a par with developing Asia. In most countries, higher growth has not produced new jobs or social protection. The region needs colossal investments in almost all the sub-sectors (transportation, telecoms, water and sanitation, and energy supply) to ensure sustainable growth. The World Bank estimates total financing needs at US$93 billion per year, of which a third remains un-funded. However, if it invests more in nurturing a skill-based society and in transformative infrastructure required for growth, Africa could join the ranks of the world’s most dynamic and productive economies.

Deepening regional integration and building sound financial systems (like in South Africa) will create economies of scale and encourage FDI across diverse sectors. Outside of the extractive industries, most foreign investors are largely unaware of Africa’s investment possibilities. Sir Martin Sorrel, head of WPP (the leading advertising company in Africa), told CEO Summit Africa in London: ‘We are very big believers. It is the continent of opportunity.’

The coming years could be Africa’s golden opportunity for global recognition. There is a large pool of investable private capital seeking long-term outlets. Prospects in the OECD economies look grim, Asia’s stellar growth will eventually peak, and labour costs in China are already rising. Meanwhile, Africa remains one of the last ‘great untapped’ frontiers with potential for further resource discoveries and for commercial cultivation of its vast, underused agricultural land. On current trends, several decades of strong growth appear a likely scenario, which, in turn, will enhance Africa’s role in the global economy.


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