SEARCH FOR GROWTH: AFRICAN SECTORS TO BANK ON
WITH 30% OF SOUTH AFRICA’S VALUE-ADDED EXPORTS GOING TO THE REST OF AFRICA, THE FORTUNES OF OUR ECONOMY ARE CLOSELY TIED TO THE STATE OF THE CONTINENT. BUT AFTER ENJOYING YEARS OF STRONG GROWTH, FUELLED BY THE COMMODITY SUPERCYCLE, MANY AFRICAN ECONOMIES HAVE BEEN STRUGGLING WITH SLUGGISH GROWTH, DECLINING FOREIGN DIRECT INVESTMENT AND RISING BUDGET DEFICITS. IS THIS THE END OF THE ‘AFRICA RISING’ NARRATIVE?
until recently, “Africa Rising” had become the welcome new continental narrative, replacing such grim storylines as The Hopeless Continent, the infamous headline of The Economist’s May 2000 cover story. As if to prove that publication wrong, African economies powered their way into the third millennium, growing by an average 4.9% a year between 2000 and 2008.
They even rode the storm of the 2008 global financial crisis, continuing to grow at an average of 4.7% a year from 2008 until 2012. Investment largely followed. Foreign direct investment (FDI) shifted away from ailing industrialised economies towards emerging and developing economies where returns were higher, including many in Africa, where overall foreign investment climbed 22% from 2010 until 2014, according to KPMG. Africa’s high growth rates, burgeoning population, growing middle class, perceived improved political and macroeconomic stability, vast tracts of arable land and attractive geology were the main attractions for investors, says KPMG’s Robbie Cheadle.
She shares the conventional wisdom that much of Africa’s rise then was due to the commodities supercycle, mainly fuelled by phenomenal demand from China.
If so, the party was bound to end sometime, though many naïvely thought it would continue forever, says Duncan Bonnett of South African business consultancy Africa House.
McKinsey Global Institute differed somewhat from the conventional wisdom. No one is more responsible for the Africa Rising narrative than McKinsey, which insisted in a 2010 report that the commodity boom was not the main part of the story. It said commodities had accounted for just 24% of Africa’s GDP growth between 2000 and 2008.
It attributed much of the rest to more sustainable factors, particularly growing political and macroeconomic stability and microeconomic reforms. In its muchquoted Lions on the Move report later that year, McKinsey said because Africa’s growth surge was widespread across countries and sectors, extending far beyond the global commodities boom, “Africa’s
It said commodities had 24%accounted for just of Africa’s GDP growth between 2000 and 2008.
business opportunities are potentially very large, particularly for companies in consumer-facing industries such as retail, telecommunications and banking; infrastructure-related industries; across the agriculture-related value chain; and in resource-related industries”.
Then, in 2013, the music suddenly stopped.
That year growth fell to 3.9%, the next year to 3.7%; in 2015 it fell again to 3.4% and last year even further, to a miserly 2.2%.
Commodities and growth
Between 2010 and 2015, Africa’s overall GDP growth averaged just 3.3% a year. This crash coincided with the global slump in general commodity prices, precipitated mainly by a slowdown and re-orientation of the Chinese economy away from manufacturing and towards consumer demand.
That seemed to prove that Africa’s growth spurt had, all along, indeed been mainly due to the commodities supercycle.
Greg Mills, Olusegun Obasanjo, Jeffrey Herbst and Dickie Davis certainly think so. They argue in their recent book, Making Africa Work: A Handbook, that McKinsey underestimated the influence of raw materials and overestimated the extent of economic reforms and improved governance by African countries. They contend that African governments failed to exploit the fat years of the commodities boom to prepare for the lean years that would inevitably follow. Now they need to play catch-up by rapidly improving political and economic governance and making the climate for business and investment much more attractive, to avoid being overwhelmed by booming youth bulges.
But McKinsey itself revisited Africa in its September 2016 report Lions on the Move II: Realizing the Potential of Africa’s Economies, where it offered a more nuanced view. It essentially blamed the slump in African economies on the crash in the global oil price – from $114.8 a barrel in June 2014 to below $30 a barrel in January 2016 – and the major disruptions to North African economies caused by the 2011 Arab Spring, rather than on the fall in commodities prices in general. McKinsey said the weak overall GDP growth of just 3.3% a year between 2010 and 2015 “hides a marked divergence”.
The Arab Spring African countries – Egypt, Tunisia and Libya – had grown an average of 4.8% a year between 2000 and 2010 and then plunged to zero between 2010 and 2015, McKinsey said.
Meanwhile Africa’s oil exporters had grown an average of 7.3% per annum from 2000 to 2010 before dropping to an average of 4% a year between 2010 and 2015.
“For the rest of Africa, growth actually accelerated to 4.4% in 2010 to 2015 from 4.1% in 2000 to 2010. In addition, longterm fundamentals are strong, and there are substantial market and investment opportunities on the table.
