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African growth has started to decouple itself from resources and is increasingly being driven by other sectors, spurring investment

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In January 2015, the IMF revised its growth prediction for the continent to 4.9% for the year, down from the 5.8% it had forecast in October 2014.

What’s remarkable about the forecast is that it is still so upbeat. The prices of minerals, on which African economies seemed so dependant, fell throughout 2014, with gold, copper and iron ore being just off five-year lows at the end of December.

‘Even though growth rates are down, the actual volume growth in China will boost demand in the future and will lead to metal prices rising,’ says Coenie Middel, founder of advisory firm Middel & Partners. ‘With global urbanisation increasing, around 60% of the world’s population will be living in cities by 2050. The need for metals, most notably copper, iron ore and platinum will stimulate demand and price.

‘Current metal prices for copper and platinum are currently low, with supply exceeding demand. However, with a compounded growth rate of 18% over the next three years, the demand will exceed supply.’

In the previous three decades, declines in commodity prices would have spelled doom and gloom for Africa. Indeed, those with long memories were likely to have understood the oil price plunge since August – from just over $100 to under $60 in February 2015 – as the final nail in the continent’s growth prospects. But this is not so.

Despite the oil price issue, the IMF still forecasts a robust growth rate of 4.8% for Nigeria – down from an expectation of 7.3% in October. Somewhat tardily, the organisation hasn’t revised its September 2014 projection for Angola (5.9%) but the rather more on-the-ball Economist Intelligence Unit has – from 5.5% to 4.8%.

Why are these pundits still so optimistic about African growth? The reason is straightforward: African growth has started to decouple itself from resources and is increasingly being driven by other sectors such as banking, telecoms, consumer goods and infrastructure.

Old Mutual Investment Group director Hywel George told Bloomberg: ‘It’s not merely a matter of resources but also about providing the structures and systems required by the burgeoning growth in the middle class, now larger than that of India.’

‘The real story remains that of the developing consumer market driving the growth of the retail sector. These consumers are increasingly accessing services in banking, insurance and mobile telecoms.

‘Housing and infrastructure development also remains a key theme as well investment in agriculture,’ he said.

The changes, in some cases, have been striking. ‘If you had visited the copperbelt region in Kitwe, Zambia, or Kolwezi in the DRC five years ago, you would have travelled via roads full of potholes. Now you will find beautifully paved roads,’ says Middel. ‘A proper road network in any country is essential for development and some African countries are doing something about this.

‘Access is being improved, goods are being shipped faster and this is helping stimulate growth. I have witnessed this myself over the last 10 years. The DRC, for example, is a very different place to what it was like in 2010.’

According to Michael Duncan, executive leader of Marsh Africa, the continent is attracting FDI largely because the political and economic climate is more stable. ‘Although there is an infrastructure deficit throughout the continent, virtually every government is committed to addressing this as they recognise this as an imperative to ensure GDP growth and attract foreign investors,’ he says.

‘While Africa currently has a small middle-class population, an increasing number of countries can boast a significant “middle income” group, in terms of the World Bank classifications, with an ever-increasing amount of disposable income.

‘It is revealing to note that almost two-thirds of households in 23 sub-Saharan countries have at least one mobile phone, with a 27% average annual growth in mobile phones since 2008, according to Gallup.’

In other respects, however, the issues Africa faces remain the same. In an online article, Martyn Davies, CEO of Frontier Advisory, poses three big questions on the sustainability of African growth.

The first addresses just how inclusive resource-based growth will actually be. Africa’s track record is hardly a cause for optimism. As Davies points out, in too many countries ‘wealth is unable to trickle down into society from “narrow” extractive industries, especially in the face of corrupt and bureaucratic governments’.

Secondly, he questions the sustainability of the continent’s consumer boom: at this point in time, it appears to be a genuine unknown.

Third, asks Davies, how fast and deep will African industrialisation be? ‘I cannot think
of a single developmental success story in which an economy has developed without industrialising,’ he says. This is the nub of the issue. An ‘Africa rising’ story based solely on consumerism would fly in the face of decades of developmental wisdom and experience.

