Africa News blog

Can Africa sustain its economic growth momentum?

Forget the days when the image of Africa in the developed world was one of rolling vistas of unspoilt safari parks, natural disasters and war.

In the last 10 years, western firms and investors have been showing much greater interest, ploughing increasing investment flows into the continent of 1 billion people.

In its World Economic Outlook, the IMF predicts sub-Saharan Africa will grow by an average of 4.7 percent this year, a rate that is second only to Asia.

Africa offers a higher rate of return on investment than any other region in the world, Razia Khan, regional head of research for Africa at Standard Chartered Bank in London, told a Thomson Reuters Newsmaker event this week.

Foreign direct investment has shown strong growth over the last few years, with more than half coming friom Asia in the second quarter of this year alone.

But some investors wonder whether the continent can sustain this kind of growth rate, especially since crises elsewhere in the world, such as the sovereign debt crisis in the euro zone, have prompted a flight of capital to safe havens.

Lack of affordable sources of long-term funds for businesses and corruption can also compound the problems.

from MacroScope:

Building BRICs in Africa

Some eye-catching numbers from Standard Bank out today on the influence of BRICs countries -- Brazil, Russia, India and China -- on Africa.

First off, the bank says the global recession and its recovery have been nourishing these so-called South-South ties. But it is all now ready to take off. The bank estimates:

-- By 2015, BRIC-Africa trade will have incresed threefold, to $530 billion from $150 billion this year.

-- BRICs share of Africa's total trade will increase from one-fifth today to one-third in the next five years.

-- BRICS foreign direct investment stock in Africa will swell to more than $150 billion from around $60 billion today.

Standard Bank bases these assertions partly on estimates for BRICs growth over the next five years -- eg, domestic output, global output and a doubling of BRICs trade with the world in general. But it also sees Africa growing rapidly -- for example, a per capita real annual growth rate of 5.7 percent between now and 2015, and a doubling of private consumption in Africa's 10 largest economies. And it adds:

Crucially, a host of global-minded corporates is emerging from the BRICs. In 2010 231 (11.5 percent of the total) companies listed in the Forbes Global 2000 originated in the BRICs, up from only 83 companies (4 percent) in 2005. Recent trends are a harbinger of deeper potential.

African agricultural finance under the spotlight

Africa is turning into a fashionable post-crisis investment destination as investors regain their confidence and start to focus on the continent’s lack of direct involvement with the global market’s volatility drivers and trouble hotspots. Africa is benefiting not only from a resumption of international debt and equity flows; it is also a beneficiary of international efforts to maintain the flow of trade finance via multilateral guarantee programmes – 45 issuing banks from 27 countries in sub-Saharan Africa have joined the IFC’s trade finance programme, for example.

At the same time, bilateral and multilateral development agencies are actively investing via an assortment of public and private-sector channels; the international capital markets pipeline is building – sovereign debt offerings on the docket for Nigeria, Senegal, Tanzania, and Zambia with Libya believed to be looking – while the slew of private equity and hedge funds being raised this year for Africa are seeing healthy interest from public-sector and private LPs.

Investors are focusing broadly on Africa’s relative political stability, improving governance, more conducive policy and regulatory environment, as well as more transparent foreign investment regimes. At the macroeconomic level, above-average growth and low levels of government and corporate indebtedness add to the appeal. What’s key to much of the capital flowing into Africa is that it is supplemented by a support network of capacity building, advisory services, training, technology transfer, and infrastructure benefits.

From a sector diversification perspective, the emergence of new technologies such as mobile telephony and Internet broadband are creating interest beyond the traditional natural resource plays; the telecoms and services sector was the dominant Africa FDI recipient in 2009.

In its World Investment Report 2010, UNCTAD noted that Africa still trails at the bottom of future investment destinations relative to the rest of the world. But that could be about to change as foreign governments and private investors reset their investment horizons and start to look at Africa from a different perspective. Plus: Africa has an abundance of one commodity that is becoming ever more fiercely fought over: agricultural land.

Rising levels of international investment capital in African agriculture and agribusiness have taken the investment thesis directly into the intensely political arena of global food security and land rights. It will remain there as long as food security remains a top agenda item for the likes of China, India, Saudi Arabia, UAE, South Korea and many others.

The notion of foreign investment in agriculture as a key to Africa’s food security, particularly when it is aimed at supporting smallholder agriculture and sustainable farming, is a relatively straightforward one. The acquisition of huge tracts of African agricultural land by foreign governments (directly or through sovereign wealth funds), and by multinationals, investment banks, hedge funds, private equity firms and speculators creates a slightly more convoluted picture.

