African Trends 2015
Africa is a huge continent, consisting of 55 countries, an even larger number of ecologies, and too many languages and cultures to count. It has roughly the same surface as that of the moon, and countries such as China, the USA, India, Western Europe, Japan, and a few more will all fit into Africa, with a bit of land to spare.
Since starting with the publication of the weekly newsletter on Africa, Friday@Noon, quite a number of prominent trends were picked up.
Trends in Africa
Firstly, Africa’s economy has been growing at high rates over the past few years. Its gross domestic product (GDP) growth is expected to strengthen to 4.5% in 2015 and 5% in 2016. This was after a bit of sluggishness in 2013 (3.5%) and 2014 (3.9%), which can be ascribed to a global economy that remained weaker and some African countries having somewhat severe domestic problems.4 Domestic demand has continued to boost growth in many countries, while external demand has remained mostly subdued because of flagging export markets. Export values of goods were also depressed by lower export prices.4 Africa is therefore in a way the victim of the problems in the developed economies.
So far African economies have been relatively resilient to the sharp fall of international commodity prices. Production of commodities has often increased despite the lower prices, and overall growth has been boosted by other sectors. Nigeria, for example, is highly dependent on oil for its export revenues (approximately 92%), but the primary driver of its GDP are services (57%)6.
Africa is also host to 7 of the 10 fastest-growing economies going into 2015, i.e. Ethiopia, Mozambique, Tanzania, Democratic Republic of the Congo, Ghana, Zambia and Nigeria. Interestingly enough, the overall fastest-growing economy based on GDP from 2001 to 2010 was Angola. In fact, in that time span, 6 of the top 10 fastest-growing economies were of African nations. Africa’s GDP growth rate of 5.7 percent in the decade from 2001 was second only to Asia (7.9%) and outshone Latin America’s 3.3%.5 It must be said, however, that Africa’s growth has been off a low base.
According to McKinsey, Africa’s combined GDP of US$1.6 trillion in 2008 will increase to US$2.6 trillion by the year 2020. This year will also see an estimated US$860 billion of consumer spending in Africa.5
However, the future does have in store the slowdown of the Chinese economy. Commodity export-oriented countries such as Nigeria and Angola have felt the negative affects of this phenomenon, and would need to re-orientate its economies to become more manufacturing oriented. The diversification of economies and the beneficiation of commodities will therefore have to become an urgent matter of policy. As it is, Nigeria has accepted a US$30 billion budget for 2016, which aims to diversify its economy away from oil by boosting the agriculture and mining sectors. 30% of the budget would be allocated for capital expenditure, to be funded through a rise in non-oil revenues.
Secondly, we saw a continuation of FDI in Africa. Here one sees countries such as China, India, Brazil, Japan, Malaysia, Turkey and others (including the USA and the EU) who are investing in Africa in various guises and forms. Some, i.e. China, are interested in resources, while others get involved in other ventures, such as consumer goods. Africa needs this investment as its investment opportunities far outstrips the availability of internal funding sources. Interestingly, South Africa is the second largest FDI investor in Africa. At the latest China-Africa business summit (FOCAC) in Johannesburg recently, the Chinese president committed to develop projects that would enable African countries to beneficiate at the source. This has the benefit of helping Africa to diversify its economies away from commodity exports. In the long term, this will be very good for Africa, leading to import substitution, economic growth, industrialisation, and job creation.
The third point links up with the above trend. Africa is not a poor continent; however, it needs development. It has massive discovered resources (US$82 trillion – oil, coal, gas, copper, platinum, diamonds, gold, etc.).7 Currently, most of these resources get exported as commodities to China, etc. Very little local beneficiation currently takes place. An example is where Nigeria exports its crude oil and then imports the refined product. In this way, it loses the opportunity to create jobs and reduce its vulnerability to oil price and foreign currency volatilities. They are unfortunately by no means the only example. The beneficiation at source touched upon above will help to deal with this. The same is true for Dangote’s construction of an oil refinery in Nigeria, which should be operational by 2018. The development of the gas resources in Mozambique and Tanzania will hopefully also be done in such a way to enable the expansion and diversification of their respective economies.
