24 Aug 2016

The Business Times

By OMID KASSIRI, ACHA LEKE

AS GLOBAL economic conditions have become more challenging, Africa's remarkable development story of the past 15 years has lost some of its shine. However Africa's socio-economic fundamentals are strong. This is a young continent in an ageing world; by 2034, Africa will have a larger workforce than either China or India. Africa is urbanising rapidly, and consumer and business spending is growing at a rapid clip. The International Monetary Fund (IMF) expects Africa to be the world's second-fastest-growing regional economy over the next four years.

In Africa as a whole, GDP growth has slowed from 5.4 per cent between 2000 and 2010 to 3.3 per cent from 2010 to 2015. But look at individual countries, and we see a divergence in economic performance. Two groups of African economies have taken a significant hit on growth: North African nations caught up in the Arab Spring movements, and Africa's oil exporters. However, the rest of the continent has succeeded in accelerating growth to 4.4 per cent over the past five years from 4.1 per cent in 2000-2010.

This is still a continent on the move, with attractive opportunities for investors. Spending by consumers and businesses already totals US$4 trillion, and is growing rapidly. Based on the current trajectory of spending growth, this could be heading towards US$5.6 trillion by 2025, according to forthcoming research from the McKinsey Global Institute (MGI), the business and economics research arm of McKinsey & Co.

By tapping rising demand for a wide range of manufactured goods such as processed food and beverages, cars and trucks, and construction materials, Africa could nearly double its manufacturing output to reach US$1 trillion - well above the current growth trajectory of US$640 billion in 2025.

Three-quarters of the manufacturing opportunity can come from the region increasingly producing at home what it currently buys from abroad. Today, the region imports one-third of what it consumes in the categories of processed food, beverages, fabricated metals, and similar goods that are not easily traded. This compares with 20 per cent in the case of the Association of Southeast Asian Nations (Asean).

The rest of the opportunity could come from driving higher exports. Labour-intensive exports are a particularly promising emerging opportunity. Today, Africa commands only one per cent of global exports in this category, compared with China's 35 per cent, and growth has been relatively slow at 3 per cent a year versus 18 per cent in Vietnam, 14 per cent in Bangladesh, and 11 per cent in India. Having among the lowest labour costs in the world, some countries in Africa could now start to compete internationally with China, where wages are rising.

This is Africa's potential economic opportunity - but it will take a great deal of work to make it happen. Corporate Africa is on the rise, but does not yet have enough clout to carry the continent's fortunes on its own. Africa has 400 companies with revenues of more than US$1 billion a year, and these companies are growing faster and are more profitable, in general, than their global peers. But this is not yet enough; indeed, excluding South Africa, the rest of Africa has only about 60 per cent of the number of large companies one would expect in comparison with the corporate landscape in other emerging countries. Corporate Africa's average annual revenue is also less than half the level of its emerging market peers.

The continent's companies need to step up their effort, but Africa also needs the contributions of foreign companies and investors - not least of those in Asia. Asia is one of Africa's most important trading partners. Asia's share of African imports increased from just 17 per cent in 2000 to 29 per cent in 2014, and Asia's share of African exports increased from just 13 per cent in 2000 to 21 per cent in 2014.

African governments also need to weigh in to ensure that Africa offers attractive opportunities for foreign investment - and improve their own leadership and governance. We note six broad areas to which governments need to pay special attention: mobilise more domestic resources; aggressively diversify economies; accelerate infrastructure development; deepen regional integration; create tomorrow's talent; and ensure healthy urbanisation.

Let's highlight three of these that are of particular relevance to Asian investors and companies.

More diversification

The more diversified African economies are, the greater the range of opportunities for foreign investors. There has been progress on this front, but more is needed. Governments can help by taking steps to improve the business environment. In the World Bank's Doing Business 2016 report, only seven African states - Botswana, Mauritius, Morocco, Rwanda, Seychelles, South Africa, and Tunisia - placed in the top half of the ranking. Governments should set out strategies to encourage growth in high-potential sectors in close cooperation with business, based on a clear understanding of their countries' comparative advantages. This is an approach that Morocco has taken in manufacturing, agriprocessing, and business process outsourcing. Governments also need to market proactively to foreign investors, perhaps through a dedicated investment agency, and offer support for those investors even after a deal is signed. The Rwanda Development Board is an agency that has proved effective at delivering on these goals.

More infrastructure

Part of making Africa a more attractive environment for business is putting in place sufficient high-quality infrastructure. Subpar electricity provision and poor transport links contribute to the lack of scale among Africa's companies and hinder regional integration. Although Africa's spending on infrastructure has doubled over the past five years, it needs to double again - in itself, a business opportunity for foreign investors. There is an opportunity for Asian companies to play a number of roles, including investing in projects, becoming involved in execution and delivery, using the extensive experience they have in their home markets, and sharing their expertise in making public-private partnerships more effective. Today, Africa has half the number of such partnerships as major emerging economies.

More regional integration

Investors are attracted to large markets, yet Africa's constituent economies and markets remain highly fragmented. Unlike the large integrated markets of China, Brazil, and the United States, Africa is a patchwork of more than 50 mostly small economies with only a limited degree of economic integration and political collaboration. That helps explain why so many large African companies have focused their expansion on their immediate regions. Investors interested in Africa will find that the SADC (Southern African Development Community) and EAC (East African Community) trade blocs are the most developed in the continent at present, MGI finds. African governments can help corporate Africa to build scale by reducing the time it takes for goods to cross borders, continuing to lower tariffs between countries, and implementing double-taxation agreements; driving closer integration of regional capital markets to help attract foreign direct investment; and encouraging the movement of business people between African countries through simplified visa requirements.

Africa remains an attractive proposition for investors, but what the turbulence of the past five years has proved is that the continent's political and business leaders need to work even harder to keep the region's economies moving forward.

  • The writers are from McKinsey & Co. Omid Kassiri is a partner in the Nairobi office, and Acha Leke is a senior partner in Johannesburg. Mr Kassiri will be speaking at the Singapore-Africa Business Forum hosted by IE Singapore on Aug 24

Source: The Business Times © Singapore Press Holdings Limited. Reproduced with permission