Alex Vines: Look Westward, Africa
Here are five elements investors should examine to assess whether growth across African markets is sustainable.
There are clear limitations of the idea of a single and definable story behind Africa’s recent economic and political momentum. This narrative of Africa “rising” was always a concerning one, given that the largely commodity-driven growth would at some point temper; that exogenous risks would remain pronounced; and that political change would be bumpy and temperamental.
Now that these cracks have begun to re-emerge — symbolized most powerfully by factors such as the slump in commodity prices and the slowdown in China — those who had propped up the idea of Africa’s seamless “rise” are faced with a dichotomous dilemma: if Africa is no longer singularly “rising”, then by inference, it must be “falling.”
Of course, neither narrative provides an accurate reflection of the dynamics of change taking place across Africa’s 54 economies. The continent is too fragmented and complex to allow such glib and linear propositions to define its trajectory.
Now, more than ever, discussion needs to move towards the merits of individual economies, or regions, as a means of providing a more reflective account of the continent’s merits. This does not mean that we are unable to consider wider trends as indicative of the fundamental potential the continent offers, or the pervasive cross-cutting risks that it equally presents to investors. But it does implore us, when considering the sustainability of growth in Africa, to be far more honest and nuanced in our evaluations.
Commodity prices demonstrate the tremendous divergence inherent in Africa’s outlook. The slump in energy and base metal prices has had a profound and lasting impact on large commodity-exporting economies, such as Angola, South Africa and Nigeria. Yet, the majority of African economies are net oil importers, with oil imports equivalent on average to 20 percent of imports and 7 percent of GDP. Though the gains of lower oil prices will be offset for many of these economies by the slump in metals prices, several important economies — in East Africa in particular — will still notably benefit.
Across the board, there is a 25 percent differential between Africa’s best-performing economy (in terms of GDP growth) this year (the DRC, 9.2 percent) and its worst-performing (Equatorial Guinea, -15 percent). The next five years will likely expand this divergence: the IMF expects Mozambique to grow at an average annual rate of 9.2 percent, with South Africa at best mustering an average of 2.5 percent.
Returning to the question of sustainability, I would suggest that the following factors are particularly definitive for determining the future trajectories of individual economies and, to an extent, regions:
First, political stability. Key disruptions over the past eight years have served to further underline the importance of relative political calm as a support mechanism for sustained economic momentum. As shown by Ethiopia and Angola, democracy and political stability — at least as far as the momentum of economic growth are concerned — are not inherently intertwined. That said, over time, those economies that enjoy the soundest levels of stability will be those that have engaged proactively and progressively in the realization of individual liberties.
Second, sound economic planning, underpinned by appropriate policies and credible institutions. Recently, increased interest in African debt and equity markets has placed a brighter light on the credibility and independence of finance ministry and central bank authorities. Though many economies have undergone notable reforms, elevating transparency and inspiring greater confidence, others have faltered under the intensification of this scrutiny.
Third, diversifying the levers of economic growth. In the main, African economies without meaningful reserves of extractable natural resources have been forced to diversify, and are arguably better-positioned now for the next decade of potential advance.
Fourth, strengthening institutions (particularly related to healthcare and education) and bridging crippling shortages of enabling infrastructure. As we know, Africa’s population is swelling dramatically; by 2050, the UN expects Africa’s population to have doubled to 2.4 billion. Meanwhile, people across the continent are rapidly converging on urban centers.
These trends present compelling opportunities: Africa’s youthfulness, when coupled with sustained economic growth, can allow the emergence of a “demographic dividend” — which could inspire deeper and healthier economic lift. Meanwhile, urbanization has the capacity to bring people closer to markets and services, in so doing elevating socio-economic prosperity. Yet none of this can be taken for granted — and the benefits from these trends will not be equally shared across the continent.
Finally, food security, hinged on broader agricultural reform. Virtually all sub-Saharan African countries have profound agricultural potential, but it will be those that are politically and socially stable; have embedded agricultural reform into long-term economic policy; and have adopted a proactive and sensitive approach to the balance between commercial and small-scale farming, as well as a rational approach to foreign investment, that will realize the most pronounced and sustainable gains.
