Visionaries - May 25, 2018

GDP of Africa

GDP of Africa is 2.5% of the total GDP of the world in 2008, and to be estimated as 2.3% of the world GDP in 2009.

It is a tragic reality that the world’s image of Africa is still mainly one of starvation, bloody civil wars and corrupt despots. Yet there is also a general inability to discern the many nuances of a large and multifaceted continent.

“If there is any part of the globe with the potential for record growth over the next few years, it’s Africa,” South African President Jacob Zuma said recently. If visions of an Asian-style growth miracle on the African continent were previously dismissed as the product of national leaders’ enthusiasm for castles in the air, many analysts today are prepared to conclude that Zuma is right. Here are some numbers that might prove him right:

Strong domestic consumption

Over the next few years, the International Monetary Fund predicts a rapid recovery: 4.5 percent this year and 5.5 percent next year. While a recovering Chinese appetite for raw materials is one explanation for the expanding economy, there are also local factors. Two-thirds of Africa’s total economic growth over the last few years has come from domestic consumption.

Large service sector

The service sector’s share of GDP in Africa’s 10 largest countries is 40 percent, not much lower than India’s 53 percent share. Many of Africa’s 1 billion people still live in abject poverty. But the continent also has a middle class of 300 million fairly well-off individuals.

Growing foreign investment

While foreign direct investment fell by 20 percent globally in 2008, it reached a record high in Africa. According to one study, 954 publicly traded African companies had a return on capital between 2000 and 2007 that was 65 percent higher on average compared with similar companies in China, India, Vietnam and Indonesia.

Brightest star South Africa

By far the continent’s brightest star is South Africa, where per capita GDP is significantly higher than in either China or India. Moreover, unlike China, South Africa is a democracy with fairly firm ground rules for international companies. The world’s 18th-largest stock exchange is located in Johannesburg.

The people of South Africa and their leader do not lack for challenges on the road ahead. Unemployment is high, over 30 percent, and widespread crime is a national trauma. Major economic disparities from the apartheid era persist, creating bitterness and a breeding ground for controversial figures like Julius Malema, the leader of the African National Congress Youth League.

At the core of their work is trade. Many African countries actually have good economic prospects – particularly given the demand for natural resources from India and China.

Some countries in Africa are reaping the benefits of supplying natural resources such as oil, gold and diamonds to China and India. Africa produces 46 per cent of the world’s chromium, 48 per cent of its diamonds, 29 per cent of its gold and 48 per cent of its platinum.

Mining, agriculture and tourism are the flywheels of Africa’s economy, says Investec Asset Management strategist Michael Power. Collectively, these generate more than 80 per cent of the foreign exchange earned by most African nations.

South Africa is Africa’s largest and most developed market, accounting for 10.4 per cent of the MSCI Emerging Markets Index. The next two biggest are Egypt (0.8 per cent) and Morocco (0.3 per cent).

Others, such as Kenya, Ghana, Nigeria, Tunisia, Namibia, Botswana, Zimbabwe and Ivory Coast, are tiny in the global context and shares in these countries are more difficult for private investors to access.

How to get into Africa

It is difficult to invest directly in African-specific portfolios. The main fund available is the Investec Pan-Africa Fund which is based offshore. However, because African markets are tiny in a world context, collectively representing less than 1 per cent of the global stocks markets, financial experts do not recommend that private investors should hold a big exposure to Africa within their portfolios. Rather, it is better to gain exposure to these markets through broader emerging markets funds, they say.

  • * Gavin Haynes, a portfolio manager at Whitechurch Securities, in Bristol, says this is a lower-risk strategy as your exposure is diversified across several areas.
  • * His preferred funds in the emerging markets are First State Global Emerging Markets Leaders, Lazards Emerging Markets and Baillie Gifford Emerging Markets.
  • Among the broader emerging markets portfolios, Gary Potter, a fund-of-funds manager at Credit Suisse Asset Management, is impressed with First State Global Emerging Markets Leaders, Aberdeen Emerging Markets and JPM Emerging Markets.
  • * If you prefer to focus on the energy theme and are looking for local expertise in South Africa, Investec offers its Global Energy Fund, managed by Tim Guinness and the Investec Global Gold fund, which is managed by Daniel Sacks.
  • * Alternatively, Old Mutual South Africa is an investment trust with a decent performance track record that specialises in the country.

Africa has a large quantity of natural resources including oil, diamonds, gold, iron, cobalt, uranium, copper, bauxite, silver, petroleum, but also woods and tropical fruits. It has lots of its natural resources undiscovered or barely tapped.

More than 30 sub-Saharan African countries recorded higher economic growth rates in 2007 than 2006. But these growth rates must be sustained and accelerated in order to have a significant impact on poverty and increase living standards.

Almost unnoticed, signs of economic life have begun to stir in that most unlikely of places—Africa. Despite its riches in natural resources and geographic proximity to Europe, Africa has been a perennial laggard on the global economic scene. Mention the phrase “emerging economies,” and most people rightly think of Asia and Latin America. Few look to Africa as an economy of the future.

That view might be changing. As then U.N. Secretary General Kofi Annan declared in 1999, “Africa’s profitability is one of the best-kept secrets in today’s world economy.