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‘It’s not merely a matter of resources but also about structures and systems’

HYWEL GEORGE, DIRECTOR OF INVESTMENTS, OLD MUTUAL INVESTMENT GROUP

It is here that African countries are increasingly differentiated. Using growth to build the sort of economic resilience we are now seeing in the continent is something much more complex and the key to this is better governance. As Davies puts it: ‘Ultimately governance will determine whether the resource rents are reinvested into ensuring that African economies are sustainable.’

Previously, resources windfalls simply generated profligate spending in most African countries. Only Botswana, perhaps, resisted the impulse to buy political popularity when the going was good. But when commodity markets turned, as they always do, economies have crashed and political tensions risen.

While all African nations have issues, reform has followed reform across the continent for the last decade. Countries that have concentrated on rehabilitating their investment climate have positioned themselves the best.

Such reforms are cumulative. As the World Bank/IMF index, Doing Business, points out, Rwanda now offers a more enticing regulatory set up than Italy. It is ranked 46 while Italy is 56. Rwanda’s most spectacular sub-category is ‘access to credit’, where it is ranked fourth in the world.

Five of the index’s top 10 reformers in 2014 were African economies: Benin, the DRC, Côte d’Ivoire, Senegal and Togo.

According to the report, Côte d’Ivoire ‘made starting a business easier by reducing the minimum capital requirement, lowering registration fees and enabling the one-stop shop to publish notices of incorporation’. That’s in addition to making ‘transferring property easier by digitising its land registry system and lowering the property registration tax’.

Namibia, on the other hand, made paying taxes more complicated for companies by introducing a new vocational education and training levy.

It hardly needs to be pointed out that across the continent, investment climate reforms are generally inconsistent. Countries that have reformed have taken a giant step forwards while others have been left behind.

The differential impact of the oil market’s downwards move will powerfully test the quality and depth of governance reforms. Oil exporters such as Nigeria and Angola, which depend on oil for around 70% and 80% respectively of government revenue, will find their room for manoeuvre much more restricted, and political stresses may well be exacerbated.

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Ghana, another oil exporter, was already spending more than it could afford, although it does have a more diversified economy, an entrenched democracy (by African standards) and a fiscus that is less dependant on oil revenues. But its rapidly devaluing currency suggests some pain may probably lie ahead.

Elsewhere on the continent, those oil-importing countries that have coherent industrial policies can be expected to thrive as lower energy costs stimulate demand. None is better placed than Kenya.

In late 2014, the IMF announced that ‘rising domestic and foreign investment are set to boost economic activity in Kenya, as the central African country reaps rewards of extensive institutional reforms and prudent macroeconomic policy’.

Kenya has a long history of market-friendly policies although its ranking in the Doing Business index (136) is only slightly above the African average.

Recently, says the IMF, the Kenyan government has spent wisely on infrastructure, notably in the energy sector as well as upgrading the Nairobi-Mombasa rail link. Mombasa is the major transport hub for the entire region, including Uganda, Rwanda and South Sudan. Mobile telephony in Kenya is well developed, agricultural productivity is high and, in December 2014, the EU reinstated duty- and quota-free market access.

This is especially good news for Kenya’s cut-flower industry, which is the dominant winter seller into European markets.

The impact of the lower prices on the oil and gas industries of Kenya, Tanzania and Mozambique is yet to unwind. However, if the new low $50 to $60 per barrel level is maintained, it may be that these countries have missed out on the boom.

That said, there is a need for industrialisation in these countries already.

As Davies points out, China is currently moving away from its old model of churning out low-end, mass-produced goods and achieving market access for these products by keeping its currency artificially low. There are indications that production is shifting to other developing countries.

A gap has thus opened up. Can some African countries step into it?

Ghana and Kenya appear eager to make the attempt. Davies, however, identifies another frontrunner: ‘Ethiopia’s “authoritarian developmental” model is conducive to working with Asian investment, which wants a stable manufacturing platform.’

As he explains, the World Bank predicts that due to rising production costs, China will lose up to 85 million (mostly manufacturing) jobs over the coming years. Just 10% of that share would double Africa’s industrial workforce.

This means that many of those raw materials currently exported without beneficiation could be used in Africa to drive a new growth phase.

By David Christianson
Image: Gareth van Nelson/HSMimages