Africa: potential, challenges & risks

This Economist Intelligence Unit webinar was presented by the EIU Regional Director for Africa, Pratibha (Pat) Thaker on .   The following are my notes from the webinar.

1.  Introduction: Growth forecast optimistic

The continent of Africa is growing faster than any other place in the world other than India and China.   The fastest growing economies in the continent are Angola (10.3%), Nigeria, and South Africa.  Most of the other countries are expected to grow quickly as well; there are some exceptions such as Zimbabwe and Swaziland (-1 and 3% growth, respectively), but these are in the minority.

2.  What is driving growth in Africa

a.  External demand from China and India, particularly for natural resources such as oil (Nigeria and Angola) and minerals (Tanzania).   This demand is keeping commodity prices high, which has fueled much of Africa’s growth recently.   Oil has been discovered in Uganda recently and in Kenya as well.

b.  Domestic demand driven by increasing urbanization and rising disposable incomes.   This is true of emerging service sectors such as telecommunications and banking, but in traditional sectors such as agriculture (Ethiopia, Rwanda).

c.  Political changes have brought stability and growth.   Improved economic management after the debt relief in 2006 and 2007 has led to increased capital inflow.

d.  Demographics:   Africa has the youngest and most populated market in the world.    More than half of population is under 24.   By 2050, Africa’s population will be 2 billion, greater than the 1.6 billion in India or 1.4 billion in China.   Urbanization is rapid: 40% of Africans live in cities; lower than China but higher than India, but by 2030, urbanization will increase to 63% of Africa.   Meanwhile, the middle class is growing and families are starting to have fewer children.   10 years ago the average African woman had 6 children; today she has 5 (compared to the average of 1.7 in Asia).    The growing middle class will create demand for schools and utilities.

3.  Foreign investment in Africa

Foreign direct investment peaked in 2008, dipped in 2009 and 2010 in line with global recession, but has quickly picked up again.   The top three deals that foreign companies have recently made in Africa are the following:

a.  Bharti Airtel (India) buys Zain’s African assets for $10.7B, which overnight allowed it to do business in over 15 African countries.

b.  NTT (Japan) completes takeover of South Africa’s Dimension Data for $3.3B

c.  Wal-Mart (US) buys 51% of SA retailer Massmart for $2.4B after finally winning approval from the competition authorities who were concerned about trade union opposition.   Wal-Mart wants to use South Africa as the gateway to the rest of Africa.

Most African markets are open in telecommunications and banking, but there are some exceptions:  Ethiopia does not allow foreign direct investment in either sector.

4.  Regional trade is growing

There are four main trading blocs in Africa:

a.  SADC (S)

b.  Comesa (SE)—links Egypt to Africa

c.  EAC (E)—integrating the fastest of all blocs; common market introduced in July 2010

d. Ecowas (W)

A common African bloc unifying all four regional blocs will take several years to materialize.   A single currency has been proposed by 2012, but will probably take until 2015 to complete.   A single currency has been proposed by 2012, but will probably take until 2015 to complete.

5.  Key obstacles to foreign investment

1.  Cost and difficulty of setting up a business—varies from country to country:  takes 2 days in Rwanda, 18 months in Kenya, and hard to get business visa in Angola.   Mauritius, South Africa, and Botswana are the 3 easiest locations for doing business in Africa.

2.  Skill shortages, labor market restrictions

3.  High taxes and complex tax systems

4.  Dealing with licenses and property registration

5.  Contract investment

Overall the top worries of investors are the infrastructure and skill level of workers, but improvements are going on in these areas.   In fact, investments in infrastructure and education are some of the most promising areas for growth.

6.  Political liberalization

After Arab Spring last year, what are prospects of an “African Spring”?

Underlying conditions are similar:
a.  Authoritarian governments & geriatric rulers

b.  high unemployment & widespread poverty

c.  corruption & excessive regulations

But there are key differences between Africa and Arab countries:

a.  Larger rural populations in SSA

b.  Less extensive use of the Internet & social networking

c.  Smaller middle class

d.  Less organized opposition groups

e.  Slightly better democratic record

For the above reasons, Pat Thaker thinks it is unlikely an Arab Spring willspread into SSA (sub-Saharan Africa); however, there may be sporadic food and fuel related protests.  However, over the medium term, political pressure on governments to deliver goods and services to people will be ongoing due to the demographic pressures mentioned above.

7.  Conclusion

In short, there has been an increased global understanding of the tremendous potential for growth in Africa in the next 5 or 10 years.



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