Africa: the highest returns are in the sectors delivering goods and services to Africans themselves
thanks to structural reforms and its demographic dividend, it has become one of the world’s top growth areas (5.6% p.a.). From an empty rural space 20 years ago, Africa is fast becoming a booming urban continent, which will soon host 20% of the world’s population. Its middle class of 250 million people will represent a $2 trillion market. This major demographic, urban and revenue shift brings considerable investment opportunities.
A structural growth of 5% for a decade, better macroeconomic fundamentals and more political stability
The commodity boom, with a high global demand for raw materials and the surge of commodity prices, is one of the factors in the economic take-off of Africa but it represents only 25% of African GDP. Africa’s sustained economic growth is triggered by a lot more than a simple resource boom. Favorable demography and the development of the manufacturing and service economies are the main drivers of the African growth.
More and more countries in Africa show greater political stability, policy continuity and improved governance that are prerequisites for attracting the long-term investments to generate sustainable economic development. This stability has been mainly supported by the reduction of Africa’s outstanding public debt as a percentage of GDP, a controlled inflation, which dropped from 22% in the 1990s to 8% in the past decade, and limited budget deficits.
This improved business and political environment has encouraged investments on the continent as witnessed by the flow of private capital and the increasing presence of large multinational companies. In 15 years, the percentage of African exports to China has multiplied by 20 while in the meantime those to Europe were halved. The development of new technologies is accelerating the inclusion of Africa in the globalization process.
Trade between Africa and the rest of the world has increased by 200% since 2000. The rate of foreign investment has soared around tenfold in the past decade. In 2010, total foreign direct investment was more than USD 55 billion, five times what it was a decade earlier.
These investments will move from the historical commodities and natural resources sectors to the sectors that will benefit from the booming emerging middle class market and reinforce the internal growth of the continent.
For the first time, the highest returns are now in the sectors delivering goods and services to Africans themselves.
In addition to the improved macroeconomic fundamentals and political stability, the urbanization of Africa and the emergence of a huge urban consumer market will permit to generate a sustainable growth. With more than 500 million people of working age, Africa’s labor force is growing rapidly. By 2040, this number is projected to exceed 1.1 billion, more than China or India. This growth of the working force combined with African urbanization will create a huge consumer and middle class market. From 100 million in the 1980’s to 800 million in 2040, urbanization in Africa will bring higher productivity and incomes as well as a growing middle class market. The middle class market in Africa is expected to reach more than 250 million people by 2040 representing a UDS 2 trillion market. This huge and dynamic urban market opens up new opportunities in consumer goods and service markets especially in consumer goods, telecoms and banking.
Experience and facts show positive returns and lower risks than those captured by the financial markets
The international rating system with country ceilings reaches its limits in Africa, where private risk can be better than public risk. According to World Bank data, non-performing loans (NPL) in banks are similar to other emerging markets for large/medium sized companies (6.8% vs. 5.1%). Therefore, the level of risk is 10 times lower than the theoretical risk captured by the rating agencies. As a consequence, for the last decade Africa shows the best world returns in most of all the asset classes (foreign direct investments, stocks markets, Private equity).
However, this long-awaited growth is also bringing strong political, environmental and social tensions which have to be dealt with, as illustrated by the limited progress to reduce poverty, bad harnessing of natural resources, sanitary risks, water deficit, geopolitical tensions and environmental issues…
This very specific mix of high risks and strong potential still makes Africa a complicated destination for investors.