Africa: A Continent of Opportunities

In this interview, CJ Giddy, International CEO, Absa Securities UK Limited, a part of the Absa Group, one of Africa's largest financial services groups, talks to Eleanor Hill, Editor, TMI, about the growth of the African economy, its position in the global marketplace and the opportunities that this vast and diversified continent offers to investors.

Eleanor Hill (EH) The IMF has warned that a trade war could shave 0.5% off global growth by 2020. What might the short- and longer-term impact of Trump’s trade war be on African markets, especially on currencies and commodities?

CJ Giddy (CJG): It's actually difficult to answer for Africa as a single entity, given the important differences that exist amongst the 54 countries that make up our diverse continent. To provide an overview, however, Africa generally benefits from a world that is: growing quickly; where commodity prices are well supported; where policy certainty helps encourage long-term direct investment flows; and where financing conditions are relatively benign. In our view, a global trade war will damage the first three in that list and contribute, along with inevitable monetary policy normalisation in the major global economies, to a less helpful environment on the fourth of the list.

Lower global growth will likely coincide with generally weaker commodity prices, whilst an environment of generally larger policy uncertainty, and where long-term financial flows are often more circumspect, is expected to weigh on many African currencies. That said, the damage to Africa is likely to be collateral rather than the direct result of targeted trade policy. And since the majority of countries in Africa currently produce few of the intermediate and final goods that are frequently the target in global trade wars, Africa’s trade patterns are unlikely to change drastically. So, all in all, it’s an environment that is more challenging, but not yet one that would make us fear a derailment of the underlying African economic story. 

EH: What about Brexit? Is that necessarily a negative for African markets? Are there new opportunities on the horizon? What could new UK/Africa trade deals and new investors mean for Africa’s growth?

CJG: The UK is a key source of foreign direct investment (FDI) and a critical trade partner for Africa, so the type of Brexit achieved will be important for Africa. Prime Minister May's recent trip to the continent, where she visited the three economic powerhouses of Sub-Saharan Africa (Nigeria, South Africa and Kenya), was accompanied by a message that, post-Brexit, the UK will seek to deepen trade and investment ties with the continent.  

This is certainly welcome news to those of us in Africa, but just how this will translate into real economic success stories remains to be seen. Africa can best position itself as a top partner for the UK in the same way that it needs to position itself as a potential top partner for Europe, Asia, the Americas or elsewhere: by highlighting the continent’s impressive demographics; by ensuring greater efficiencies through well-targeted infrastructure; and by providing a stable regulatory environment in which long-term investment decisions can be made.

EH: What does all this mean for the bigger trade picture – and Africa’s role within that?

CJG: On balance, it looks like we are entering into an environment that is less attractive to global trade, and where global growth is likely to be somewhat weaker than otherwise could have been the case. Neither of those scenarios is welcome news for Africa. With regard to the continent’s commodity exports, the impact is likely to be felt more heavily in the price Africa receives for its exports, rather than resulting in a major shift in volumes.  

But as Africa looks to harness its huge labour market to integrate itself into the global supply chain at higher value-add levels, the challenges could become greater. Global companies facing the prospect of protectionist action within the three big global economic blocs (the US, China, the EU) may well think twice before exposing their supply chain outside of these markets. Africa will need to step up its game in order to offer a sufficiently compelling investment case. 

A continued focus on improving transport, electricity, regulatory and educational infrastructure will help promote Africa as a source of efficient, low-labour cost production. Meanwhile, progress on implementing the African Continental Free Trade Area will help provide the specialisation and economies of scale that have in the past helped propel other developing nations higher up the economic value chain. Happily, both types of initiatives are already under way and have broad support across the continent.  

EH: Where is Africa in its growth story now? Almost a decade ago, it was very much about ‘Africa rising’ – but has that stalled?

