Africa: Site Of The World’s Next Explosive Growth?

Via The Financial Post, an interesting article on the economic development and potential of Africa:

Once the undisputed worst economic region in the world, sub-Saharan  Africa is now one of the fastest-growing areas on the planet and  despite the turmoil in North Africa, has become one of the most  incredible success stories of the global economy.

Once the undisputed worst economic region in the world, sub-Saharan Africa is now one of the fastest-growing areas on the planet and despite the turmoil in North Africa, has become one of the most incredible success stories of the global economy.

When Charles Field-Marsham arrived in Nairobi during the early 1990s, the founder of Kestrel Capital, now Kenya’s largest stock brokerage, remembers it being economic chaos. The Cold War had just ended and all across sub-Saharan Africa, strong-man regimes, long propped up by competing U.S. and Soviet Union interests, were being called out by their new benefactors, the IMF and World Bank, to democratize governments and liberalize economies. As a result, old political hostilities were reborn, wars were breaking out, unemployment was on the rise and economic growth had all but vanished.

“When I arrived, T-bills were 80%-plus and the currency was absolutely plummeting,” says Mr. Field-Marsham, a Torontonian who now has three businesses in Africa. “It was a tough, tough time.”

Today, the scenario couldn’t be more different. Once the undisputed worst economic region in the world, sub-Saharan Africa is now one of the fastest-growing areas on the planet and despite the turmoil in North Africa, has become one of the most incredible success stories of the global economy.

Thanks largely to China, whose emergence as an economic powerhouse has fueled rising global commodity prices and led to massive investment in African infrastructure, a burgeoning consumer class has surfaced and the once dark continent is now littered with diversified economies that can sustain sectors from technology to retail.

Whether that growth is sustainable or not remains a critical point and no question Africa’s economic fortunes have become a hot topic as a host of conferences around the globe this winter attract investors captivated by getting into the next big thing.

This past week, the Reuters 2011 Africa Investment Summit in Johannesburg attracted several of the continents leaders hundreds of investors. This coming week the “Africa Rising” conference at the MaRS Institute in Toronto will showcase a number of global business leaders discussing entrepreneurial opportunities in Africa. In April, the government of Kenya will host it’s own Africa investment conference in New York.

“Investment” is quickly replacing “aid” when it comes to discussing pumping money into the region.

A recent catalyst for western investors is last summer’s landmark report from McKinsey & Company titled “A continent on the move.” Almost any conversation with members of the investment community about sub-Saharan Africa these days seems to veer toward the report, which highlights the regions explosive potential and decade of growth without glossing over its massive challenges.

It seems to have emboldened many to consider putting capital into the region. But they would hardly be the ones breaking new ground. The economic transformation that has taken place to over the last decade has laid out a solid foundation from which to build on. According to the International Monetary Fund, real GDP in sub-Saharan Africa increased by 5.7% annually between 2000 and 2008, more than double the pace during 1980s and 90s.

The collective output of it’s 50-plus economies, meanwhile, reached US$1.6-trillion, far greater than, say, global industrial power Republic of Korea.

Not surprisingly, Africa’s impressive economic momentum over this period owes much to its natural resource wealth that includes a majority of the world’s platinum, chromium and diamonds and a large share of global oil and gas reserves and gold and uranium deposits. However, rising prices for these commodities is only part of the story. According to McKinsey, natural resources and related government spending accounted for 32% of Africa’s GDP growth, with the remaining two-thirds nicely distributed across other sectors, notably wholesale and retail, agriculture, transportation and telecommunications.

Underlying this economic breadth, says the report, is the African consumer. From 2005 to 2008, consumer spending increased at a compounded annual rate of 16% and rose in all but two countries. Millions of Africans have moved from the “destitute” level of income below US$1,000 a year to the “basic needs” level between US$1,000 and US$5,000. A smaller portion have moved into the middle income bracket of US$5,000 to US$25,000.

“There is a lot more going on than just natural resources,” Mr. Field-Marsham says. “The middle class is exploding. They are buying soap, they’re buying beer, they’re buying telephones, they’re building housing, and they’re buying cement. Now, everybody has a stake.”

Stronger and more diversified growth would not be possible, says Ngozi Okongo-Iweala, a managing director at the World Bank, if it were not for the major changes in political and economic stability over the past two decades. While many countries continue to face serious challenges such as poverty, disease and high infant mortality, concerted government action to end armed conflicts and embrace democracy and free elections has taken hold in most of sub-Saharan Africa, paving the way for much needed economic reform. Importantly, countries have liberalized trade, reduced debt, lowered corporate taxes and developed better-functioning financial markets. Furthermore, they have increased investments in infrastructure such as roads, power plants, fibre-optic networks and human development, via better education for its growing population of young people.

Even in the aftermath of the global financial crisis, the World Bank reports two-thirds of sub-Saharan countries implemented reforms in 2009, citing Rwanda and Liberia as two of the top-ten “reformers” worldwide.

“Most encouraging of all is the fact that the region is continuing to reform through difficult times,” Mr. Okongo-Iweala said in a report. “There is growing conviction among sub-Saharan Africa’s leaders that sustained growth will come only from the private sector and increased integration with the global economy.”

That conviction is helping Africa increase access to foreign direct investment, which increased from just US$9-billion in 2000 to US$62-billion in 2008, garnering better rates of return than anywhere else in the developing world.

In this area, China has become an undisputable force, offering over US$33-billion of government-sponsored aid and investment between 2002 and 2007.

Steve Davis, a senior advisor at McKinsey and Jonathan Woetzel, a McKinsey director, note that China’s growing involvement in Africa has been criticized given Chinese support of oppressive governments in Sudan and Zimbabwe and questions about worker safety, community engagement, and environmental degradation at projects China finances. Yet, Africa’s development is lined with Chinese-sponsored projects thanks to its pragmatic focus on much-needed infrastructure that extends across almost every country and helping many different non-resource industries.

“Many Africans welcome the involvement of China not only because of the scale of its resources and commitments but also because it has credibility,” Mr. Davis and Mr. Woetzel write.

Of course, China isn’t Africa’s only source of foreign investment and Canada has also been growing its stake in the continent. Export Development Canada’s equity division, for one, has committed $30-million there in the past two years by investing in an information and communication technology fund in Kenya and more recently a Nigerian fund focused more broadly on oil & gas, financial services and telecommunications.

Cordiant Capital, a Montreal-based private equity firm that specializes in emerging markets has also increased its presence, having been selected by the federal government to co-manage the US$212-million Canada Investment Fund for Africa (CIFA) established in 2002.

David Creighton, Cordiant’s president and chief executive officer, says Africa’s cellular phone revolution, which has seen subscriber rates increase 43% per year since 2003, has driven incredible efficiencies in the economy. At the same time, sub-Saharan Africa remains largely unbanked and the fast-expanding financial service industry represents a massive growth opportunity. “The last numbers I saw, it was a US$107-billion industry and over the next ten years will increase by $517-billion,” he says.

Despite its progress and prospects for the future, sub-Saharan Africa still remains an afterthought for too many investors who see risks that clearly outweigh opportunities. While it is true that many nascent economies in the region face ongoing challenges ranging from poor business governance, limited infrastructure, logistics and education, many of the old arguments used against the region no longer hold true. And as Pierre Lapointe, a macro global strategist at Brockhouse Cooper in Montreal, contends, the increased optimism and focus on Africa is more than justified.

“Conventional wisdom says that Africa is not reducing poverty fast enough and that African economic growth is purely extractive, benefiting only foreigners and the corrupt elites at the top.” he says “But this view is wrong. Our belief is that Africa might be the world’s next explosive growth.”

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