The spotlight is now shining brightly on Africa. Not only as a result of the Football World Cup will be hosted in South Africa, but also because some of the world’s most excellent think tanks are now endorsing the continent as a place with a bright and prodigious future.
During this week alone, apart from the habitual parties such as the OECD, The African Development Bank (AfDB), the United Nations Economic Commission for Africa (UNECA), both the Boston Consulting Group and McKinsey, have published research papers that make the case for continent’s bright future.
Could the advent of the first Africa hosted football world cup be the inspirational factor behind this? Possibly so but we tend to think that Africa’s shiny reality has now become impossible to ignore when contrasted with the economic hardship most of the world is going through.
All these efforts have produced so much insight and material that we are struggling to choose what to exactly to feature in this special update. We thought we’d let others do the storytelling about the opportunities in Africa for a change. Both groups make similar conclusions that the economies are steadily growing and that the opportunity it is not only about resources but more about economies that are increasingly diversified across different sectors. Hopefully the below serves as a good summary of the key points.
BCG’s African Challengers
The Boston Consulting Group released a study titled the “African Challengers, Global Competitors Emerge from the Overlooked Continent”. Africa’s top 40 companies are emerging as competitors on the global stage, propelled by economies whose performance now rivals the BRIC nations.
According to the study, 500 African companies have been growing at more than 8 per cent a year since 1998. The report selects the top 40 among them, ranging in size from $350m to $80bn, and argues that these companies, already regional players in mining, consumer industries and services, are now well positioned to “spread their wings and look beyond the continent”
The report also highlights the fact that between 2000-2008 Africa’s annual GDP grew by 5.3% (adjusted for purchasing power parity) compared with 4% globally and single out that the local equity markets also outperformed global indices. They single out Egypt’s 39% annual returns compared with 2% for the MSCI World.
In addition, while the great recent recession shrunk most economies, the continent’s GDP still expanded by 2% during 2009. During the same period, the USA dropped by 4% and Europe’s dropped by 2.8%. while averages can be suspect, 60% of the continent’s GDP is shared by Algeria, Morocco, Egypt, Nigeria and South Africa. We find it refreshing that, just like us, they chose to use the term ‘Lions’ as a metaphor for the top economies in the region.
Another point that is made is that these ‘Lions’ have a GDP/Capita which exceeds that of the so-called BRIC nations. The GDP/capita of these two groups are $10,000 and $8,800 respectively. Great diversity exists between the Lions and the BRICs but their development rests on similar pillars.
Going back to the African Challengers, BCG highlights that the keys to success that most of these companies share and have allowed them to prosper lies in
· The benefit from doing business in a place where with many native advantages, including natural resources, cheap labor and a fast growing population that is unencumbered with legacy technology and systems.
· They enjoy a beneficial business environment that includes market deregulation, national economic-development policies, and commodity prices that, for most of the past decade, have been rising.
· They share a challenger mindset – a willingness to be bold and to recognize that a challenging economic environment is an opportunity to be creative and expand globally.
During the decade between 1999 – 2009, the Compounded Annual Growth Rate (CAGR) for shareholders of the Challenger companies with more than double the returns of the MSCI Emerging Markets Index and more than 20 times that of the S&P 500 over the same period!
Finally, the point is also made that many Western companies are trying to do business in Africa, some gain access by investing in local companies while at the same time, many of these African companies are – or will become stiff competitors, even outside of the continent.
McKinsey’s drivers of African Growth
McKinsey Quarterly also released a report on Africa this week. The publication is titled “What’s driving Africa’s growth?”.
The report highlights that the rate of return on foreign investment is higher in Africa than in any other developing region and that Global executives and investors ‘must pay heed’
They highlights that Africa’s collective GDP at $1.6 trillion in 2008 is now roughly equal to that of Brazil or Russia. The continent is now among the world’s most rapidly growing economic regions and that this acceleration is a result of hard-earned progress and promise.
They make the point that natural resources and the related government spending they financed only accounted for 32% of Africa’s GDP growth during the past decade. The remaining two thirds came from other sectors, including wholesale and retail, transportation, telecommunications and manufacturing. Economic growth accelerated across the continent, in 27 out of the 30 largest economies. Countries with and without significant resource exports had similar growth rates! This clearly challenges the general perception of investors that Africa is essentially a commodity play.
The long term growth prospects will be driven by :
· Global economic ties: although this story about more than just resources, global demand for oil, natural gas, minerals, food, arable land, etc will continue to act as a support factor for Africa’s economies
· The rise of the African urban consumer: the long-term growth will increasingly reflect social and demographic changes creating new domestic engines for growth.
A key driver for changing demographics will be urbanization, an expanding labor force, and the rise of the middle-class African consumer. People living in urban areas increased from 28% in 1980 to 40% at present. The continent has more than 500 million people of working age, this number will increase to 1.1 billion by 2040, more than in China and India. Over the past 20 years, 75% of the continent’s increase in GDP per capita came from an expanding workforce, the rest from higher labor productivity. If Africa can provide its young people with the education and the skills they need, this large workforce would become a significant source of rising global consumption and production.
While Africa’s collective long-term prospects are strong, the growth trajectories of its individual countries will differ. Economists have traditionally grouped them by region, language, or income level. McKinsey takes another approach, classifying 26 of the continent’s largest countries according to their levels of economic diversification and exports per capita.
· Diversified economies – Africa’s growth engines: Egypt, Morocco, South Africa, Tunisia
· Oil Exporters - Enhancing growth through diversification: Algeria, Angola, Chad, Congo, Equatorial Guinea, Gabon, Libya, Nigeria
· Transition Economies - building on current gains: Cameroon, Ghana, Kenya, Mozambique, Senegal, Tanzania, Uganda, Zambia
· Pretransition Economies – DRC, Ethiopia, Mali, Sierra Leone
Everyone seems to be chanting to the same tune. We have all noticed a strong increase of visits by heads of state from developed countries to the region over the past few months and they are all clearly trying to forge closer ties with the local leaders. It is also more than well known that China and India are aggressively expanding their activities across the African continent.
Many leading corporations of the developed world are trying hard to gain market share in Africa. It has become a competitive environment and the foreign entrant is often faced with the reality that they at times are competing with indigenous regional players who have expansion strategies of their own. The fact that the major consulting and accounting firms have set up shop across the continent is yet another piece of evidence that there is serious business to be done there.
So if all these organizations and countries are trying so hard to get into Africa, why are professional international portfolio investors taking so long to invest there? If we had a rational answer, we would be delighted to share it with you but unfortunately we don’t. What we do know is that investors are certainly running out of excuses not to start investing in Africa. The African markets have only begun and the investors will eventually come…
The reports can be found on:
Boston Consulting group: here
Courtesy Silk Invest