Given the recent news items – from the oil crisis and other resource price shocks, to lack of FX issues and increasing insecurity; one can’t help but ask the question – “Is Africa’s growth story over?”
The McKinsey team led by their Partner Acha Leke sought to address this issue at their breakfast session entitled “Lions on the move 2.0” during the World Economic Forum on Africa 2016. Acha began by walking the audience through their soon to be published report on Africa. For McKinsey the Africa growth story is still positive with 4 trillion USD of business opportunities identified on the continent. The growth however has been largely uneven across the continent as former “darlings” of investors are currently struggling and new frontier markets are emerging to take their positions. More specifically, whereas Arab Spring countries such as Egypt and Tunisia and oil exporters such as Nigeria and Angola have seen their growth prospects decline significantly, the “rest of Africa” (ROA) category has actually experienced an increase from about 4.1% to 4.4%. 13 countries in all have essentially accelerated their growth rates with Rwanda, Ivory Coast and Ethiopia emerging as “growth stars”.
According to McKinsey, the long-term prospects for the continent are still very positive due to solid irrefutable fundamentals including a growing work force and rapid urbanization. Stable jobs are growing at a faster rate than labour jobs. This affects taxability and directly impacts governments’ bottom-line income positively. Infrastructure has improved by 33% across the continent and Africa is still number two on the International Monetary Fund’s list of the fastest growing continents.
Thanks to these fundamentals, companies are spending in Africa. Corporations spend up to 2.5 trillion USD annually on the continent with South Africa and Nigeria accounting for over half of corporate spend. The service sector benefits the most from this spend particularly the banking and insurance industries. Over 400 companies on the continent have revenues of a billion USD and above – 50% of them are in South Africa, 20% in the North, 10% in Nigeria and the ROA group account for the rest. An additional 700 companies make 500 million USD or more. As such when comparing profitability between global companies and their counterparts in Africa, African companies in most sectors are actually more profitable than the rest of the world. The majority of these African companies, about two-thirds, are privately run.
Africa companies however are still very small (except in South Africa) and few compared to their global counterparts and this affects their ability to attract foreign investors. So why can’t they scale? Several reasons where examined; fragmentation both on a geography level and on a sector/industry level is a main reason. Africa is made up of 54 different countries with different rules, regulations and processes. This results in small fragmented markets that are difficult to scale across on a regional basis. The lack of infrastructure has a major impact on scalability. Not only can companies not rely on public infrastructures such as roads, power, water and electricity, but the lack of this infrastructure means that companies have to be self-reliant and maintain their own in-house supply chains. This has significant costs implications.
In order for Africa to move past these limitations and attract the necessary FDI’s to scale the business landscape, both public and private sectors have to play crucial roles. As a start, the government needs to create an enabling environment both in terms of the physical infrastructure and the legal/policy frameworks that are implementable and consistent. Governments also need to mobilize their own resources (taxes and savings) to invest in and aggressively diversify their economies. Both the public and private sectors can be partners in this process. Together, both sectors can work together to improve the investment attractiveness of projects set up as part of this diversification process. The private sector can play a pivotal role in terms of providing vocational training that is topical and efficient. Through effective leadership and partnership in both the public and private sectors, Africa growth path can be ascertained and accelerated.