Fourthly, there are those countries in Africa that have chosen the path to industrialisation and manufacturing. A shining example is Ethiopia, who is actively pursuing a strategy of transforming its economy to be less dependent on agriculture. The purpose of this strategy is to create opportunities for the beneficiation of resources and integrating industry value chains, thereby not only creating value for the country through exports of value-added products or through import-substitution, but also by creating much needed jobs. Nigeria is becoming a hub for the manufacturing of vehicle components for brands such as Toyota and Ford. It is currently also looking at developing its vehicle manufacturing industry, as is Ghana. In this way, Africa hopes to become less dependent on commodity exports and the negatives associated with it. Africa does not have sufficient capital or competencies for this strategy and will need support to help it on its way to a greater degree of self-sufficiency.
Fifthly, Africa has a population of about 1 billion people. This figure is forecast to grow to 1.9 billion by 2050. Within this large group of people, Africa’s middle class is growing in leaps and bounds. According to the African Development Bank, Africa had 350 million people in its middle class in 2011, and this would grow to 370 million by 2014. They define middle class as those spending between US$2 and US$20 per day. Standard Bank of South Africa looked at 11 countries with 50% of Africa’s GDP, and counted 15 million households in the middle class, which is set to grow to 42.2 million households by 2030. Standard Bank defines middle class as those who can spend between US$15 and US$115 a day. Irrespective of the measure used, it is clear that there is a strong growth in the middle class in Sub-Saharan Africa. This group is responsible for the growth in consumerism that can be observed in Africa. Due to this rising consumer awareness, brands have become important for the identity of Africa’s people. We also see a strong growth in the luxury class in Africa, albeit from a low base. This trend will support the increasing entry of luxury brands in Africa.
A further feature of Africa is the move towards urbanisation that is taking place. Africa’s urbanised population, currently at 40% of the population (up from 36% in 2010), is set to grow to 50% by 2035.8 This provides a consolidated and concentrated market, which is easier to access and target. It also provides construction opportunities for construction companies. The projects of the latter have been moving from mining and energy to houses, office blocks, road infrastructure (transportation) and malls. Cities, poorly designed in the past, are now being redesigned and new ones are built (e.g. in Senegal). This phenomenon of urbanisation has led multinational companies to target cities in their expansion strategies rather than countries. An example would be Elizabeth Arden, the USA-based beauty product company who is targeting Africa via its subsidiary in South Africa. A lack of proper rural infrastructure in many countries are a problem for those companies wishing to grow into Africa. Hence the need to develop a city strategy.
The seventh trend of interest as far as Africa is concerned, is its progress as a source of innovation in the field of mobile technology and applications. In Africa, and more specifically East Africa, the M-Pesa application (mobile money) is very well known. Large numbers of Kenyans are using it. Vodacom, the RSA mobile telephony provider, is now rolling it out in South Africa. M-Pesa is being used as a base platform for applications such as M-Akiba. This is used by the Kenyan government to sell bonds to the population at large. Then we have M-Kopa, which is used to sell renewable energy to the poor by means of M-Pesa, instead of them having to buy the expensive capital equipment upfront. In Nigeria we see Paga, whilst EcoCash is being used in Zimbabwe. These applications are by no means the total sum, as we also get M-Farm and M-Health, amongst others.
This trend has the potential of disintermediating banks, should they not innovate their business models to provide for this new technological development. As it is, various banks are responding by partnering with the likes of Safaricom, the parent company of M-Pesa. We now see mobile money applications increasing the proportion of the population that are financially included in the formal system. Up till recently, large numbers were excluded from the formal financial banking systems. This is changing, making it easier to trade.
Mobile money platforms are also facilitating the management of the increasing remittances to Africa from the African diaspora. Up to now, the diaspora have had to make use of unscrupulous players in the African market, which has led to unfair and exorbitant costs to transfer money into Africa.
