Oxford Business Group’s Five Keys to Understanding Africa, in Advance of US-Africa Leaders Summit
Africa is the new kid on the block for the international investment community: as growth rates in advanced economies have slowed, GDP across Africa has risen by roughly 5% since 200 -- virtually double the rate of the mid-90s – and is expected to average 5.5% this year; meanwhile, Foreign Direct Investment (FDI) in Africa for 2014 is expected to reach $80 billion.
However, the factors behind this performance are many and varied, and the simple narrative of “Africa Rising” obscures some key trends driving market activity. Oxford Business Group—the premier source of economic and business research on African markets for more than a decade—has identified the five issues to consider when looking at growth in Africa:
1) FRAGILE GROWTH: African economies have posted impressive growth in recent years – Ghana in 2011 saw nearly its output expand by nearly 15% -- and unlike in previous booms, that growth is no longer wholly or even largely dependent on commodities.
However, for a number of Africa’s economies, if growth slows even moderately, they risk losing many of the gains accumulated over past years. To actually reduce structural unemployment, Egypt would need growth more than double its current rate. Ghana’s oil is bringing in new revenues, but the economy is still vulnerable to price volatility in commodity markets.
Making growth sustainable over the long-term – by diversifying activity and stimulating job creation – has thus become one of the key challenges across the continent.
Trade with developing economic regions comprises roughly half of the continent’s overall export and import volumes – with Asia roughly even with Europe in percentage terms – but much of that is raw material. And in spite of all those headline investment deals – China’s $5 billion stake in Standard Bank, for example – total FDI stock in Africa is still dominated by Europe and the US.
In West Africa, intra-regional trade comprises less than a tenth of total volumes and in other regions such as the Maghreb it is even less. These low levels are due in part to uneven border controls, high costs and non-tariff barriers. In fact, it can take three times as long to ship a container within West Africa as opposed to between two OECD countries.
As a result, a number of economic blocs – including ECOWAS, COMESA and EAC – are working to strengthen intra-regional links and improve cross-border transactions.
4) GATEWAY OPPORTUNITIES:
Some markets are also deliberately positioning themselves as a low-risk entry point to greenfield opportunities elsewhere. Morocco, for example, has a growing list of companies doing business in the region, with assets throughout Francophone Africa.
Following the withdrawal of French banks during the global economic crisis from African markets, Moroccan banks moved in, spurring a dramatic increase in Africa-focused investment from North African firms in everything from telecoms to insurance. As a result, Morocco is able to serve as an accessible gateway for foreign investors keen on tapping more challenging markets elsewhere.
5) MIDDLE CLASS: A famous AfDB middle class study a few years back said the middle class made up 35% of the total population, but that includes categories of the population that subsist on $2 a day – which means they are still very price sensitive and vulnerable to shocks. The drop in beer sales in Nigeria following a rise in fuel prices provides ample demonstration of this.
However, the continent’s demographics remain enticing in other ways. The labor force in virtually every African market is expanding and urbanization is roughly double what it was thirty years ago, which in turn boosts productivity, demand and investment.
About Oxford Business Group
Oxford Business Group (http://www.oxfordbusinessgroup.com/
The critically acclaimed economic and business reports have become the leading source of business intelligence on developing countries in the regions they cover. OBG's online economic briefings provide up-to-date in-depth analysis on the issues that matter for tens of thousands of subscribers worldwide. OBG's consultancy arm offers tailor-made market intelligence and advice to firms currently operating in these markets and those looking to enter them.
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