Wide Differences

To be clear, Africa faces many daunting political and economic challenges. Parts of the continent continue to struggle with an AIDS epidemic or sectarian strife. But in the same way that we easily distinguish between Germany and Greece when we think of the European market, we must also understand that Africa is a vast continent with numerous religious, ethnic, and cultural differences. Those differences often divide the continent and restrict economic cooperation, but some of those differences can also be the basis for dynamic economic development.

A quick look at some statistics might be surprising. According to a report by consulting firm McKinsey, Africa had a compound annual economic growth rate of 4.9 percent from 2000 to 2008. While that’s not as robust as the 8.3 percent pace in emerging Asia during the period, it actually exceeded the growth of both Latin America and Central and Eastern Europe. Even Sub-Saharan Africa, the poorest region of the poorest continent, had average GDP growth of 4.8 percent between 2004 and 2008. While the global economy shrank in 2008, the African economy still managed to grow another 2 percent, and growth rates this year are almost back to 5 percent.

The Boston Consulting Group has coined the term “African Lions”, to refer to Africa’s strongest economies: Algeria, Botswana, Egypt, Libya, Mauritius, Morocco, South Africa, and Tunisia. What is most stunning about the African Lions is that their average per capita GDP of $10,000 actually exceeds the combined per capita GDP of the so-called BRIC nations—Brazil, Russia, India, and China—of $8,000. While averages such as these mask many anomalies, and certainly the African Lions are far behind the BRIC nations on almost all broad indices, the number is nevertheless startling and encouraging.

One might guess that rising prices of commodities, particularly petroleum, account for much of the recent increase in African economic growth. While commodities are an important contributing factor, the McKinsey report indicates that their price increases account for only about a quarter of this decade’s economic growth in Africa.

india and China Take the Lead

While we in the U.S. and Western Europe might be surprised by the economic development in Africa, it probably comes as no surprise to business and political leaders in China and India, which are rapidly developing countries themselves. Looking for oil and other natural resources, both China and India took a keen interest in Africa as far back as the late 1980s. With 16 billion metric tons of proven oil reserves and 500 trillion cubic feet of gas reserves, Africa can be energy self-sufficient while it exports energy to fund further growth. Unburdened by a colonialist past in the region, China and India have found a warm welcome for their investments

Not only did the Chinese government make direct financial investments in the region; it also provided educational, health, and cultural support, as well as military aid, to a number of governments. China’s investments have indeed paid enviable returns; it has been estimated that Chinese trade with Africa could exceed US$100 billion this year. Indian corporations from a range of industries have also established significant operations throughout the continent. As the world seeks both natural resources and economic growth, the Chinese and Indians will certainly enjoy their early-mover status but will no doubt experience far greater competition from their rivals in Europe and the Americas.

While foreign direct investment from China, India, and elsewhere are key factors in Africa’s economic growth, local entrepreneurs can rightfully claim at least part of the credit for recent success. Vijay Mahajan, author of Africa Rising: How 900 Million Consumers Offer More Than You Think, sees emerging entrepreneurship as a crucial ingredient of African success. Mahajan believes the poor and emerging middle class in Africa are key drivers behind the economic expansion. These groups seek improved living conditions and a more comfortable life. This leads them to form small businesses as they begin to consume a whole range of products, from cosmetics to cell phones, that were out of their reach just a few years ago.

Mahajan even points to the Nigerian film industry, often dubbed Nollywood, which produces more films annually than either the U.S. or India, as a sign of homegrown development. While these Nollywood productions are low budget films by any measure, it does point to a media business not often associated with the African continent.

Key Political Stability

So how did Africa manage finally to move forward and begin to achieve significant rates of economic growth? While Darfur and other conflicts continue, the past decade has actually been a period of relative stability across most of the continent. Governments from north to south have improved, leaving politically unstable countries, such as Zimbabwe, as the exception rather than the rule. In speaking of the development model that has allowed their African Lions to achieve significant economic success, Boston Consulting Group points to a few key factors: “political stability, rule of law, property rights, access to capital, and public investment in education, health, and social services.”

To be sure, most Africans continue to live in poverty, and 60 percent still engage in agriculture as their primary source of income. There are and will be many challenges ahead, but along with those will come high rates of return and growth opportunities for those who choose to invest.

As Nelson Mandela once noted, the “greatest glory in living lies not in falling, but in rising every time we fall.” Africa has had its share of falls over the centuries, some imposed by colonial powers while others have been self-inflicted, but today we see a continent that does indeed rise after every fall. So when World Cup fans depart Cape Town after the final match and the buzzing sound of the vuvuzela mercifully fades from memory, it is likely that the people of Africa will continue their long march to further development and growth

Therefore, the African Development Bank forecasts an average growth of 4.4% in 2010 and 5.2% in 2011. Its annual report, entitled “African Economic Outlook”, released on 15th June, in Rabat (Morocco), shows the trends of a continent that is slowly emerging from the lingering effects of the global economic crisis. Developed in partnership with the OECD (Organization for Economic Cooperation and Development), the Economic Commission for Africa and ten independent research centers, the study stresses that the international crisis interrupted a period of relatively strong economic growth Africa.

To ensure that the current cyclical upturn takes the continent on a path of sustained, high growth and lower level of poverty, the report notes that African decision makers are faced with problems that had existed even before the global crisis, which reduced the potential for growth. These forecasts are based on the assumption that the global economy and world trade continue to recover, and that oil and other commodity prices remain as they are today.

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