All of the five determinants can be mapped with hard and soft data, allowing us to more accurately determine if the growth being experienced by many African economies is indeed sustainable. For many, the answer will be in the negative. But for a relatively small group of economies, recent momentum has taken root, and the eagerness for reform is outpacing the risk of regress.
It is worth conceding that, perhaps, the thrust of the “Africa rising” narrative was an important one in the manner in which it served to awaken corporate interest in the continent. Yet those firms now engaged to varying degrees on the continent have likely already realized the limitations of this breathless hype, and will need to broaden and deepen the paradigm through which they assess the continent’s future prospects — hinged on the sustainability of economic and political growth and reform. The answers from this interrogation will be more complex and sobering, but infinitely more appropriate.
Growth patterns will vary across African economies, but partnerships are a critical to sustain them — and while this century may be Asia’s, improved relations with the West are back in fashion.
There is no one country called Africa. Generalized descriptions — or prescriptions for — the “Africa rising” story don’t work in a continent that is so vast in size that it could swallow up Europe, the United States, China, India and Japan combined.
What we can predict is that the growth pattern over the next decade will be variable — some countries doing much better than others. This is to do with leadership, governance, education and skills and location. Given Africa is the most youthful continent in the world, turning demographics into an advantage is critical for growth.
Yet just as the world shouldn’t view Africa through a single lens, African countries will increasingly need to consider geographical diversification as a growth strategy.
Shortfalls of electricity and skills deficits are a drag but significant mega-project infrastructure investment are already underway. Young, fast growing urbanized populations are generating domestic consumption for products and services although Africa’s manufacturing capacity is tiny outside of South Africa.
External market shocks still impact Africa’s growth trajectory. The sharp decline of commodity prices — brought about by cooling demand for oil and minerals from China — is having an impact on commodity exporters such as Nigeria, Angola and Zambia. This has resulted in a slowdown in investment from China, Brazil, Turkey and the Gulf countries, as well as a bit of a pullback diplomatically.
The U.N.’s 2015 World Investment Report noted that foreign direct investment in Africa remained flat at $54 billion, decreasing in North Africa while rising in sub-Saharan Africa to $42 billion. What the report illustrated — and what African governments have increasingly appreciated — is that the United States, Britain and France remain leading sources of foreign direct investment. Indeed, by number of projects (if not value of deals) Britain and the United States remain the leading sources of FDI in sub-Saharan Africa, followed in third place by South Africa.
U.S. private equity firms such as KKR and Carlyle Group have recently made their first sub-Saharan African investments, and this trend will grow. Foreign direct investment is still highly concentrated in a few resource-rich countries such as South Africa and Nigeria, but this will change over time. More private equity will be drawn to Africa as governments improve their “ease-of-doing business climate.”
The World Bank’s most recent Doing Business report found that some 35 sub-Saharan economies have implemented one pro-business reform in 2013-14, with the region accounting for five of the top 10 improvers worldwide in 2014. It is worth noting, though, that 14 of the 20 least competitive economies in the world are in sub-Saharan Africa — a further reminder to avoid generalization.
East or West?
This century may be Asia’s, but the slowing of the Chinese economy and the strengthening of the U.S. economy have encouraged a greater realism among many African governments that they need diversified partnerships to navigate a changed world order.
China remains part of this calculation, but improved relations with the West is back in fashion — as highlighted by President Obama’s trip to Nairobi in July and his meeting with Nigerian President Buhari in Washington. Angola, which has become highly dependent on Chinese loans and trade, is also showing willingness to improve its relationship with Washington.
Meanwhile, South Africa appears to be pulling in an opposite direction despite the importance of western investment for its economy. As many African states try to widen their international choices, South Africa risks becoming trapped in its BRICS — Brazil, Russia, India, China, South Africa — narrative.
Just as Africa shouldn’t be seen as a single entity, the economic realities facing African economies today is far a zero-sum choice between the East and West. Diversification of partnerships will play an increasingly important role in the growth strategy of many African governments.