The eighth issue of importance, given the growth in Africa, are energy systems. More than 600 million Africans do not have access to electricity. Yet Africa has a vast growth potential in renewable energy, i.e. 11 terrawatts of solar power, 350 gigawatts (GW) of hydropower, 110 GW of windpower, and 15 GW of geothermal power. By 2040, it is forecast that renewables could provide more than 40% of all power generation capacity. In addition to the lack of energy infrastructure, Africa also has an inefficient generation, transmission and distribution system, which leads to increasing costs. For example, the average efficiency of the fleet of gas-fired power plants was 38% in 2012. Had the average efficiency been equal to that of gas-fired power plants in India (46%), the unused fuel could have generated 8 TWh (21%) more electricity. Transmission and distribution (T&D) losses also reduce the supply ultimately available to end user sectors by more than 20% in some countries in sub-Saharan Africa. Such high loss rates reduce the reliability of the power supply, which is already insufficient to meet demand in most countries. In addition, high losses increase the cost of the power actually delivered, by as much as US$25 per MWh consumed. All these additional costs, including the T&D infrastructure and retail costs, can add $50-$80 per MWh to the average cost of the consumer.1
Installed grid-based power generation capacity in Africa has been steadily increasing in recent years and reached 158 gigawatts (GW) in 2012. Grid-based power generation capacity in sub-Saharan Africa has increased from around 68 GW in 2000 to 90 GW in 2012, with South Africa alone accounting for about half of the total. Coal-fired generation capacity is 45% of the sub-Saharan total, followed by hydropower (22%), oil-fired (17%), gas-fired (14%), nuclear (2%) and other renewables (less than 1%).2
According to Bloomberg, Africa as a whole was predicted to add about 1.8 GW of renewable energy capacity in 2014 — an addition that amounts to more renewable energy than the continent added in the last 14 years combined. Additionally, over the next two years, South Africa is expected to install 3.9 GW of renewable energy, mostly in the form of wind and solar, while Kenya is set to install 1.4 GW and Ethiopia will install almost 570 MW. Given the potential referred to above, this is but a drop in the bucket, with so much potential left untapped. Morocco has also started with the addition of massive solar plants, as has South Africa.
Another interesting energy and environmental phenomenon is the start of Waste-to-Energy (WTE) plants in Ethiopia. Danish engineering and Chinese labour and capital are being used to build this plant in Addis Ababa. Once completed, this plant will serve as proof of concept in rolling out a number of other plants into Africa. Not only will this project provide employment for a number of local and foreign workers, but it will generate 50 MW of electricity whilst getting rid of waste dumps in the city – a common feature of African cities. We see Johannesburg generating about 5000 tons of waste daily, whilst struggling with landfill sites. This makes it, and several other cities in South Africa and in Africa, excellent candidates to develop WTE plants. Singapore provides a great example of a city using waste to complement its electricity provision. It has recently commissioned its 6th WTE plant, to be built by a partnership consisting of Hyflux and Mitsubishi.
Increasing water scarcity is the ninth trend observable in Africa. At the same time, Africa has massive rivers and access to a long coastline. While desalination is expensive, Africa’s governments could address the issue should they have had a cheaper form of energy. As far as drinking water is concerned, despite strong overall progress, 748 million people still did not have access to improved drinking water in 2012, 325 million (43%) of which live in sub- Saharan Africa. Fourteen countries in Africa are already experiencing water stress; another 11 countries are expected to join them by 2025, at which time nearly 50% of Africa’s predicted population of 1.45 billion people will face water stress or scarcity.
The tenth trend is the lack of access to capital for entrepreneurs in Africa. Venture capital providers in Africa are few. NEST from Hong Kong is one of a few VC’s interested in supporting entrepreneurs in Africa, and have opened an office in Nairobi, Kenya. A small number of Private Equity (PE) funds are now looking at Africa – but Africa needs longer-term capital than PE funds typically are prepared to provide. The PE space in Africa is expanding, creating jobs and fostering economic growth. There is still a long way to go, though, as only about 1% of the US$3.8 trillion of PE in the world goes to Africa. To address this, more venture capital funding is needed to grow smaller companies into the size that PE companies would be interested in. Africa has started to tap into the bond market, issuing eurobonds, as well as issuing so-called diaspora bonds. Africa’s bourses are still under-developed, with less than 1% of Africa’s registered companies listed on a stock exchange.
The eleventh trend of importance deals with the 60-65% of the world’s uncultivated land that is available in Africa, and which is currently underutilized. Instead of exporting food, Africa has to import it. With the right knowledge, agricultural practices and funding, Africa has the ability to feed the world. The DRC can feed 1 billion people, yet struggles to feed its 70 million population. Food security has become a major issue for Africa. Singaporean companies that have already bought into this potential and that are playing a major role in Africa’s agriculture, includes Olam, Tolaram, and Wilmar.
