HomeBusinessUnleashing investment opportunities in Africa

Unleashing investment opportunities in Africa

-

Africa’s household consumption has continued to grow at a robust pace. Sixty percent of consumption growth has come from an expanding population, and the rest from incomes rising enough to fuel spending on discretionary goods and services as well as basic necessities — all powered by rapid urbanisation.

By Kudzai Goremusandu

According to McKinsey Global Institute 2016 report despite the various challenges, Africa’s domestic consumption and corporate spending are both growing strongly, offering companies a $5,6 trillion opportunity by 2025.

Africa’s manufacturing sector today underperforms those of other emerging economies. However, output could expand to nearly $1 trillion in 2025 if Africa’s manufacturers were to produce more to meet domestic demand from consumers and businesses, and work with governments to address factors hindering their ability to produce and export goods.

To realise this potential will require Africa’s companies to step up their performance. Africa is home to 700 companies with revenue of more than $500 million per year, including 400 with revenue above $1 billion. However, the region has a relatively small number of large companies. It needs more.

Africa achieved impressive economic growth over the past 15 years with the average gross real domestic product (GDP) rising from just above 2% during the 1980-90s to above 5% in 2001-14.

In the past two years, growth has been more moderate; this trend is expected to continue in 2016, but strengthen in 2017.

Africa’s growth is adversely affected by headwinds from weaknesses in the global economy and price falls of key commodities, but is supported by domestic demand, improved supply conditions, prudent macroeconomic management and favourable external financial flows.

The Africa economic report 2016, forecast assumes a gradual strengthening of the world economy and the slow recovery of commodity prices.

However, given the fragile state of economic recovery and the high volatility of commodity prices this forecast is uncertain. Growth remained highest in East Africa, followed by West Africa and Central Africa, and is lowest in Southern Africa and North Africa.

Rapid urbanisation in Africa creates an opportunity for business. Africa is the world’s fastest urbanising region. Over the next decade, an additional 187 million Africans will live in cities — equivalent to 10 cities the size of Cairo, Africa’s largest metropolitan area.

Between 2015 and 2045, an average of 24 million additional people are projected to live in cities each year, compared with 11 million in India and nine million in Chinas.

Urbanisation has a strong correlation with the rate of real GDP growth, because productivity in cities is more than double that in the countryside: Africa’s urban GDP per person was $8 200 in 2015, compared with $3 300 in rural areas. Higher productivity translates into higher incomes, and cities offer better access to infrastructure, education, and new markets, resulting in more rapid growth in consumption by households and businesses.

The challenge will be to cope with the stresses of rapid urban expansion, including provision of housing and services.

The projected economic growth decline in China provides an opportunity for Africa. In emerging and developing Asia — the fastest-growing region in the world — growth declined from 6.8% in 2014 to 6,5% in 2015. In the People’s Republic of China, the largest economy in the region, growth continued to decline to below 7% from 7,7% in 2013 and 7,3% in 2014.

China’s weaker growth and its transition from investment and exports of industrial goods towards consumption and services is an important factor in the recent drop in commodity prices, which suggests that the “commodity super cycle” of the past decade has come to an end.

While lower commodity prices are providing significant headwinds to Africa’s commodity exporters, the rebalancing of China’s economy towards more consumption may provide backwinds to Africa’s economies in the coming years.

African countries best placed to export consumer goods to China, including agricultural products, are those that will benefit most from China’s switch to more consumption-based growth.

Africa can take advantage of the high population of young people. The continent has a young population and a growing labour force — a highly-valuable asset in an aging world. The challenge for Africa will be to ensure that its economies continue to create sufficient jobs for the many millions of young people entering the workforce — thus, far the signs are positive with the rate at which stable jobs have been created outpacing growth in the workforce — and to help develop their skills.

By 2034, the working-age population is expected to be 1,1 billion, larger than that of either China or India. Roughly 60% of the world’s population lives in countries with fertility rates below replacement rates and, for the first time in human history, demographic change could mean that the planet’s population plateaus. In some countries, one-third of the workforce could retire in the period to 2025, with a potentially negative impact on economic growth prospects.

Africa contains 60% of the world’s unutilised, but potentially available cropland, as well as the world’s largest reserves of vanadium, diamonds, manganese, phosphate, platinum-group metals, cobalt, aluminum, chromium, and gold.

It is responsible for 10% of global exports of oil and gas, 9% of copper, and 5% of iron ore. Even at recent low prices for such commodities, a significant share of African production continues to be cost competitive, putting the resources sector in a strong position for when demand and, eventually investment — recover.

Recent Posts

Stories you will enjoy

Recommended reading