CJG: The ‘Africa rising’ narrative has become more complex, for sure. Commodity prices slumping from their peaks, rising public debt levels, falling credit ratings, and signs of market strain for some countries are all features in the overall picture. And, in the simplest terms, Africa just isn’t growing as quickly as it did - but it’s too easy to suggest that the economic opportunity should no longer be a focus. Africa’s real economic growth may have slipped to barely 2% in 2016 as several of the largest economies were facing near-zero growth or even recession, but it has already recovered to above 3% for 2018 in our current forecast. 

And although economic giants such as Nigeria, South Africa and Angola continue to struggle to return to very strong growth, elsewhere on the continent the picture is often much brighter. The IMF forecasts that more than 70% of Africa’s economies will be growing faster than the global average during 2018-20, for example. East Africa in particular, led by Ethiopia, Tanzania, Kenya and Uganda, has posted growth at world-beating rates consistently through the recent ups and downs. So, there are a lot of bright opportunities out there. 

EH: What needs to happen for Africa to move into the next phase of its evolution?

CJG: Africa needs to focus on improving its efficiency so that it can move up global value chains from being a supplier of raw commodities to a point where it is able to engage in some of the manufacturing and services activities that are more highly valued. Though the continent is huge, it has suffered from poor economies of scale, from disparate regulations, and from weak hard and soft infrastructure. 

Many factors are helping African countries in their efforts to ensure that the region’s economic story remains a positive one. These include China’s Belt and Road initiative, the myriad further hard and soft infrastructure programmes that are a current focus of nearly all continental governments and  the implementation and associated adjustments  of the African Free Trade Area.  These all underpin  the determination of African countries to make sure that the continent’s huge demographic shifts not only help to propel African living standards higher, but also play a positive role in the global economic outlook in the decades to come.

EH: How can current geopolitical challenges be turned into Africa growth opportunities?

CJG: It is said that “When the elephants fight, it is the grass that suffers”, and there is certainly a risk of that happening to Africa as the world’s super-powers squabble over the economic terms for the global economy. Though the voices of some individual African economies can sometimes be heard – typically in one or two commodity markets where Africa might host a large share of the global supply of certain materials – on a broader stage there are going to be many periods where Africa may feel like the ‘grass’ under the feet of the global ‘elephants’. African governments will need to respond to this more difficult environment by focusing on improving the efficiency and competitiveness of their own markets, and the companies active in Africa will have to be ready to share their positive experience of opportunities on the continent.

EH: What else do companies and/or investors need to be thinking about when it comes to Africa? 

CJG: Historically, we often think of Africa as largely a commodity exporter in terms of its economics. Whilst much of the earlier narrative here has spoken to the topic of Africa moving up export value chains in processing, manufacturing and in services, there is a risk of missing more domestic parts of the African story. 

After all, Africa has the world’s youngest population, as well as its fastest growing population, and one of the most rapidly urbanising populations. These demographic trends offer huge opportunities on the continent for investors and companies alike, whether in the provision of different types of hard and soft infrastructure (electricity, water, education, housing, healthcare) as a huge opportunity for consumer-facing initiatives, or even in opportunities for large-scale commercial griculture. Africa’s story isn’t just going to be about natural resources going forward.  

EH: What would be your top pieces of advice for investors when it comes to making the most of the opportunities that Africa can offer?  

CJG: First and foremost, it is important to recognise that Africa is a diverse and growing continent, with strong demographic tail winds that will be a long-term theme throughout the economic cycle. This means that the theme of growing investment and trade within the continent will remain a feature of the future.

In addition, given the diversity of economies and systems in Africa, a strong local banking partner is advisable to assist clients and investors navigate the environment successfully. Absa Group Limited is one of Africa’s largest diversified financial services groups with a presence in 12 countries across the continent and around 42,000 employees. We are represented in Africa’s key powerhouse economies, Kenya and Nigeria. Through our unrivalled knowledge of the region and on-the-ground capabilities, we can assist clients to familiarise themselves with the countries in which we are present, providing the key banking services and access to financial markets and issuers which they will require.

Our deep local knowledge is backed by over 150 years of experience on the continent. This gives us a robust understanding of regulatory and market practices, which our clients and African investors find invaluable in assisting them to meet their strategic goals in Africa.