Trend number 12 deals with the phenomenon of African companies investing in their own continent, outside of their national borders. Aliko Dangote’s diversified conglomerate is not only involved in cement and oil in Nigeria, but is also building cement factories and taking interest in mining entities throughout Africa. The latest reported investment by Dangote is said to be in Zimbabwe. Other companies include Sanlam (financial services), Shoprite, Massmart, Pick ‘n Pay, Woolworths, The Foschini Group, etc. (Food and clothing retail); Group 5 (construction); Standard Bank (banking); and Toyota SA and Ford (motor manufacturing). These corporations are deriving a sizeable portion of their revenues from business in Africa, and present a clear indication of what is possible should one understand Africa.
It should be noted that some of these players have not been unwilling to enter into a country, learn from their mistakes, and withdraw. Woolworths, for example, went into Africa, realised they had the wrong business model (franchise), went back into Nigeria with a corporate store approach, and then withdrew again after they realised the cost and revenue element of their business model was not working. However, their model does work in other countries.
A number of these companies are entering Africa with greenfield operations (Shoprite), which they start scaling when they achieve initial success. Others use joint ventures and partnerships (Sanlam), while others use acquisitions (SABMiller).
The thirteenth trend entails the interest shown by large multinational corporations in Africa. These include food suppliers such as Kellogg, Procter & Gamble, Unilever and Kimberley-Clarke. Very recently Kellogg purchased a stake in an African subsidiary of Singaporean-based Tolaram Group in order to benefit from their local distribution channels and supply chain footprint. Global food retailers such as Walmart and Carrefour have also entered Africa. Walmart’s main strategy for its African entrance has been through a majority share acquisition of Massmart in South Africa, to tap into the latter’s large African footprint. This is a continuation of the entry into Africa by Singaporean companies such as Indorama, Olam, PIL, Tolaram and Wilmar.
On the political front, we see a fourteenth trend. In Nigeria and Tanzania, we saw incumbent presidents leaving the political scene peacefully after either having lost an election (Nigeria), or having come to the end of his tenure (Tanzania). These are all very good indications of continuing democracy in Africa. In a similar vein, we see very good signs of good governance in these countries where their new and re-elected presidents, Buhari in Nigeria and Magufuli in Tanzania, have started delivering in a tangible way on cleaning up the pervasive corruption in their countries. In the Ivory Coast, president Quattara was re-elected in a relative peaceful election for a second term as president. One can also count the continued good governance by Macky Sall of Senegal, Hage Geingob of Namibia, and Paul Kgame of Rwanda as positive indicators.
The counterpart of this trend is not so positive. We have seen two confirmed cases of incumbent presidents changing their country’s constitutions in order to have a third term as president. Paul Kgame of Rwanda has gone the route of getting the support of his parliament, and has subsequently obtained the support of the whole country in a national poll. In spite of Kgame being a good administrator, it does create a precedent for others with the same intentions. His move is therefore mostly viewed negatively by Western countries. On the other hand, Pierre Nkurunziza from Burundi has forced through his third term, creating a lot of volatility and instability in Burundi. It seems that Joseph Kabila from the DRC is also planning to force a third term as president. This possibility is already causing instability in the DRC. It is unfair, however, for obvious reasons to mention Kgame on the one hand and Kabila and Nkurunziza on the other hand, in the same breath when talking about this issue.
A fifteenth trend that has become very pronounced, is the exodus of African migrants to especially Europe. These are people in search of greener pastures as they believe that Africa does not have the opportunities for them to achieve their higher aspirations. This migration has reached a scale of such proportions that Europe has offered African countries tremendous amounts of money to keep their population in Africa. This would entail the development of projects that would create jobs and keep Africa’s skilled and competent people in Africa. It would also entail the upgrading of the education and training of Africa’s youth.
A sixteenth trend is the continued effort towards regionalization. In addition to the existing economic communities, the SADC, EAC and COMESA signed an agreement to create the Tripartite Free Trade Area (TFTA) that will incorporate the mentioned 3 communities. The TFTA will consist of 26 countries, 625 million people, and will generate more than US$1 trillion GDP. This will dramatically increase the inter-Africa trade, currently only at 13% of Africa’s total trade. It is speculated that the implementation of the TFTA would increase this figure to 30%. This is still way off the 70% of inter-regional trade for the EU, but a massive boost for Africa. Challenges for the TFTA include political instability, lower commodity prices, corruption, and electricity shortages. These are known problems, though, and have been targeted by African countries. As such, they can even be seen as investment opportunities by the private sector.
