Africa is taking over the “7% growth club”
Africa is on the up. It presents international businesses with immediate growth opportunities, particularly in the infrastructure sector. In the latest issue of our Global Economy Watch, we have taken a closer look at the prospects for Africa. Most African economies have shown resilience following the financial crisis and their growth momentum is expected to continue in the medium term, driven by rising commodity demand from Asia and other emerging markets, favourable demographics, improving productivity levels and investment in infrastructure projects. In fact, nine African economies -- Mozambique, the Congo, Liberia and six other economies* are expected to achieve growth rates of 7% or more this year. To put this into perspective, China, India and Vietnam are the only other large emerging markets in the “7% growth club”.
Business leaders in Africa are very optimistic about the future with more than 90% of CEOs based in Africa being confident or very confident about their revenue growth prospects for the next 12 months. This is the second highest figure recorded after Latin America. High African growth rates mean that international businesses will be presented with immediate opportunities to grow. For example, across the whole continent of Africa, the World Bank has identified a funding gap for infrastructure projects worth around $48 billion. Long-term projects like these could provide returns for cash rich UK entities (be it companies or investment vehicles). Engineering and construction firms can also take advantage of the opportunities on offer.
But, as with all business projects, CEOs and their teams need to factor in and account for the practical costs and risks of doing business in Africa. For example, the World Bank estimates it takes three times as long to start up a business in Nigeria, compared with an average OECD country. In some cases an indirect presence in the country, via a partnership with a local business, could prove to be a wiser strategy. Our heat map (Figure 1) shows that in most cases the larger African economies have a clear demographic advantage relative to other emerging markets, but the key challenge is in creating an environment where it is easier for business to operate.
Figure 1 - African countries have more favourable fundamentals than some of the larger emerging economies
Another significant challenge for Africa is its over-reliance on commodities. One of the main reasons Africa has been growing fast over the last decade is because of high commodity prices. This, in turn, has attracted investments from resource-hungry emerging economies such as China that are keen on securing raw materials for their expanding manufacturing base. Our analysis shows that FDI to the region was up by US$113 billion during the 2008-12 period compared to US$495 billion in the 2003-2007 period, with a significant proportion of this capital flowing into the natural resource and energy sectors. However, exporting natural resources to fuel economic growth is not a sustainable long-term growth strategy. To sustain their development over the long-term, African economies will need to diversify away from natural resources and move up the value chain.
Only when these challenges have been met will African economies make major inroads into the income gap with more established emerging market economies - in Latin America, Asia and the Former Soviet Union.
 Richard Boxshall and Barret Kupelian also contributed to this article