Growth: Africa to Outpace Asia
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Improved governance, growth and stability across most of Africa have unleashed private sector value creation and investment in a wide range of industries. I see numerous examples, wherever I travel in Africa, of this private sector success creating stronger and broader domestic political constituencies for further reform and modernization. Africa’s growth has kicked off and is being propelled by a virtuous cycle entailing the collapse of discredited ideologies, improved governance and greater business confidence leading in turn to further business and community-based pressure for additional modernization and reform. This process is greatly increasing the expectations and aspirations of African political and business leadership. I am stunned by the level of aspiration and commitment to development visible today, especially in comparison with the more muted confidence evident four or five years ago.
Why growth should be faster than that experienced by Asia is an interesting question. In essence, I think that a number of the key transmission mechanisms for development simply operate faster than they used to. Asia’s own success means that redundant ideologies are extraordinarily difficult to sustain and the key parameters of good economic management are clearer than ever. Similarly, business confidence and accelerating domestic investment happens faster because the formula for economic success has been tried and tested so many times before.
The global capital markets also react more quickly to emerging successes because of the increased conviction in the overall emerging market growth story. Today we hear little skepticism regarding Africa. Whether we are talking to Sovereign Wealth Funds, the worlds’ largest institutional investors or savvy hedge funds, the questions are more about 'how' rather than 'if ' or even 'when' to invest.
The process of accelerating capital flows into Africa will be reinforced by the likely massive, tidal movement of capital from the West to the emerging markets. Total foreign capital flows into Africa increased from USD15 billion in 2000 to USD87 billion in 2007; more than 20 African countries received at least USD500 each in foreign investment in 2008. Moreover, according to analysis undertaken by McKinsey returns on African FDI exceed those in other regions of the world.
Similarly, most of the worlds’ major commercial banks have a deliberate strategy of moving their balance sheets out of low-growth Western markets into emerging and frontier markets. The combination of Africa’s strong economic performance and its status as the last great emerging market frontier mean that Africa stands to be one the biggest beneficiaries of this historical reallocation of global capital.
As Renaissance’s Global Chief Economist, Charles Robertson, wrote in a groundbreaking report on China in Africa, the GDP boom in China and Africa over the past decade has been exceeded by even faster growth in Chinese-African economic relations. While Chinese trade with the world has risen eightfold, with Africa, it has seen a tenfold increase, from $11bn in 2000 to $129bn in 2010, and unlike China’s trade with most of the world, it is Africa that has the upper hand in this trading relationship. By 2015, trade turnover could have reached nearly $400bn, with Africa’s surplus around $40bn. But it is not only China. India, the Middle East, Kazakhstan, Brazil and Russia are also becoming increasingly important sources of African investment. Equally, intra-African investment is also increasing rapidly, and for similar reasons. By some estimates, South Africa has invested more than China into sub-Saharan Africa over the last 5 years.
Another reason to believe that African growth may outpace Asia’s is Africa’s greater ability to leap-frog in the adoption of new technologies and innovative governance and financing strategies. Telecom penetration in Africa has increased from 2% of the population in 2000 to 37% in 2008, not far behind the average in the BRIC. This deepening penetration is evident in Nigeria, where the telecom sector has exhibited real growth of 30% over the past two years, making it the country’s fastest growing sector. Competition in African telecom markets, particularly since the arrival of Bharti the Indian operator, is driving costs and tariffs down to extraordinarily low levels stimulating demand and the rapid uptake of new technologies. Safaricom, the leading Kenyan mobile operator, is moving beyond Kenya’s modern telecoms infrastructure and is expanding its fibre optic network right through East Africa including into politically challenging markets like Somalia.
Less well understood is the potential for Africa to find leap-frog solutions to one of its supposedly most intractable problems – core infrastructure. Between 1998 and 2007, Africa’s annual private infrastructure investment increased four times, significantly outpacing the increase in global infrastructure spend. Going forward, there are reasons to believe that at least some African countries will find solutions to lack of investment in roads, water, ports, airports and rail which are as revolutionary as those achieved for mobile telephony.
The first reason concerns the way investors are addressing the infrastructure requirements of large-scale resource projects. To mine global scale iron ore deposits in Sierra Leone, Guinea or Cameroon or coal deposits in Mozambique, it is necessary to bring holistic solutions encompassing roads, rail, ports and, in some cases housing. In an increasing number of cases, this is exactly what is happening with mainly emerging market investors making multi-billion infrastructure investments to enable them to efficiently develop global scale resources. These investments will often have considerable positive externalities in the form of improved ability to develop other resources in the relevant region and improved infrastructure and logistics for other industries.