A seventeenth trend is the apparent improvement in the security situation as far as Boko Haram in Nigeria and al-Shabaab in Somalia is concerned. When Buhari took over as president in Nigeria, he committed to destroying Boko Haram. Towards late December, he declared that Boko Haram had technically been destroyed. Time will tell whether this was indeed the case. In Somalia, al-Shabaab has split up, with some factions aligning with ISIS, whilst the others stayed loyal to al-Qaeda. The breaking up of al-Shabaab is not necessarily good news, as the splinter groups might become more extremist and active to increase their standing.
Trend number 18 deals with tourism. Hotel development in Africa will grow strongly as international brands such as Marriott, Hilton and Radisson seek to benefit from the strong economic growth in Africa. It is said that about 50,000 rooms spread among 270 hotels in Africa were set for development in 2015. Demand from the growing middle class will contribute to development in sub-Saharan Africa, while the number of business executives conducting deals in Africa will boost the growth of five-star hotels. Nigeria will see the most of this action, whilst Ethiopia is also planning for a strong growth in tourism. Egypt’s tourism has been dealt a severe blow with the shooting down of the Russian plane. South Africa’s tourist trade was initially negatively impacted by their new visa regulations. Fortunately, the government changed the regulations towards the end of 2015, which should see tourism to South Africa picking up again. Overall, this trend is linked to the perceived security situation.
Trend number 19 sees the continued development and increased utilisation of Special Economic Zones in Africa. We see them being used in South Africa, Kenya, Tanzania, Nigeria, and Ethiopia, to name but a few countries. In some of these countries, they have been accused of being too rigid and as such defeat the very purpose of their existence. Kenya recently starting converting their EPZs into SEZs, as the former were not performing as designed. The country was losing out on its taxes to a much greater extent than expected.
The 20th trend is the acceptance of Africa’s geo-political and military importance. It seems that Russia is positioning itself in the eastern Mediterranean, with footholds in the Crimean Peninsula, Syria and Egypt. China, the USA and France have all acquired military bases in Djibouti. China is the new kid on the block as far as their military presence is concerned, but this must be seen as complementary to their economic presence in Africa, which is quite substantial. Possible reasons for the popularity of Djibouti is its proximity to volatile areas in Africa, important sea lanes, and the Suez Canal. China’s presence could be a source of concern to the USA. President Obama’s trip to Africa in 2016 focused on East Africa. There is a clear link between this visit and an attempt to bolster the USA’s presence in the region.
It is clear that Africa represents a source of resources such as agricultural products (food, etc.) and commodities (oil and minerals). It is also clear that Africa as a whole has the energy potential to provide the continent with all the energy it needs, be it coal- or renewable energy driven. It would need an integrated management approach for this to become a reality.
Africa also serves as a destination. It represents a large consumer market with a strongly growing middle class and consumer segment. As such, it is a destination for processed food, electronic technology, construction and capacity building skills, manufacturing skills, ability to generate, transmit and distribute energy (in its various forms), water management skills, and public transportation skills.
It is also clear that the opportunities are not only for the large conglomerates, but also the small to medium enterprises (SME’s).
New entrants into Africa have a range of business models to choose from, such as green field operations, acquisitions, mergers, and joint ventures/partnerships. Patience in Africa is a virtue, as is the ability to learn from one’s mistakes and adapt strategies and business models that at first were not successful. Agility and knowledge of the environment are crucial elements for success in Africa.
Access to capital is a need in Africa that cannot be underestimated. FDI serves some of the need, but many more VC’s and PE funds are required to comprehensively fulfill the needs of African entrepreneurs. Africa also needs to diversify its economies away from commodity exports. This increases the need for development capital.
Africa’s geo-strategic importance will continue to increase. The major powers are targeting Africa to protect their perceived interests in Africa and the Middle East. Africa can serve as a springboard to project their power into the sensitive areas of the world, such as sea routes and oil fields.
This article contains content from an article in the Business Times, “Bright Future for the Dark Continent” by me, published on 10 October 2015, and available on the website of NTU-SBF Centre for African Studies.
https://www.iea.org/publications/freepublications/publication/WEO2014_AfricaEnergyOutlook.pdf – page 41
https://www.iea.org/publications/freepublications/publication/WEO2014_AfricaEnergyOutlook.pdf – page 40
http://www.africaneconomicoutlook.org/fileadmin/uploads/aeo/2015/PDF_Chapters/Overview_AEO2015_EN-web.pdf page i