Focus on Africa: Taking over the 7% club

Highlights

  • High rates of economic activity means that UK based international businesses (and indeed other multi-national corporations) will be presented with immediate opportunities to grow
  • The key challenge the African economies need to overcome is in creating an environment where it is easier for business to operate.

Africa is taking over the “7% growth club”

Figure 4 – Sub-Saharan Africa is expected to be the second fastest growing region in the world in the next 5 years.

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Our latest CEO Survey results show that business leaders in Africa are very optimistic about the future. In fact, more than 90% of CEOs there are confident or very confident about their revenue growth prospects for the next 12 months. This is the second highest figure recorded after Latin America. So is this optimism really justified?

Sub-Saharan Africa showed resilient growth during the financial crisis. Growth slowed down in 2009 but unlike almost all advanced economies, African economies did not contract. This resilience is expected to continue in the medium term, driven by rising commodity demand from emerging markets, favourable demographics, improving productivity levels and investment in infrastructure projects.

According to the International Monetary Fund (IMF), Sub-Saharan Africa is expected to grow by 6% over the next 4 years (see Figure 4). In fact, Mozambique, the Congo, Liberia and six other economies* are expected to achieve growth rates of 7% or more this year. To put this into perspective, China, India and Vietnam are the only other large emerging markets in the “7% growth club”.


What does this mean for global businesses?

High African growth rates mean that UK based international businesses (and indeed other multi-national corporations) will be presented with immediate opportunities to grow. For example, across the whole continent of Africa, the World Bank has identified a funding gap for infrastructure projects worth around $ 48 billion. Long-term projects like these could provide returns for cash rich UK entities (be it companies or investment vehicles). Engineering and construction firms can also take advantage of the opportunities on offer.

But, as with all business projects, CEOs and their teams need to factor in and account for the practical costs and risks of doing business in Africa. For example, the World Bank estimates it takes three times as long to start up a business in Nigeria, than in an average OECD country. In some cases an indirect presence in the country, via a partnership with a local business, could prove to be a wiser strategy.


If Africa is serious about growing in the long-term, it will need to reform and diversify

Figure 5 – The African economies have failed to diversify away from resource-extracting activities into manufacturing and services

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Figure 6 – The income gap between the Sub-Saharan Africa and the emerging and developing economies of the world is projected to increase

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Is there a specific factor underpinning Africa’s high growth rates? The main reason for Africa’s success over the last decade lies in the high commodity prices. This, in turn, has attracted investments from resource-hungry emerging economies such as China that are keen on securing raw materials for their expanding manufacturing base.

Our analysis shows that FDI to the region was up by US$113 billion during the 2008-12 period compared to US$495 billion in the 2003-2007 period, with a significant proportion of this capital flowing into the natural resource and energy sectors. However, exporting natural resources to fuel economic growth is not a sustainable long-term growth strategy.

Has there been any success yet in moving away from resource extracting industries to manufacturing and services? Figure 5 shows that the share of value added to GDP by manufacturing has fallen over the 2003-10 period. There are some pockets of change, notably in Tanzania and Uganda where manufacturing makes up a bigger proportion of the economy. But any shift towards a more manufacturing-based economy is happening at a slow pace across Africa as a whole.

It is critical for the African economies to create an environment where there are fewer obstacles to business operations. Our heat map in Figure 2 shows that in most cases the larger African economies have a clear demographic advantage relative to other emerging markets. For example, in Nigeria, the growth of the number of people of working age will be much faster than in any of the BRIC economies.

The key challenges that African economies need to overcome are inefficient public sectors, unreformed institutions and high levels of red tape, all of which dissuade businesses from reaping the vast untapped potential these economies have to offer.

It will only be when these challenges have been met that African economies will start closing the income gap (see Figure 6) between its economies and other emerging markets such as the BRICs.


*Excluding South Sudan which is projected to grow by 69% in 2013. The economy shrunk by 55% in 2012 owing to a temporary shutting down of oil production for most of the year.