New Africa about much more than football

The first World Cup in Africa also highlights a dramatic change driven by forces more powerful than football.

While the competition may help change Africa’s image in the minds of any outsiders still fixated on cliches of bloodshed and famine, those in the know long ago spotted Africa’s emergence from no-go zone to frontier market and are seeing the returns.

If you had put $1,000 in Nigerian or Kenyan stock markets at the start of the year, you would have made a profit of around $150. If you had done the same with the U.S. benchmark S&P 500 index, you would be nursing a loss.

Global fund trackers EPFR reported a 40th consecutive week of inflows to African equity funds this week. India’s Bharti Airtel completed a $9 billion purchase of Zain’s African operations in another vote of confidence in the continent.

“It’s not to denigrate the World Cup for a moment, but it’s not what defines Africa in 2010. What should really be defining Africa is Zain buying Bharti’s assets,” said African affairs commentator Joel Kibazo.

“I think there is still a false image of Africa even in South Africa, never mind the rest of the world, about the rest of the continent. The fact is, it has really been getting ahead and there are more people with money to spend.”

Half of the world’s 10 fastest growing countries will be in Africa in 2011 according to the International Monetary Fund.

West must change approach to Africa

Tom Cargill, Assistant Head of the Africa Programme at Chatham House, writes on the West’s relationship with Africa:

French President Nicholas Sarkozy put it best this week, when he spoke of the increasing important of Africa in Global Affairs: “Africa’s formidable demographics and its considerable resources make it the main reservoir for world economic growth in the decades to come.”

This is indeed the principal finding of our new Chatham House Report ‘Our Common Strategic Interests: Africa’s role in the post G8 World’. Yet so far there is very little evidence that Western policy makers, publics, or most importantly, businesses, are waking up to the opportunities that are slowly draining away from them with each passing day.

For the past ten years, fundamental change has been taking place across large parts of Africa. Growth rates and stability have increased. Political, regulatory and security reform have deepened. Increasing investment from China, but also Brazil, India, Turkey, South Korea, Argentina and other ambitious emerging powers has acted for the most part as an accelerant.

Even the global financial crisis has in some ways hastened this process, for while in the short and medium term it had a devastating impact on millions across Africa, it has also revealed the true ebb of power from East to West, and encouraged the new economic actors of the G20 to chase access to the 40 percent of the world’s mineral resources, and 1 billion consumers gathered in Africa. Almost as important is the 25 percent of UN General Assembly votes that are represented by the continent’s 53 countries.

Meanwhile, many Western countries seem trapped in a humanitarian conception of Africa.

Popular media coverage and policy judgement is overwhelmed with a perception that Africa is simply a problem continent with little strategic value, except as a space where largess is shown and good things done to make up in some small way for the messy reality of international diplomacy.

South Africa overshadowed by growth of the rest

South Africa’s place as the sole economic giant in Africa is set to decline in coming decades as its growth is outstripped by countries to the north that have emerged as some of the fastest growing in the world.

As part of a package of Reuters reports on Frontier Markets, my colleague Ed Cropley takes a look at the importance for South Africa’s future of positioning itself as a springboard to the rest of the continent.

Although South Africa has been one of the best long term investments in the world over the past century, the next century looks less promising.

South Africa accounted for nearly 40 percent of all economic output in the sub-Saharan region in 2000, according to International Monetary Fund figures.

That share will drop to 28 percent this year, in part because South Africa’s economy was caught in the global recession. It will shrink further as countries such as Nigeria, Ghana and Uganda notch up growth of 7 percent or more compared to the 2.3 percent expansion forecast for South Africa in 2010.

Some South African companies are leaping on the opportunities – MTN, Standard Bank and Shoprite are obvious examples – but others may be slower to catch on.

“South African companies need to wake up. A lot of opportunities are already being stolen from under our noses, and not just by the Chinese — it’s the Indians, the Brazilians, the Russians, the Canadians, Australians,” said Duncan Bonnett, of consultancy Whitehouse and Associates.

Time for an Afribond?

“Europe possibly needs an Afribond,” commented one contributor this week on the Thomson Reuters chatroom for fixed income markets in Kenya.

A nice quip from Henry Kirimania of The Cooperative Bank of Kenya and a reminder of just how much better placed Africa is now in terms of its debt burden than it once was and particularly in relation to what might now be regarded as the world’s Heavily Indebted Formerly Rich Countries.

