Finweek English Edition - - FRONT PAGE - By Peter Fabri­cius


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.

At­tract­ing in­vestors

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. ed­i­to­rial@fin­

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.

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