“Future growth is likely to be underpinned by factors including the most rapid urbanization rate in the world and, by 2034, a larger working-age population than either China or India. Accelerating technological change is helping to unlock new opportunities for consumers and businesses, and Africa still has abundant resources. The International Monetary Fund projects that Africa will be the world’s second-fastest-growing region in the period to 2020.”
The impact of oil
McKinsey nonetheless agreed with the authors of Making Africa Work and others that African countries now had to work harder to make their economies grow rather than waiting for prosperity to gush from an oil well or spill from a mine shaft.
However you crunch the numbers to explain the crash, it is certainly true that oil producers took the biggest hit. Just for illustrative purposes, in Equatorial Guinea, almost entirely reliant on oil, GDP contracted by 8.2% in 2016 and is
Between 2010 and 2015, Africa’s overall GDP growth averaged just 3.3% a year. Now African governments need to play catchup by rapidly improving political and economic governance and making the climate for business and investment much more attractive.
Overall investment into Africa also plummeted, dropping 31% between 2014 and 2015.
Nonetheless, even if a lot of naked governments have now been revealed, Africa continues to offer significant investment and trade prospects – though they are now more modest and rather different.
expected to shrink further by 5.9% in 2017.
The drop in Nigeria was not so sharp statistically, but the impact was much greater on the region because of the size of the economy which was – at least until the oil slump – Africa’s largest.
In 2016, Nigeria’s economy slipped into recession for the first time in more than two decades, shrinking by 1.5%, and reflecting adverse economic shocks, inconsistent economic policies, and security problems in the northeast (the Boko Haram Islamist insurgency) and Delta regions (violent confrontations over oil resources), according to the African Development Bank.
The shocks included the continued decline in oil prices, foreign exchange shortages, disruptions in fuel supply and sharp reduction in oil production, power shortages as well as a low capital budget execution rate of just 51%.
Nigeria’s raft of daunting problems has been aggravated by the continuing ill health of President Muhammadu Buhari, who is now spending more time in London receiving treatment for an unannounced – but clearly serious – illness than at home managing the crisis. Abuja is struggling to make ends meet with the government budget and current account seriously in the red.
Nigeria has now embarked on a drastic plan to contain the crisis, including a contractionary monetary policy stance to attract capital inflow and control upward-ticking inflation. At the same time it is pursuing an expansionary fiscal policy to try to reflate the economy by allocating close to 30% of the budget to capital expenditure. The results are uncertain, though the African Development Bank does expect a small recovery, with GDP growth of 2.2% expected this year, mainly fuelled by an uptick in the oil price.
Nigeria’s plight starkly illustrates what all analysts agree on – that in the aftermath of the commodities supercycle, African governments need to greatly up their game and pay due attention to correcting policy and generally creating a climate attractive to business, including foreign investment which they ignored during the fat years.
“As Warren Buffett famously observed,” Mills, Obasanjo and co. write in Making Africa Work, “‘Only when the tide goes out do you discover who has been swimming naked.’”
Says the African Development Bank, more soberly, “Countries with better coordinated and consistent fiscal, monetary and exchange rate policies are able to weather shocks.”
Cheadle agrees, noting that during the commodities supercycle, the demand for resources was so great that investors were ready to overlook poor infrastructure, adverse policies and cumbersome business environments to get them.
That has now changed. Nigeria was the biggest recipient of FDI inflows in West Africa during 2014, receiving 37% of the total to the region, some $4.7bn. But that already represented a significant drop of 16% on 2013 and the fall was even greater, nearly 30%, in 2015.
Overall investment into Africa also plummeted, dropping 31% between 2014 and 2015, for example, says Cheadle, adding that the United Nations Conference on Trade and Development (UNCTAD) was not expecting FDI inflows into the primary sectors during 2017 and manufacturing will also be very subdued.
After the supercycle, “African governments need to actively attempt to attract the limited available FDI by making their countries more attractive to investors,” she says. “Unfortunately, the opposite seems to be happening generally, judging by the latest Corruption Perceptions Index (CPI) graphs and Ease of Doing Business surveys.”
Nonetheless, even if a lot of naked governments have now been exposed, Africa continues to offer significant investment and trade prospects – though they are now more modest and rather different – says Africa House.
Africa House believes that the continent is increasingly attractive for exporters, with the value of exports to sub-Saharan Africa rising from just $48bn in 1995 to $345bn in 2015. Intra-African trade levels remain fairly low though, because of slow integration and product similarity. It totalled $61bn in 2015.
It also believes that despite the overall drop in FDI, at least 1 800 greenfield and brownfield projects have been announced or pursued since the start of 2014, with an estimated value in excess of $1tr over the medium term.
“This is quite staggering for a continent that only 15 years ago was struggling to attract $10bn a year in FDI,” it says.
Cheadle, Africa House’s Duncan Bonnett and the Brenthurst Foundation’s Greg Mills agree that as well as improving overall governance and business climates to attract investors who have now become more discerning, African economies also need to diversify and that this is starting to happen. Infrastructure build, consumer goods and services – including tourism, financial services and telecoms – are the main sectors that are emerging.
