The case for investing in Africa has been widely made. The continent is booming and offers a largely untapped market, which is evident when seeing businesses investing widely in sub-Saharan Africa. The key reasons for doing so are:
- The region has been doing very well economically, growing at 5.6% per year in the last decade. Six of the 10 fastest growing economies in the world in the past decade were in sub-Saharan Africa. According to the IMF’s latest forecasts, six of the 10 fastest growing economies in the next five years will be in sub-Saharan Africa
- A large market: 840 million people, with a total US$1.9 trillion in purchasing power, making it larger than some of the BRICS
- A sharp reduction in political conflicts
- An improved macroeconomic environment, with inflation and budgets broadly under control
- A better business climate owing to regulatory reform and privatisation
- Improved access to and integration with international capital markets
- Favourable demographics: from a rapidly growing population and labour force, to urbanisation and growth in the middle class
- The perception of it being the “last frontier”
But sub-Saharan Africa comprises 46 countries (including South Sudan) with vastly different population sizes, income levels, growth rates and operating conditions. How you choose between these countries will depend on your particular company’s circumstances. It is important to allow for an element of flexibility when an investor is looking to implement a pan-African strategy.
Where are corporates going?
According to UN statistics, within sub-Saharan Africa, South Africa and Nigeria have the greatest amount of foreign capital invested, with Sudan, Angola and the DRC falling some way behind. Angola has been receiving a huge share of new investment more recently, with Ghana, Equatorial Guinea, Zambia, Uganda, the DRC and Madagascar also seeing meaningful inflows.
We have noticed a huge pick up in investment activity from our South African clients. The rollout strategy is generally quite similar, with firms first looking at neighbouring countries, then Zambia and east Africa before moving on to either the DRC or one of the big west African nations – Nigeria or Ghana.
Surveys confirm that investors are primarily interested in sub-Saharan Africa as a resource play while it is still largely off the map in terms of being seen as a manufacturing centre. But the most notable increase in interest has been in sub-Saharan Africa’s consumer market.
Countries with high consumption growth potential
Companies should take into account future market growth. We do this by looking at:
- Population size: to provide an indication of potential market size
- Forecast population growth rates: to provide an indication of growth in market size
- Forecast per capita GDP growth rates: to provide an indication of the growth in future purchasing power
- Urbanisation growth rates: to provide an indication of future market concentration
- For each of the different measures, we created an equally weighted ranking index that combines the variables into a single measure. Uganda, Ethiopia, Kenya, Angola and Tanzania have with the most favourable macroeconomic backdrop for consumption spending growth.
Reasons to be cautious
There seem to be few willing to challenge the Africa success story. Nevertheless, the arguments for caution are not hard to find:
- A large part of the achievements of African economies in the last decade might simply be a result of the increase in resource prices. While we agree that domestic demand has contributed significantly, it remains to be seen how well sub-Saharan Africa would perform if commodity prices entered a prolonged slump.
- Past success doesn’t necessarily imply future success. We looked at the correlation between country economic growth in the 1980s and the 1990s, and the 1990s and the 2000s and found that countries that did well in one period did not necessarily do well in the next.
- Political risks may be diminished but remain high, as the recent problems in the Côte d’Ivoire demonstrate.
- Most sub-Saharan African countries are still far from fulfilling the conditions associated with sustained economic success in other developing countries. Most economies are still relatively closed, governments widely interfere in the private sector, leadership and administration capabilities are weak and, most of all, investment rates are inadequate.
While sub-Saharan Africa might be reforming and growing rapidly, most countries still have a long way to go when it comes to investor-friendly regulatory/business environments. But it is an investment opportunity that is not to be missed.
Celeste Fauconnier is an Africa analyst for the RMB Fixed Income Currency and Commodities Research Team. The FNB/RMB “Doing Business in Africa” conference, organised by the Cape Chamber of Commerce and Industry in association with How we made it in Africa, will take place on 25 & 26 July 2012 at the 15 On Orange Hotel, Cape Town, South Africa. To book a place contact Denise Kolbe at firstname.lastname@example.org