New Corporate Growth Horizons in Africa
by Jeff Gable, Head of Africa Fixed Income and Macro Research, Absa Capital
In a business environment where growth potential in traditional markets has become harder to find, corporations in all industries, and headquartered in every region, are seeking new growth opportunities. While Asia, and to some extent Latin America, has been a focus for European and North American companies for some time, Africa has become the next region to command corporate attention. According to Ernst & Young’s Africa Attractiveness Survey, 2012, 73% of corporations noted that Africa will become a more important region compared with the previous three years, a third of which noted that it is a significantly more attractive region.
Growth and resilience
This statistic reflects corporates’ recognition that Africa has been the second fastest growing region globally for the past two decades, with a growth trajectory that is anticipated to continue in the coming decade and beyond.
According to the International Monetary Fund (IMF), over the next five years seven out of the top ten fastest growing economies globally will be in Africa, compared with six out of ten in the past 10 years. Not only is Africa’s growth potential attractive for foreign investors, but its resilience is also an important factor in its favour. During the 2008-9 global economic crisis, the majority of developed nations experienced recession or zero growth. While Asia fared better, four out of ten countries suffered recession, compared with only two out of ten in Africa. With significant volatility in many markets, companies in all industries are seeking greater resilience and predictability, which Africa is increasingly demonstrating that it can offer.
A wealth of natural resources
Inevitably, Africa’s wealth of raw materials and energy resources is a draw for multinational companies, with over 80% of the world’s platinum and chromium, 60% of diamonds and 40% of gold reserves. The International Energy Agency states that China is now the largest energy user in the world, with growing demand in most regions. Moreover, the pursuit of natural resources to produce technology components continues to be relentless. Consequently, global companies across a spectrum of sectors will increasingly be seeking to establish sources of raw materials and energy resources in Africa.
The opportunities however, extend far further than commodities. The development of agricultural resources is an enabler of growth in Africa and essential to feeding the world’s ever-growing population. Ethiopia is, for example, the fifth fastest growing economy in the world, but has no natural resources. Diverse forms of agriculture account for 41% of GDP and 85% of total employment. A number of countries across Eastern, Western and Central Africa in particular still have untapped potential for developing agricultural production, both for domestic consumption and export. In 2010, agriculture created revenues of $280bn across Africa, and organisations such as the Food and Agriculture Organisation predict that this could reach $880bn within 20 years.
Infrastructure and growth
Today, lack of infrastructure, whether physical, technical, financial or socioeconomic, remains a significant impediment to Africa’s competitiveness; however, as investment continues, this is likely to be relatively short-lived. In 2010, foreign direct investment (FDI) reached £36bn, compared with £9bn in 2003. Although this represented substantial activity in the energy and commodities sectors, financial services, business services and communications were also core growth industries.
Another factor both fuelled by, and accelerating the development of, physical, social and economic infrastructure is the growth of the domestic consumer market in Africa. Already we are seeing a combined GDP of $1.6 tr in Africa, comparable with that of Russia or Brazil, with 52 cities whose populations exceed one million. UN estimates suggest that more people will move to cities in Africa over the next two decades than in China or India. This represents a major, rapid social and economic transformation which forward-thinking companies will want to be a part of. Consequently, Ernst & Young project that FDI will increase to $150bn by 2015.
While strong trading links exist between Europe/ Africa, and North America/ Africa, we are seeing enormous growth in international trade between Asia/ Africa, particularly China, as well as Latin America/ Africa. For example, trade flows between China and Africa have increased 20-fold in the past 10 years, compared to growth of around three times between Europe and Africa.