These types of opportunities are not limited to natural resources. Renaissance Partners, our principal investment arm, together with Kenyan partners is building a new multi-use city for 63,000 residents and 30,000 daily visitors on the outskirts of Nairobi. The next stage of the project, called Tatu City, involves USD250 million of investment in roads, water, sewerage and electricity distribution. As we prepare to break ground in Tatu city, we are beginning to roll out similar projects in Ghana, Angola and the DRC. On April 15th, we launched a pilot 100 hectare development in Lusaka which is already largely sold. These are not invest-and-exit projects. They will take many years to implement, and world-class teams with Africa experience. But what we are already finding is: if you build it, they will come. Meaning, when we seed high quality projects with capital for land and infrastructure, global and domestic retailers, corporations, banks and property developers – come calling. They are ready to put their Africa footprint on our developments. It’s good business for us. It’s also good business for Africa. When these projects mature, we will have provided well in excess of 10,000 jobs from Nairobi to Lusaka and beyond, not to mention raising the bar for the quality of urban development and playing a significant role in opening up middle-class mortgage markets in these geographies.
The final reason that I am positive about infrastructure development in Africa is the tremendous scope for greater private ownership and private public partnerships in both funding and operating large scale core infrastructure projects. In many cases the required reforms are not complex. McKinsey calculates that 85% of African utilities set their prices below the level required to recover capital and operating costs. This is something that many African governments will now address. For example, Nigeria’s notorious power shortages actually represent a massive commercial opportunity which the forthcoming privatization of generating capacity will hopefully address.
Although commodities are not the primary reason for Africa’s economic takeoff, they are another factor increasing the likelihood that Africa will become the fastest growing region in the world. The first industrial revolution created several hundred million middle class consumers; the current one will welcome as many as three billion people to the ranks of the middle classes over the next two decades. Just think of the demand for raw materials from supposedly redundant primary products like wool through to the totally new commodities like rare earths.
Africa’s geological history means that it has one of the greatest stores of commodities in the world. The potential is vast. Let me briefly give just to give two examples: iron ore and agriculture. Currently, about 1 billion tonnes of iron ore is shipped globally; none of which comes from Africa. The reserves of ore being brought to market right now in Guinea, Cameroon and Sierra Leone will likely become the biggest supplies of iron ore globally. From zero now to one third of total traded iron ore is likely to come out of West Africa over the next decade.
In agriculture, sub-Saharan Africa, alongside Brazil, Southern Russia and Ukraine, offers one of the last remaining untapped resources globally. Only 10% of the 400 million hectares of land between Senegal and South Africa suitable for farming is actually exploited; Africa accounts for 60% of the world’s arable land that is not in cultivation. And Nigeria is only utilising half of its arable land. The increase in demand for agricultural commodities can only be met by managing the potential in Africa. Improved political and economic stability, the rapid development of local banking markets and improved regulation of land ownership and agricultural markets will, in my judgment, underpin dramatic improvements in agricultural investment and productivity.
Against all expectation, over the last 15 years, Brazil has developed one of the world’s most efficient agricultural sectors following decades of under investment and neglect. Wise public policy and the rapid uptake of state of the art crop types, new farming techniques and advanced technologies have transformed yields and production. Improved productivity has in turn unlocked large scale investment in storage, logistics, and transportation and processing.
Based on the private sector dynamism and policy improvement taking place across Africa there is reason to expect that many African countries will also travel the road of vast improvement in agricultural productivity and output over the next decade or so creating hundreds of billions of dollars of additional economic output in the process.
The final reason I expect outsized economic growth in Africa relates to demographics and urbanization. It is no coincidence that the fastest wave of urbanization in history occurred in the last ten years, at the same time as the fastest period of economic growth in history. Population growth in general and urbanization in particular are drivers of growth, and they are happening faster in Africa than anywhere else on earth. Of the top ten fastest growing cities in the world today, one is in China, two are in India and three are in Africa. Similarly, Africa’s labour force is the fastest growing in the world. According to McKinsey, over the past 20 years 75% of the continent’s increase in per capita GDP resulted from a growing labour force; the balance from higher productivity.
By Stephen Jennings
CEO, Renaissance Capital.