Eighteen months after the onset of the US-led financial crisis and economic downturn – events which had appeared to shatter more than a decade of uninterrupted growth on the world’s poorest continent – Africa is bouncing back.
Not only have African economies weathered the downturn better than anticipated, they are now promising growth rates to rival those of their Asian counterparts, making the performance of developed economies still largely reliant on fiscal stimulus programmes look decidedly anaemic by comparison.
“All across the continent,” Dominique Strauss-Kahn, the Managing Director of the IMF told a panel discussion at the University of Nairobi, Kenya, in March, “we can see signs of life, with rebounds in trade, export earnings, bank credit and commercial activity. A lot depends on what happens to the global recovery that is still in its early stages. But I think Africa is back.”
African economies south of the Sahara are projected to grow by an average of 4.5 percent in 2010, growth rates which are expected to accelerate in 2011 – up sharply from the less than two percent experienced in 2009 as global trade and capital flows shut down in the wake of the Lehman Brothers collapse, which had brought an abrupt end to Africa’s unprecedented decade-long growth spurt of five to seven percent.
The strength and speed of Africa’s economic recovery has taken most analysts and observers by surprise. “Usually,” Strauss-Kahn said, “there is always a rather long delay between the recovery from crisis in the rest of the world, and the time when African economies begin to catch up,” he added. “This time it is not the case.”
Strauss-Kahn attributed the swift upturn to the ability of many African countries to increase their budget deficits and boost government expenditure, having introduced more disciplined macro-economic and fiscal policies in the years leading up to the downturn. “For the first time in its history, maybe, Africa was able to implement the same kind of policies that the IMF had advised for the rest of the world – and they have done it very effectively.”
Asian economies are in the vanguard of the upturn but African economies “are recovering at the same speed, sometimes faster than many others, especially when you look at Japan or the European economies,” Strauss-Kahn said.
Africa’s lack of integration into the world economy, particularly its lack of exposure to the subprime assets which brought many western financial institutions to their knees, had enabled the continent to largely escape the primary impact of the financial crisis. But Africa’s heavy reliance on earnings from oil and commodities meant that it could not escape the secondary impact of the financial meltdown on global trade.
Preparation for the inevitable
As earnings from commodities contracted and economic growth rates fell, African governments found that they were able to expand their budget deficits to lessen the impact of the downturn. Ten years of prudent macro-economic and fiscal management had given many African governments the luxury of fiscal room for manoeuvre never before experienced.
In addition, the IMF and World Bank were able to reassure African leaders that, given the cyclical rather than structural nature of the crisis, their lending policies would be targeted on meeting short-term financing needs rather than on imposing long-term structural reforms.
During 2009-10, the IMF signed financial support programmes with 28 African countries – up from six in 2006, and its lending exceeded $3.5bn – more than the three previous years combined. At the same time, the World Bank extended more than $21bn in concessionary loans and grants to the world’s poorest countries – most of them in Africa – compared to $12bn the year previous.
But while the IMF and World Bank were rallying to provide Africa with a financial lifeline, the response of private sector investors to the crisis – the now notorious flight to safety – had become a source of considerable alarm.
In 2008, prior to the impact of the downturn, Africa had attracted a record $88bn in FDI. In September 2009, however, the United Nations Conference on Trade and Development’s (UNCTAD) annual World Investment Report, a leading authority on global trade and investment flows, forecast that global FDI would fall from around $1.7trn to $1.2trn for 2009. It also estimated that FDI into Africa in the first three months of 2009 had plunged a staggering 67 percent.
With the benefit of hindsight that estimate was unduly pessimistic. Lenders facing liquidity constraints had greatly scaled back their African exposure in the early part of 2009. But UNCTAD’s mistake was to assume that the first quarter figures would set the trend for the remainder of the year. In fact, the opposite happened.
Early caution eased considerably as the year wore on. Not only were fresh sources of investment forthcoming from new emerging market lenders such as China and India, bolstering the lifeline thrown to emerging market and developing economies by the IMF and World Bank, but other sources of FDI started to recover too, as western private capital began flowing back into Africa in search of higher returns that were now largely unobtainable in most developed economies.
Despite facing the most challenging market conditions in decades, the number and value of African project finance deals began to register a marked increase. EDFR Global, the Washington-based emerging market fund analyst, had by August detected a reversal of the panic sell-off that had hit African markets during the 2008-09 flight to safety, highlighting what it called the “underlying logic of investing in a continent which remains host to about a third of the world’s known mineral resources”.
By October Standard Chartered Bank had reinforced this analysis by suggesting that the resurgence of interest in frontier African assets was less attributable to a recovery of investor appetite for risk than in a growing recognition “of the compelling economic argument for investing in Africa”, which had not only survived the downturn, but was no likely to recover faster than anyone had hitherto anticipated.
