Lower commodity prices hammer African economies
WHETHER it’s selling pensions, pasta or t o ot hpicks, investors in Africa have been targeting the booming middle class. But a year of diving commodity prices has exposed how much the continent, and its consumers, still rely on exporting resources.
A decade of growth above five per cent in sub-Saharan African economies has drawn a wave of interest in selling consumer goods and providing services to a rapidly urbanising population of 1 billion.
Millions of Africans have moved out of subsistence farming, but national economies have yet to make the transition from relying on commodity exports to mass manufacturing, the model which transformed living standards in much of Asia.
Now the end of an upswing in global prices for energy, minerals and farm products has hammered economies across Africa and pushed their currencies sharply lower.
This, in turn, is raising doubts about whether the growth of the African middle class has been overplayed: has the wealth created by the decade of growth been widely distributed, or have only relatively small pools of urban consumers merely benefited from a transient commodity boom?
The expansion of budget retailer Shoprite, telecoms firm MTN and consumer goods giants Nestle and Unilever shows that many lower-income Africans do have more money to spend.
This spending power, however, seems closely linked to the price of resources.
More than 87 per cent of government expenditure across Africa is derived from commodity exports, according to consultancy DaMina Advisors.
Foreign direct investment in resource-rich South Africa, Nigeria, Ghana and Mozambique totalled $23 billion in 2013, more than the rest of sub-Saharan Africa combined.
Most of that was in commodities production.
As growth slowed, Nestle said in June that it would cut 15 per cent of its workforce in Africa because it had overestimated class.
“The fall in oil and metals prices has certainly shown that Africa remains too dependent on commodities,” David Rubenstein, co-CEO of US private equity firm Carlyle, said. ‘‘The ‘middle class’ theory may need a rethink.”
HOW BIG IS IT?: The African Development Bank said in 2011 that 34 per cent of Africans were now middle class, in what it described as a bulging “middle of the pyramid”. Under its broad definition, anyone living on between $2$20 a day was middle class.
Consultancy Mickinsey,
the
rise
of
the middle
however, defines the class as households spending $20,000 a year while the OECD’s range is $10-$100 a day.
Depending on the calculation, the middle class therefore ranges from 16 million to 327 million.
“There have been numerous studies done on the size of Africa’s middle class, often at cross-purposes,” Razia Khan, head of Africa research Chartered, told Reuters.
‘‘There is now a question mark as to how important the concept of ‘middle class’ might be.”
Backers of the concept say the middle class’s emergence proves Africa has achieved inclusive growth that lifts the masses out of poverty, and not just a commodity-fuelled boom which benefits only foreign investors and a local elite.
Mickinsey said the middle class, which it reckons accounts for only 1-2 per cent of African households, will contribute 40 per cent of spending-
at
Standard power growth, suggesting many investors are really targeting the wealthy.
Krispy Kreme Doughnuts and coffee-giant Starbucks have recently announced plans to enter South Africa, the continent’s most developed economy.
Hotel groups such as Marriott and Accor hotels are going ahead with expansion plans in major African cities.
These companies are all aiming for high-end consumers, not people living on $2 a day.
RICH GETTING RICHER: “What we are seeing is not a pyramid bulging in the middle but a society where the top spenders are getting richer,” said Morten Jerven, author of “Poor Numbers: How We Are Misled by African Development Statistics and What to Do about It”.
Some of those who are bullish on Africa say the continent has six of the 10 fastest growing economies, but often fail to mention it also has seven of the 10 most unequal countries.
Continent-wide statistics can be misleading because they include economies growing from a very low base, such as South Sudan and the Democratic Republic of Congo (DRC). Here investments beyond the commodities sector aren’t attractive.
“Where I come from there are the very rich and very poor,” Serge Ramazani, a migrant from the DRC who lives in the rundown Johannesburg suburb of Yeoville, said. ‘‘People are saying Africa has a lot more ‘middle class’ but they are describing the big boys, the elite.”
Whether or not it benefits a small or large “middle class”, investment continues to flow into Africa because high returns remain available in pockets.
“The fall in oil and metals prices has certainly shown that Africa remains too dependent on commodities.”