“It used to be that when you thought about highly indebted countries, you thought about those in our part of the world,” Maria Ramos, head of South Africa’s Absa Bank told the recent World Economic Forum on Africa. “You can’t any longer.”

By global standards, African debt has also performed fairly well during the crisis over Greece. Although the yield on Ghana’s Eurobond spiked when concerns over Greece reached fever pitch before the EU and IMF safety net announced at the weekend, it has been on a steady downtrend and has fallen back somewhat this week.

Ghana, set to be the world’s fastest growing economy next year after it starts pumping oil later in 2010, is especially well placed, but debt yields have been falling elsewhere in Africa too.

Rising commodity exports, helping to feed Asian demand, generally better economic management, increased political stability and technological change such as the explosion of mobile phone networks have all helped to put Africa on a sounder footing than it was before.

Angola broadens its reach

Nigerian, Kenyan and South African banks have been making forays into the rest of the continent in search of growth so it was interesting to see Angola’s biggest bank opening an office in Johannesburg this month.   Banco Africano de Investimentos, Angola’s biggest bank by deposits, sees the office as a launchpad for ventures further afield in the southern African region as well as in business between Angola and South Africa.

Angola’s banking sector has enjoyed huge growth since the country emerged from a three-decade long civil war in 2002 as one of the world’s fastest growing economies thanks to booming oil production and high oil prices.

And as Angola’s economy has grown, so has the OPEC member’s influence as a power within southern Africa, within Africa’s other former Portuguese colonies and within the Gulf of Guinea region that produces most of Africa’s oil.

The interest in BAI’s opening in Johannesburg was itself a sign of how keen companies are to seek deals and investments and establish a presence there.

“You wouldn’t have this sort of crowd if it was a bank from elsewhere in Africa opening up,” commented one foreign financier at the event.

But while Angola expands abroad, it isn’t always as easy for those trying to get a share of Angola’s growth.

Investors complain of frustrating officialdom, corruption, a lack of transparency and astronomical operating costs as well as the difficulties of finding businesses or instruments to invest in despite the money flowing to Angola as a result of the oil.

Betting on Zimbabwe

With global risk aversion decreasing there has been renewed interest in frontier markets.

They don’t come much more frontier than Zimbabwe, which is where Investec Asset Management is looking to make one of its newest investments – buying into a supermarket chain – and then for other potential opportunities.

Despite the continued political troubles since President Robert Mugabe and old rival Morgan Tsvangirai put together a power sharing government just over a year ago, Zimbabwe’s economy grew last year for the first time after a decade of debilitating decline. Growth was estimated at nearly 5 percent.

Returns on the stock market have been even better, although trading remains thin. The ZSE Industrials Index is more than 160 percent above where it was a year ago if down 20 percent from its high last October).

Chris Derksen, head of frontier markets at South Africa-based Investec Asset management, which has $1.5 billion invested across the continent, saw strong further potential given gross domestic product in 2008 was half that of a decade before and Zimbabwe’s share of the economy in the Southern African Development Community had shrunk even more dramatically.

He sees the consumer sector as particularly promising.

“The Zimbabwean consumer is coming from a very low base and the potential for catch-up growth is strong. The difficulty, of course, is getting the timing on a sustainable change right,” Derksen said.

African poverty falling faster than thought?

The old image of an Africa doomed to get ever poorer has certainly lost credence over the past decade even if it is a view still held by some.

Well, according to a new study, Africans are getting wealthier more quickly than previously believed and the poorest continent’s riches are also spreading beyond the narrow confines of its elite.

“Africa is reducing poverty, and doing it much faster than we thought,” the study by U.S.-based economists Xavier Sala-i-Martin and Maxim Pinkovskiy said.

“The growth from the period 1995-2006, far from benefiting only the elites, has been sufficiently widely spread that both total African inequality and African within-country inequality actually declined over this period.”

The research, which assesses poverty levels and income distribution from 1970 to 2006, lends weight to a belief among local and foreign investors that Africa is finally getting its act together 50 years after shaking off the colonial shackles.

The study, published by the private, non-profit U.S.-based National Bureau of Economic Research, also challenges the suggestion that strong African growth over the last decade or more has done little to alleviate grassroots poverty due to the countervailing effect of equally strong population expansion.

Going by an inflation-adjusted $1 per person per day yardstick, the study, using statistical analysis pioneered by the two authors said 32 percent of Africans were in poverty in 2006, compared to 42 percent in 1995 and 40 percent in 1970.