Africa - the sleeping, potential economic giant - is stirring. Acceleration in private capital flows to sub-Saharan African countries is stimulating growth and creating opportunities not seen in that part of the continent for many years. Although this resurgence in interest may suggest an economic transformation in the region, risks still remain for investors. On average, the continent’s GDP grew almost 6 percent a year from 2001 to 2008. In 2007, private capital flows to Sub-Saharan Africa reached over $50 billion - overtaking official aid flows for the first time, according to the IMF’s latest economic outlook for the region . Although almost 90 percent of the money went to South Africa, private capital infusions are also on the rise in other countries - notably Ghana, Kenya, Tanzania, Uganda and Zambia. “Africa’s future is up to Africans,” as U.S. President Obama stated during his visit to Africa in July, and this future is indeed looking brighter.
What makes this growth so astonishing is that until recently Africa was referred as “the worst economic tragedy of the 20th century” by the World Economic Forum in its Africa Competitiveness Report 2004. The IMF’s statistics are especially meaningful because Africa is indeed a giant - the second largest continent geographically and the second most populated one with a billion people. Yet, with only 2 percent of the global output, Africa’s potential for growth is tremendous.
The global financial crisis offers a good test of the staying power of the continent’s economic transformation: Is recent growth a matter of favorable trends outside the continent’s control, such as the commodity price boom, which saw oil, copper and cocoa prices skyrocket? Or can it be traced to hard-won economic policy changes, such as liberalization of trade and investment?
Africa’s improving political and economic stability has been an important factor contributing to the region’s economic growth. From 1980 to 2006, 27 Sub-Saharan African countries improved their ratings in the Vancouver-based Fraser Institute’s Economic Freedom Index. Although ranked last in business-friendly regulatory environments by the World Bank, the region implemented more reforms in 2008 than in any previous year, as Mauritus, Botswana, and Malawi were top performers in their categories and Rwanda was the world leader in reforms.
Trade should play a growing role in Africa’s growth. Between 1995 and 2006, tariff levels were nearly cut in half. Although the continent must face the economic reality of global market prices, having less-protected markets will compel entrepreneurs to quickly address the scale, cost and product quality issues that have handicapped the region.
Another key growth enabler is foreign direct investment (FDI), which can include valuable knowledge transfer. According to the United Nations Conference on Trade and Development (UNCTAD), FDI inflows to Africa grew almost 35 percent from 2007 to 2008 to more than $70 billion. The vast majority of this money is focused on resource extraction, including mining and petroleum drilling, but it also includes investments like the Industrial Bank of China’s purchase of a 20 percent share of Standard Bank Group of South Africa for more than $5 billion.
The flow of capital from private equity funds into Africa is also starting to accelerate. This is an important sign of confidence, as managers of these funds are putting their own capital at risk - anywhere from 2 percent to 12 percent of total value of funds raised. Moreover, private equity managers act as powerful conduits that bring not only capital and management resources, but operational, financial and governance discipline to their portfolio companies. Today global firms such as Actis, Aureos Capital and Emerging Capital Partners are active across the African continent. Last July, Actis paid $244 million for a 9.3 percent stake in Commercial International Bank, Egypt’s biggest commercial lender.
Foreign capital gravitating to Africa’s resource-intensive industries often brings positive spillover effects. One of these is “parallel” investment in roads, power plants and other infrastructure. The impact of China is especially pronounced with the China Ex-Im Bank averaging $1.7 billion a year in African investments from 2001 to 2006.
Mobile phones provide one of the more remarkable private investment stories in Africa. Today, according to the Paris-based Organization for Economic Cooperation and Development, about one in five Africans has a mobile phone, and revenues from mobile services are higher than for fixed lines. The continent is the first region in the world to offer free, mobile roaming services across several countries. African telecommunications firms, such as MTN, Orascom and Celtel, were the market catalysts and pioneers. According to International Telecommunication Union, Africa is expected to see double-digit average annual growth rates during the next five years, with the value of its market reaching well over $40 billion by 2013.
This is not to say that the economic path ahead for Africa will be smooth. The continent leads the world with the highest percentage of population with AIDS. Unstable states threaten regional stability. According to the World Bank, Africa faces an annual $23 billion financing gap to build necessary infrastructure. Corruption remains a scourge. The continent’s reliance on resource exports puts it heavily at risk of a Chinese economic slowdown.
Still, some experienced investors are optimistic. Stephen Jennings, the chief executive of Moscow-based investment bank Renaissance Group, which grew out of the wreckage of Russia’s emergence from communism, expects “Africa to grow faster than Asia did at the equivalent stage of its takeoff.” Although African countries may not adopt Western institutions nor rely on traditional multinational-led models, Jennings believes they will benefit from the powerful economic forces of global convergence.
David Haarmeyer is an economic consultant and writer who focuses on organizations, markets and economic development. He recently completed a study on economic growth prospects in Africa. He can be reached at email@example.com.