Cheadle notes that more diversified economies that are not or less dependent on commodities are now attracting more investment; between 2013 and 2015, it rose from $4.256bn to $6.885bn in Egypt, $1.281bn to $2.168bn in Ethiopia; $514m to $1.437bn in Kenya, $258m to $471m in Rwanda and $801m to $1.078bn in Namibia.
Bonnett says East Africa has emerged as the most popular region for investors and Cheadle agrees Kenya, Ethiopia and Rwanda are high on the list, though Morocco is also attractive. And for SA in particular, Mauritius is still popular and Botswana is becoming more so.
Bonnett believes East Africa is becoming more attractive because of rising growth rates – it was Africa’s fastestgrowing region in 2016 at 5.3% GDP – and better regulations, “which are related”.
The East African Community, the continent’s best-integrated free trade area, is also attracting investment by offering larger markets. He notes that Ethiopia, though not part of the EAC, is attractive in itself, with its 100m population and its huge spending on massive infrastructure projects, like the Grand Renaissance Dam on the Blue Nile and its transport corridors.
Taking a long-range view, East Africa is also likely to be the major African beneficiary of China’s huge Belt and Road Initiative, as the touch-down point for the maritime Silk Road leg of this ambitious project will be Mombasa, Kenya.
The South African story
And what does it all mean for South African companies? They have done very well out of Africa to date. As Bonnett notes, about 30% of SA’s value-added exports have been to sub-Saharan Africa, greatly boosting manufacturing and employment (compared to China, SA’s largest trading partner which almost exclusively imports SA’s raw material while selling it loads of its own manufactured goods).
But local companies have also had their setbacks, some analysts say, pointing to the obvious example of MTN’s massive fine in Nigeria for failing to cut off unregistered
Despite the overall drop in FDI, at least 1 800 greenfield and brownfield projects have been announced or pursued since the start of 2014, with an estimated value in excess of $1tr over the medium term. For South African investors in particular, Mauritius is still popular and Botswana is becoming more so.
SIM-card holders (arguably the result of Abuja desperately seeking revenue as oil income dried up) and Tiger Brand’s disastrous venture into the same country.
Bonnet says two myths should now be firmly knocked on the head: that SA is the Gateway to Africa (“maybe only to Southern Africa and bibs and bobs elsewhere”) and that SA is the big bully barging across the continent, getting its own way.
“SA now is just another player, competing with some big boys like China, India, Turkey and Morocco,” he says.
And so he and Mills agree that when it comes to exploiting the big infrastructure build in countries like Ethiopia, South African construction and cement companies are unlikely to get the biggest contracts.
Bonnett notes that the Ethiopian government was very wily in the way it prepared for its big construction boom. Instead of just importing cement, it invited companies to build cement plants in-country. That saved costs but also boosted local business.
South African companies in the construction industry can nevertheless pick up smaller contracts on the edges of these big projects. And the likes of Murray & Roberts and Group Five are well-poised to take advantage of the imminent start of Mozambique’s big gas boom, says Bonnett.
South African companies need to become more nimble, imaginative and adaptable and do their homework better, Bonnett says, citing Sanlam’s deal with Morocco’s Saham Finances as a good example. He notes that together they have
South African companies should be sniffing out opportunities to snap up cash-strapped state-owned enterprises in the oil and other commodity-rich countries that are now struggling.
entered some 35 markets, with Sanlam taking the lead in the Anglophone countries and Saham in the Francophone ones.
He notes too that cement companies like PPC and AfriSam are now moving rapidly into the rest of the continent to grab some of the infrastructure action. Some commentators believe they were slow out of the blocks but will catch up.
Bonnett also notes that local consumer goods like J.C. le Roux sparkling wine and Tall Horse red wine are proliferating across the continent.
Mills says tourist service companies, like Comair and the hotel groups, as well as the banks and other financial companies, and the telecoms companies should be winners in Africa’s new investment landscape. He also believes that South African companies should be sniffing out opportunities to snap up cash-strapped state-owned enterprises (SOEs) in the oil and other commodityrich countries that are now struggling.
Mills contrasts such opportunities with those in East Africa, for instance, which he believes are often over-priced just because they are becoming the new investor darlings.
And for retail giants like Shoprite, which, under former CEO Whitey Basson, was one of the first pioneers to move into the rest of the continent long ago, the opportunities can only continue to grow, says Bonnett.
The African Development Bank forecasts that Africa’s economy will rebound slightly, to 3.4% this year. But that depends on the recovery in commodity prices being sustained, the world economy improving and domestic macroeconomic reforms being entrenched.
The last point is most important. The fat years of high commodity prices will probably never return. But if governments on the continent properly learn the lessons of the post-commodity crash, Africa could and should rise even higher in the end. firstname.lastname@example.org
Robbie Cheadle Associate director at KPMG
Muhammadu Buhari President of Nigeria
Greg Mills Director of the Brenthurst Foundation
Cement companies like PPC and AfriSam are moving rapidly into the rest of the continent, hoping to cash in on some of the infrastructure action.