"...emerging markets will grow faster than the
developed world for decades to come."

Gideon Rachman, The Financial Times

Is African economic growth finally ready to take off?

Is African economic growth finally ready to take off?

Long seen as “too risky,” African economic growth is moving forward at a remarkable pace

Africa has experienced a sea change over the past decade and has more or less shed its image of being “too risky.” And although challenges remain, the continent’s risk/reward profile has improved, warranting a second look for clients who are brave enough to venture into new frontiers.

A report released this past June by Boston-based consulting firm McKinsey & Co. , entitled Checking Africa’s vital signs, states: “Across the region, real gross domestic product increased by an average of 4.9% a year between 2000 and 2008 compared with just 2.4% a year during the 1990s.”

The African Development Bank Group forecasts average GDP growth of 4.5% this year and 5.2% in 2011 for the continent, as well as average annual inflation declining to 7% next year from 9.9% in 2009 — a substantial drop from the more than 20% seen in the 1990s.

“Africa stands out as a growth destination, with a new level of growth not seen before, in a world hungry for growth,” says Roelof Horne, portfolio manager with London-based Investec Asset Management Ltd. in Cape Town, South Africa, and manager of sub-Saharan Africa strategy for Mackenzie Universal Africa & Middle East Class fund. “This is not just a cyclical phenomenon, as underlying fundamental change is happening in Africa.”

The significant shift to democracy represents the biggest change in Africa, Roelof suggests. Today, 90% of African countries have democratic governments vs only 20% in the late 1980s. Although “the democracies are substantially flawed,” he adds, “they represent a move in the right direction.”

These positive political developments have empowered the continent’s population and engendered change in the attitudes, actions and policies of governments, which are now much more responsive to attaining sovereign development goals, Horne argues: “People no longer have to resort to armed conflict as a means of getting rid of a government; there are very few conflicts today.”

Political change has been accompanied by sound macroeconomic policies, structural and regulatory reforms, and privatization of public enterprises. “The balance sheets of African countries are now in much better condition than a decade ago and are looking very good,” says Anthony Ginsberg, managing director with Los Angeles-based GinsGlobal Index Funds, which has offices in Cape Town and Johannesburg.

Development in Africa has been supported by large increases in foreign direct investment in a range of sectors. According to the Organization for Economic Co-operation and Development’s African Economic Outlook 2010, FDI flows into the continent reached US$88 billion in 2008 — almost 10 times more than in 2000. Although FDI fell by almost one-third in 2009 because of the global financial crisis, it is picking up again.

China is among the largest foreign investors in Africa, but India and Brazil have also been pumping money into Africa, says Mark Mobius, executive chairman of Templeton Asset Management Ltd. in Singapore and lead manager of Templeton Emerging Markets Fund and Templeton BRIC Corporate Class. Money is not only flowing into mining and oil, but also into infrastructure-related initiatives such as port facilities, railways, roads, electricity and water utilities.

“The Chinese have a long-term outlook on Africa,” says Horne. “They realize that they need basic materials and energy for a long time to come and are signing procurement contracts and agreements with [African] governments [and] participating in infrastructural development.”

Evidently, the foundation has been laid in Africa for businesses to thrive. This, says Mobius, is supported by “investor-friendly reforms”. Horne adds that the cost of capital has come down; barriers to exports have been removed; public- and private-sector partnerships have been established and trade relations have been strengthened — leading to improved business confidence.

In addition, African economic growth is being fueled by more than its traditional strength in mining and energy. Other sectors, including financial services, consumer goods, telecommunications, manufacturing and infrastructure are also experiencing strong growth. Horne says that the potential for agriculture is enormous and the region could become a food exporter within the next decade, representing a dramatic reversal of its dependency on food subsidies.

However, not all African countries are at the same stage of development. The McKinsey report categorizes them in four clusters: diversified economies, oil exporters, transitional economies and pre-transition economies. The report contends: “Although the countries within each segment differ in many ways, their economic structures share broad similarities.”

Africa has 29 stock exchanges representing 38 countries, with the largest being South Africa’s Johannesburg Stock Exchange, followed by the Nigerian Stock Exchange. African companies’ stocks are, on average, Mobius suggests, “under-researched, under-owned and very cheap on an earnings/valuation basis.” Among the sectors he likes are consumer, brewery and banking stocks.

If your clients are interested in investing in Africa, the best way is through targeted mutual funds, says Mobius. In addition, investing in multinational companies currently operating in the region will provide indirect exposure.

Although Africa is on the move, many challenges lie in its path. Says Horne: “There remains an infrastructure deficit in the region.”

The big question is sustainability, Mobius argues, which is dependent on the degree of reforms. Yet, he suggests, changes already made will be difficult to reverse. He adds that corruption is a big problem, but political disturbances are not an impediment. There is also scope for improvement in the legal, regulatory, accounting and corporate governance framework.

Currency volatility is also a risk, says Ginsberg, who also believes that wealth creation is concentrated among the continent’s growing middle class. He questions whether the benefits of growth are “trickling down.”

Dwarka Lakhan

Dwarka Lakhan

Dwarka Lakhan is a pioneer in emerging markets journalism in Canada. His first emerging markets article, “Africa Joins Ranks of the Emerging,” appeared in Investment Executive, Canada’s leading newspaper for financial advisors, in September 1994. Since then he has written hundreds of articles on the full spectrum of emerging markets and has conducted more than two thousand interviews with emerging and frontier markets investment professionals.


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