Why shrewd businesspeople should be eyeing Africa’s smaller economies
The author, Richard Li, is a Singapore-based partner with Steel Advisory Partners, a management consulting firm that serves clients across industries. This article was produced for the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation.
The International Monetary Fund (IMF) released its World Economic Outlook in early October, reviewing the state of the global economy. According to its latest economic data, the 2016 economic growth of sub-Saharan Africa is the worst since 2000. This is because in 2016 there were more African countries that had experienced a drop in their economic growth. When compared to their 2015 performance, the economic growth in 34 out of 54 African countries declined.
However, despite this dismal overall performance, there are 31 countries that grew by at least 3% in 2016. Out of these countries, there are 14 that grew above 5%. Not only do most of these countries have in fact a small economy with a gross domestic product (GDP) of less than US$50bn, but they are also predicted to consistently grow at a fast pace in the coming years. Hence, even if growth in the big African economies is lagging, the smaller countries are accelerating forward.
Lagging large African economies
While the IMF predicts that 2017 will be better for Africa, the five biggest African economies will still barely grow. According to IMF data about GDP at constant prices, Algeria and Egypt will decelerate from 3.3% and 4.4% in 2016 to 1.5% and 4.1% in 2017 respectively. Although Angola, Nigeria and South Africa will improve, they will barely grow at 1.5%, 0.8% and 0.7% respectively.
The impact of the decline of oil prices has been felt the most in Algeria, Angola and Nigeria. Egypt has been greatly affected by the 2011 revolution, when its economic growth dropped to 1.8% from 5.1% in 2010. However, Egypt is slowly recovering and its growth is picking up to above 4%. The IMF forecasts that Egypt will grow at 4.5% and 5.3% in 2018 and 2019 respectively.
The effects of the political uncertainties with South African President Jacob Zuma and his government are directly felt on the economy, affecting the overall business confidence. According to the United Nations Conference on Trade and Development (UNCTAD), South Africa has been experiencing massive foreign direct investment (FDI) outflows since 2012. This means that South African businesses are keener to invest overseas than within the country.
The consequences are revealed, not only in the IMF data for job creation in South Africa, with the unemployment rate reaching about 28.3% in 2018, but also in the economic growth estimates of 1.1% and 1.6% in 2018 and 2019 respectively. Except for Egypt, the economic growth of the other big African economies will be lagging and be less than 2% in the coming years.
Top 10 fastest-growing economies
The IMF statistics show that the economic outlook for the smaller African economies looks much brighter and more optimistic. By and large, in 2017, 36 out of the 54 African countries will improve their economic growth performance and 37 countries will grow by at least 3%. Moreover, 17 countries will grow by at least 5% whereas only four countries will have negative or zero growth. This means that while growth will improve more broadly among the smaller African countries, the overall growth in Africa will be dragged down by the biggest African economies in the future.
For 2016, the top five fastest-growing economies were Ethiopia, Côte d’Ivoire, Tanzania, Senegal and Guinea. In 2016, they grew by 8%, 7.7%, 7%, 6.7% and 6.6% respectively. Only Ethiopia and Tanzania have a GDP above $50bn and are estimated to reach $79.7bn and $51.6bn in 2017, respectively. The GDP of Côte d’Ivoire, Senegal and Guinea will reach $39.9bn, $16.1bn and $9.2bn in 2017, respectively.
Among the next five fastest-growing economies, only Kenya, with an economic growth of 5.8% in 2016, has a GDP above $50bn and is estimated to reach $78.4bn in 2017. As for other countries – Burkina Faso, Djibouti, Guinea, Rwanda and Sierra Leone – they grew at least 5.9% to a high of 6.5%. Moreover, all these economies have a GDP of less than $15bn.
Looking at these 10 fastest-growing African countries, there are in fact three booming regions. In East Africa, there are three countries – Kenya, Rwanda and Tanzania leading the pack. Within the Horn of Africa, Djibouti and Ethiopia are the bright spots, while in West Africa, Côte d’Ivoire is leading the region with Senegal, Guinea, Sierra Leone and Burkina Faso closely following behind.
Outlook of these fastest-growing economies
Except for Sierra Leone that was greatly affected by the ebola outbreak, contracting its economy by 20.5% in 2015, the other countries have consistently grown by more than 3% over the last few years. Moreover, the IMF growth estimates for all these 10 countries show that they will consistently grow above 5% until 2022. These 10 countries have a combined GDP of $303bn in 2017, representing about 15% of the whole of Africa. If all these countries grow at more than 5% average until 2022, they will potentially add another $100bn to their combined GDP.
In fact, since 2006, their combined GDP has nearly tripled, growing at a cumulative annual growth rate of about 9.4%. This growth has had a great impact on their GDP per capita. In 2006, Ethiopia had the lowest GDP per capita at $198, while by 2017, it has improved the most, increasing its GDP per capita by 302% to reach $795. Not to be left out, Kenya, Rwanda and Tanzania have also increased their GDP per capita by a staggering 109%, 108% and 103% respectively.
According to the UNCTAD data, not only have most of these countries been able to create the right conditions to attract FDI, but the amount of FDI received has also been increasing year on year. In 2006, these 10 countries attracted a combined FDI inflow of $1.9bn; by 2016, this inflow had increased by 3.8 times to reach $7.3bn, about 12.3% of the total FDI attracted by Africa. As a result, the total FDI stock within these 10 countries has now reached $66.4bn, up from $16.9bn in 2006, a 3.9 times increase.
From 2006 until 2016, the top three countries that have increased their FDI stock the most, are Rwanda, Burkina Faso and Kenya, increasing by 25.4, 11.7 and 9.6 times respectively. The effect of all these foreign investments has been translated into higher economic growth, as well as higher potential returns for the investors. This reinforcement cycle of investment and economic growth will continue, as shown by the high growth estimates by the IMF for the coming years.
Côte d’Ivoire, Djibouti and Kenya are already countries within the middle-income category. With their high growth rates, other countries like Senegal and Tanzania will also climb into that category in the short term. By and large, the high growth rate will eventually increase the wealth within all these countries, thereby potentially creating a bigger middle-class consumer market. As a result, this middle class will also spur the overall economy of these countries in the future.
Smaller African countries looking very attractive
The shrewd investors, while the overall economic performance of Africa by the latest IMF review does not look too fantastic, will see the forest for the trees and the silver lining of every cloud. There are many bright spots among the smaller African countries, where there are potential opportunities that can be tapped into.
As shown by the top 10 fastest-growing African countries, there are many countries within the African continent, that have great future potential. The IMF estimates that 37 countries will grow by at least 3% in 2017. And there are 14 countries that are growing by at least 5%. In fact, the IMF predicts that the number of African economies growing by at least 5% will increase to 22 and 24 in 2018 and 2019, respectively.
Therefore, to build on the progress made so far, all African governments must continue the hard work of improving the overall economic environment of their respective countries, so that the whole continent can be uplifted.
Richard Li is a Singapore-based Partner with Steel Advisory Partners, a management consulting firm that serves clients across industries. Having spent his working career in strategy consulting, he worked with various global clients and covers themes such as Corporate Strategy, Transformation, Digital Innovation and Risk Management. He can be contacted via the Steel Advisory Partners site. This article was specifically written for the NTU-SBF Centre for African Studies.