by Rizel Delano

Africa: World's fastest growing economies

The African lion is waking up

Africa is a growing lion, economically speaking
africa.jpg

Based on the International Monetary Fund (IMF) World Economic Outlook estimates released in October 2012 (which include economic growth forecasts for 185 countries), 11 of the world’s 20 fastest growing economies are in Africa.

Many of these countries started with extremely low levels of gross domestic product, which underscores that global economic growth will be driven by emerging markets and developing economies. Major trends driving this growth include changing economic policy environments, a growing middle class expecting equitable social policies, robust domestic demand, rapid mass urbanisation as well as global trade.

According to PricewaterhouseCoopers (PwC), the fast-growing emerging markets of Africa, South America, Asia and the Middle East are not so much about the speed of growth within the markets, but more on how interconnected the trade flows between them have become.

South Africa, the continent’s largest economy with large investments in neighbouring countries, has a mature economy with strong industrial, financial and transportation sectors. South Africa sits firmly in the World Bank’s upper middle income category along with Brazil and China. This has given South Africa a huge influence on the continent and a firm stake in the success of economies across Africa.

Despite this, South Africa faces challenges in areas of governance and inequality with frequent protests, instability and labour strikes threatening to hinder foreign investments.

In early November 2012, finance minister Pravin Gordhan warned that export revenues could be R12.5-billion lower in 2012 as a direct result of industrial relation tensions and wildcat strikes in the mining and transport sectors.

This means export losses would exceed direct losses, as mining has strong linkages to other sectors of the economy.

But Annabel Bishop, economist at Investec, said if there were no further strike action, South Africa’s economy could grow 3% in 2013. The Reserve Bank forecast a 2.9% growth in 2013, Nedbank expected 2.7% growth and economist Mike Schüssler expected a 2.5% growth.

The return of respected businessman Cyril Ramaphosa as deputy president is also seen as broadly favourable to business and investment. Ramaphosa is South Africa’s second richest black businessman, with a fortune estimated at $675 million (R5 794 million) by Forbes magazine. The rand already edged higher against the dollar as investors considered the likelihood of policies remaining largely unchanged under the re-elected president Jacob Zuma.

On a broader scale, with South Africa as the gateway, Africa is fast becoming an attractive place to do business, especially as corporates in developed countries seek to balance out slow growing markets in their home countries.

A significant number of companies have declared intentions of growing their presence in Africa, according to PwC's sixth edition of its biennial valuation methodology survey titled: "An African perspective: Valuation Methodology Survey 2012". The survey reflected the views of 49 financial analysts and corporate financiers from South Africa, East and West Africa.

Louise Robinson, marketing director of Database 360, a company tasked with helping organisations enter African markets and providing quality data and information on companies throughout the continent, told BizCommunity.com that Africa has a vast untapped market with an abundance of investment opportunities across many different sectors and industries.

Data collected by the United Nations indicated that Africa offers a higher return on investment than any other emerging market because fewer foreign companies have a presence on the continent, therefore less competition in markets with high consumer demands. The PwC survey noted that price and value remain key challenges for companies doing deals in Africa.

The study showed that the most predominant target industry in West Africa is retail‚ consumer goods and industrial products‚ whereas mining continues to be a key sector within the southern African markets. From lessons learnt in the recent past, when investing or doing business in Africa, each African country - including South Africa - should be carefully considered according to its individual risks and opportunities.

Risk identification processes should include a detailed understanding of the target market investors would like to enter, and regional generalisation should be avoided. Risk identifications should also include a forecasted analysis in political trends, ethnic disputes, general public pressure for reforms, border disputes and instability, expropriation, nationalisation, licence revocation, security, environmental protection policies, human resources, community relations, labour relations, managing conflicts and supply chain management.

In the meanwhile, China’s continuing interest in investing in Africa shows no sign of waning. China’s trade with Africa was expected to hit $220 billion in 2012, a 25% growth rate annually. China’s former vice minister of commerce, Wei Jianguo, told China Daily that Africa would surpass the United States and the European Union in becoming China’s largest trading partner.

The economic independence that African economies could gain from global partners such as China could be sustainable if countries draw up their own development policies and co-ordinate them at regional and international levels to better negotiate with emerging partners.

For investors, the big challenge remains in how to create a profitable business from a typically low revenue-generating population that is also geographically dispersed throughout unconnected rural areas. Therefore, to be successful in doing business in Africa, a unique business model for each opportunity should be outlined with full appreciation of Africa’s own specific dynamics.

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