At the same time, the Washington-based Emerging Market Private Equity Association (EMPEA) reported that the six-month upturn in global markets had reignited private equity investment in Africa. Private equity investment in Africa, valued at around $5bn or 0.5 percent of African GDP in 2008, had taken a knock in 2009, but EMPEA reported a sharp upsurge in investors seeking to raise fresh funds for a new wave of private equity investment in the continent in 2010.
Done deals
By the end of 2009 Dealogic, the investment banking and capital market analyst, reported that in the face of the worst economic and financial climate since the Great Depression no less than 31 project finance deals were signed in Africa valued at $12bn – less than the all-time record of $18.4bn agreed in 2007 but more than the $10.7bn recorded in 2008 – making 2009 the second best year for African project finance this decade.
Dealogic’s data reflects only syndicated loans. It does not include private equity deals, bilateral bank-project loans or government investment commitments, and so significantly underestimates the value and volume of project finance deals in Africa during the so-called “great slowdown of 2009”.
Contrary to all expectations, African fundamentals remained largely immune from the downturn. It took a while for investors to realise this. When they did, they began returning to Africa in ever greater numbers. Africa, hitherto seen as the laggard of world economic growth, has now become an important source of growth for developed economies.
The transformation in the fortunes of the developing and developed world prompted Robert Zoellick, the president of the World Bank, to suggest in April that the world’s “economic and political tectonic plates are shifting.” The old concept of a Third World was now obsolete, he said. Developed countries would no longer be able to impose their will on developing countries. Developing countries have now become “major sources of global growth” in their own right.
The significance of this development lies less in the recovery of oil and commodity prices than the fact that Africa is shifting from being a source of global supply to a source of global demand.
Private equity investors such as Actis, Aureos, African Capital Alliance, AfricInvest and Citadel Capital, have been attracted to Africa – where private equity is still a relatively novel asset class – by the prospect of 4.5 percent growth rates in 2010, 6.5 percent in 2011, and the lure of considerable growth year after year thereafter. All are acutely aware of the demand transition that is currently sweeping the African continent.
Emerging market private equity investor Actis, for example, raised around $3bn in 2009, and is planning to deploy about a third of it in Africa. Ngozi Edoziem, the firm’s West African head, points to countries like Nigeria, which has a population of around 150 million, a growing percentage of which is moving into what western economists would recognise as the middle classes, and they are fuelling demand for banking services, food and retail outlets, telecoms and information technology, and a host of other services and sectors.
“We’ve seen over the past five years that you pretty much have something like ten million people that have moved from a low income and are getting into that middle class bracket,” she said. “Demand across all areas is strong. There is growing income and wealth, and we are beginning to have the infrastructural support, as well as the government and regulatory support that creates the foundation for growth in many of these businesses,” she added.
Actis teamed up with South Africa’s Rand Merchant Bank to help finance the construction of a $100m shopping complex in Ikeja, the middle income neighbourhood of Lagos, where it estimated that there are 3.9 million people living within an eight kilometre radius of the new complex with an income of $1,500 a month.
When completed, the shopping complex will be the largest of its kind anywhere in Nigeria. But it is only the beginning. Johannesburg, which has a population of around four million, supports no less than 70 big retail complexes. Lagos, with a population of around 16 million, has one.
Actis is not alone in basing its investments on Nigeria’s changing demographics. Shoprite, the South African supermarket chain, has seen the same opportunity, and is currently planning to open up 70 retail outlets in Nigeria over the next decade, and 20 of those are destined for Lagos. Wal-Mart, the world’s biggest retailer, hinted in April that it might even buy out Shoprite, as it scourers the world – especially China, India and Africa – for new expansion opportunities to offset stalled or declining sales in the US.
Nigeria is Africa’s most populous country, and despite the considerable everyday challenges of operating there – from incessant power shortages to widespread corruption – it is increasingly being seen as the potential motor of resurgent African economy – offering the same growth opportunities that China presented two decades ago.
Nigeria’s political elites, as is the case in many other parts of the African continent, are struggling to solve the power generation crisis, the lack of the regulatory frameworks that are so vital for businesses to function effectively, the delays in the judicial system – and a host of other obstacles that have been an impediment to private investment for decades. Progress is painfully slow. But progress there is. Nigeria has been moving ahead far faster than most westerners have given it credit for.
Nor is it the only one. Continental Africa now has a population in excess of one billion people, and while substantial pockets of poverty and conflict remain, there are vast areas from the Cape to Cairo, and from Luanda to Lusaka, where a middle class has now emerged that is demanding the same kind of banking, retailing, property, telecommunications, and leisure services that are available in most other parts of the world. For investors with a tolerance of risk – and the risks remain considerable – African frontier markets are the place to be.
