9 August 2014

Africa: Trade With African Economies and Investment in Africa Offer Big Rewards

Photo: http://www.thisdaylive.com
Sim Tshabalala

Washington, DC — In his famous piece 'How to write about Africa', the Kenyan author Binyavanga Wainaina satirically advised pundits to 'treat Africa as if it were one country... 900 million people who are too busy starving and dying and warring and emigrating to read your book... so keep your descriptions romantic and evocative and un-particular.'

While Wainanina was writing firmly tongue in cheek, he elegantly expressed a major challenge facing African governments and business people aiming to engage as equals with the world economy, establish mutually beneficial trade relationships, and attract investment. Africa is still often perceived in the West mainly as a recipient of pity and aid dollars, a source of raw materials, and a very risky bet for the bravest of investors. Fortunately, all this has been changing since the turn of the century.

Wainiana's warning about generalisations is important. Africa is indeed extraordinarily heterogeneous. But it is permissible to sum macroeconomic aggregates. The continent's growth rate has exceeded five per cent a year for more than a decade now. Foreign direct investment into Africa has increased dramatically in the last decade and a half, and continues to grow. In 2013, FDI to Africa increased by 9.6% to an estimated $56.6 billion, representing 5.7% of global FDI. FDI is forecast to exceed $60 billion in 2014.Total foreign inflows to the continent reached $186 billion in 2013, and are expected to top $200 billion in 2014. Africa, in other words, has become one of the world's most favoured investment destinations.

Emerging economies - and the BRICS in particular - are seizing the African opportunity. China-Africa trade has surged from $10 billion in 2000 to more than $200 billion in 2013, making China Africa's largest trading partner. A wide range of firms from India, Brazil and South Africa are also expanding quickly in Africa, often with strong support from their governments. US-Africa trade has also been increasing, although on a gentler trajectory - doubling from about $50 billion in the early 2000s to $110 billion in 2013.

Major private equity firms, including the Carlyle Group, have launched Africa-focused funds valued in the hundreds of millions. And leading technology companies are investing in new ventures and start-ups across the continent. IBM has invested at least $100 million, with new Innovation Centres in Lagos and Casablanca. Microsoft and Intel Capital are embarking on partnerships with African tech companies, and Google is working on delivering broadband to remote communities.

Africa, in other words, has come a very long way from its era of aid-dependence. As former President of Ghana John Kufuor memorably put it, 'Africa is being courted vigorously by China and the other emerging economies, while our traditional partners in the West are also holding on tight. Africa must ensure that it comes out of this tango better off.' Trade with African economies and investment in Africa offer big rewards - but it requires sound local knowledge, strong local partnerships, and a long term view, to ensure that both Africa and her dance partners maximise their returns.

A sceptic might well reply that we've been here before. Is the present moment really different from previous bursts of Afro-optimism? Won't growth tail off as commodity prices soften? Isn't it true that Africa lacks the internal growth needed to supplement external demand? Aren't Africa's governance institutions still too weak to support sustained growth? On the first question, there's a precise quantitative answer, courtesy of the wonks at the IMF. While the era of steep commodity price increases does indeed appear to be over, the IMF is projecting, at worst, mild declines in most commodity prices until 2018. What's more, even a quite significant decline in commodity prices would have a surprisingly limited impact on African growth. Even if commodity prices fall by as much as 25%, Africa's growth would only slow by around half a percentage point a year.

Of course, as Wainaina would remind us, the impact would vary by country. Major oil producers such asAngola would suffer a more serious decline in growth. But even in big oil exporters, economic growth would remain positive. In more diversified economies, such as Ethiopia and Uganda, a dip in the commodities cycle is unlikely to have any meaningful impact on their growth.

About that internal growth engine: Africa has youth, improving health and education, and rapid urbanisation on its side. Between 2000 and 2012, the UN's Human Development Index for Sub-Saharan Africa rose by 7 percentage points. By 2030, 46% of Africans will live in urban areas, rising to 57% by 2050. Across the continent, a rapidly expanding middle class is changing historic patterns of consumption. The trend is particularly apparent in Nigeria, where the middle class has swelled by 600% since 2000. Today, Nigeria is home to 4.1 million middle-class households, containing 11% of the total population.Other economies doing particularly well on this measure include Angola, where 21% of households are considered middle class, Sudan, at 14%, and Zambia, at 10%. This rising middle class is driving a rapid diversification of Africa's economies. Natural resources remain important, but sectors such as wholesale and retail trade, transportation, manufacturing and services are growing fast. The IT story is particularly striking. The number of mobile phone users in Africa has multiplied 33 times since 2000. Within the next five years, it is likely that almost every adult African will have a mobile phone. Over 50% of urban Africans are already online. If they don't like what you're writing about the continent, expect to get a lot of tweets about it.

On governance, there's a lot of work to be done. But the direction is correct.Macro-economic conditions have improved - inflation, foreign debt and budget deficits are largely under control; state-owned enterprises are being privatised; trade is increasingly open; and regulatory and legal systems are stronger. Many countries have taken convincing measures to strengthen government efficiency.

According to the World Bank's 2013 Doing Business report, 17 of the 50 fastest-improving regulatory environments for business are in sub-Saharan Africa. In other words, this time really is different. We're seeing a combination of internal dynamism and far-reaching policy and regulatory reforms that are making many African countries very appealing dance partners indeed. Take the power sector, for example.

The International Energy Agency has described Africa as being 'ripe for a boom in renewable energy'. President Obama's Power Africa programme is working to deliver just that. The programme, which aims to double access to power in sub-Saharan Africa, has identified six African countries which are making big strides in reforming their energy sectors and privatising aspects of power supply.

The US is partnering with the governments of these countries - Tanzania, Kenya, Ethiopia, Ghana, Nigeria and Liberia - to create attractive investment opportunities for American and African firms. The US government has committed more than $7 billion in financial support and loan guarantees for the period 2013-2018 - a commitment doubled by the almost 30 private sector partners, who have pledged $14.7 billion in project finance through direct loans, guarantee facilities, and equity investments.These firms will be working with national governments and global experts to develop power resources responsibly, to build power generation and transmission, and to develop geothermal, hydro, wind and solar energy. They can be confident of a good return - all partners are incentivised to ensure that their projects deliver sustainable benefits to both investors and communities.

But, of course, unquestioning optimism is as foolish as relentless pessimism. Most Africans are very poor by developed world standards. A great deal of new investment ininfrastructure and productive capacity is still required if we are to fix that. Sub-Saharan Africa's investment-to-GDP ratio remains the lowest among developing regions, at just 22%.

Unsurprisingly, therefore, the average return on investment in Africa is very high. According to UNCTAD, the global average return on FDI was 7.2% in 2011; the return on FDI to Africa was 9.3%. US FDI showed a 20% return in Africa in 2010. But, once again, those are averages. To do well on my home continent, US companies need to understand Africa's markets in detail. The US-Africa summit and CEO forum are an important step towards deepening that understanding.

SimTshabalala is the Chief Executive of Standard Bank Group

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