Africa 2013: The Next Economic Frontier

By M. Isi Eromosele

Capital market development and economic growth tend to go hand in hand and the prospects for the latter look relatively bright in Africa during 2013.

There are eight strongly-performing economies in sub-Saharan Africa that seem to offer the strongest potential for foreign investors. The list comprises Angola, Ghana, Kenya, Nigeria, Senegal, Tanzania, Uganda and Zambia, which make up 45 percent of the region’s population and 61 percent of its economic activity.

Over the past decade, growth in these eight frontier sub-Saharan markets has accelerated to 6.6 percent from 3.0 percent over the previous two decades and is set to be sustained at close to these levels over the next five years.

This matches the 6.6 percent expansion in the BRICs, tops the 4.9 percent growth seen in the rest of emerging Asia and is well in excess of growth of around 3.5 percent in South Africa.

While frontier markets in North Africa also offer potentially attractive returns over the longer term, uncertain political transformations are likely to weigh on confidence and economic activity for many months to come. For the year ahead, therefore, growth prospects south of the Sahara are better.

As in other emerging regions, African economies have been buffeted by headwinds from the global financial crisis over the past four years. But in contrast to past global slowdowns, Africa has not been left behind as the current global recovery has unfolded.

In part this reflects improved policies that have been put in place. Most countries in the continent have done a better job in recent years of banking the dividends from stronger economic growth.

Foreign reserves have increased and debt levels have been reduced, helped in some cases by debt relief from official creditors. These buffers enabled many countries to ease policies during the recent downturn.

Stronger linkages with China and other rapidly growing markets have also added impetus to growth. Almost half of sub-Saharan African exports now go to emerging and developing markets compared with less than one-quarter in 1990 with China alone accounting for about 17 percent of the region’s trade.

In some respects, this is just another manifestation of the secular boom in commodities resulting from the rise of emerging markets over the last decade. Africa’s abundance of natural resources makes it an obvious beneficiary of this super cycle. But growth has also been strong in countries that do not depend so heavily on commodity exports, such as Tanzania and Uganda.

This year is likely to provide difficult challenges for global markets and African economies will also need to overcome their share of these. Low incomes, rapidly growing urban populations, ethnic divisions, pervasive corruption and long histories of armed conflict continue to leave some African countries susceptible to bouts

of social unrest and political tension.

Encouragingly, elections in 2011 in Nigeria, Uganda and Zambia, passed off smoothly. And polls in Ghana in 2012 further underscored the country’s already strong reputation for political stability.

Kenya’s elections, however, will be a significant test of its democratic credentials and ability, under a new constitution, to avoid a repeat of the protracted stand-off following the disputed 2007 elections, with all but the bravest of investors likely to remain sidelined until transition to the next administration is complete.

Inflation has accelerated to about 11 percent over the past four to five months from a low of 7 percent a year ago, reflecting rising international food and fuel prices and a reticence in some countries to roll back accommodative policies put in place after the last crisis.

In East Africa, these pressures have been exacerbated by a severe drought and weaker exchange rates, which have pushed inflation to 19 percent in Kenya, 17 percent in Tanzania and 31 percent in Uganda.

Central banks have responded with aggressive rate hikes in the last few months. This should help to restore macroeconomic stability and prop up their currencies, but is likely to hold back economic growth in the short term.

Africa’s exposure to commodity markets, which has driven its terms of trade to record highs, could also prove to be a double-edged sword. Global growth of much below 3 percent would likely be associated with weaker oil and industrial metals prices, which would be negative news for the region’s major oil producers, Angola and Nigeria, as well as Zambia, given its reliance on copper exports.

On the other hand, continued negative real interest rates in core markets may continue to provide support for gold, which could help to mitigate some of the negative effects of a global slowdown on Ghana and Tanzania.

Further ahead, the durability of the economic revival in Africa will also depend on how countries manage their commodity revenues. Nigeria’s recent experience has underscored that, if not appropriately managed, oil revenues can lead to wildly pro-cyclical spending patterns and macroeconomic volatility.

Going forward, there is optimism that the government in Nigeria will be able to rein in public spending, which, should in turn, bring some stability back to the foreign exchange market and pave the way for continued strong growth.

A new potential major economic force is Ghana, where new oil production is set to push economic growth up to about 14 percent, making it easily one of the fastest growing economies in the world this year.

Ghana’s framework for managing oil wealth has only recently been approved but includes several useful elements, including a strong emphasis on transparency and the creation of oil savings funds designed to insulate the economy against volatile movements in oil prices and to preserve some oil wealth for future generations.

Consistent implementation of this framework through both good and bad times should help to further lock in Ghana’s growing reputation as of one of the continent’s brightest long term prospects.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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