Commentary: Africa’s boom ‘not just a China story’

In a new report from Renaissance Capital, equity strategist Charles Robertson argues that African nations have begun “the long-awaited period of catch-up with the developed world” and that “the bottom billion is becoming the fastest billion.”

Between 2000 and 2009, Africa accelerated past Asia, with the highest number of countries that grew at an average of 7% a year, the London-based analyst said. And of the eleven nations in Africa that posted annual growth rates of 7% or more, nine were in Sub-Saharan Africa and five “were not associated with either energy or metal exports.” Three of the eleven nations posted growth rates above 10% a year.

Robertson noted that “demographics favour investment in Africa” as Asia’s young population declines and Sub-Saharan Africa is “positioned to experience 15-20% growth in the crucial 15-24 age range over the coming decades, which will provide the plentiful labour force the world economy will rely on.”

Typically population explosions of this magnitude help increase demand in the economy and keep a lid on wages. “One factor behind low Chinese inflation in recent decades has been the high supply of young workers,” Robertson explains. “One factor now prompting 25% wage increases in China is that the supply of young people is in sharp decline.” According to estimates by the U.S. Census Bureau, Robertson says, the number of East Asian youths (mainly from China) between 15 and 24 years of age will fall by 27% this decade.

“For labour-intensive industries such as textiles, evidently Africa will look ever more attractive, while the demand from employees in these growing sectors should in themselves boost consumption,” Robertson writes. “It is young adults who need homes, and items to fill those homes. If China is the dream market for the automotive sector in 2010 – which might have looked an unrealistic forecast in 1970 – demographic data alone suggest Africa will be overtaking it within two generations.”

Moreover, the workforce in Africa will be better educated than it was a generation ago, he continues. Gross primary school enrolment in 2005 reached 96% across Africa and 93% in Sub-Saharan Africa, while the gross secondary school enrolment rate in Sub-Saharan Africa has moved from just 3% in 1960 to 39% in 2005 – “now around the levels of Mexico or Turkey in the 1970s, which helped pave the way to their strong growth performance in subsequent decades. Africa’s workforce is now well-educated enough to support the take-off.” And
according to Robertson’s figures, South Africa, Botswana and Mauritius now have a higher percentage of students in secondary education than either China or India. (In Mauritius the figure is about 88%.)

“The creation of a virtuous circle of higher growth leading to better governance – in turn attracting more investment and faster growth – is underway,” he writes. “Democracies are becoming safer across the continent. We would not be surprised to see Africa recording some of the highest growth rates ever achieved in the coming decades.”

Robertson points to a number of encouraging statistics in his report, including “phenomenal” growth in information and communications technology. The number of major fibre optic cables in Sub-Saharan Africa, for instance, has grown from one in 2007 to seven, and that number will rise to twelve by the end of next year, while the cost of internet services has fallen by 95% during the same period.  “With the internet,” he writes, “services might replace manufacturing as the growth driver … Whether it is call centres in Kenya or conferences in Rwanda, there could be room for many countries in Africa to leapfrog manufacturing, reducing the need for costly investment in transport infrastructure.”

At the same time, however, manufacturing in Africa could take off as wage rates in China rise. “Beneficial trade deals between Africa and the U.S. have already encouraged a modest amount of manufacturing to relocate to Africa even from China into special economic zones,” he maintains. 

On other fronts, government debt ratios in Sub-Saharan Africa are low, meaning that investment will not be a huge burden. Domestic financing is succeeding in many African nations and “loan/deposit ratios across Sub-Saharan Africa remain very healthy – closer to Chinese levels than the more dangerous levels seen in Spain,” Robertson asserts. In Kenya, for example, the government can now borrow for twenty years in local currency, “which could help pave the way for long-term investment projects to be financed locally.”

And pension reform “might be a further avenue for domestic financing,” and investment in infrastructure to support economic growth, Robertson argues. “While South Africa looks more akin to The Netherlands or the United Kingdom, the rest of Sub-Saharan Africa shows some surprisingly high pension fund assets, with Kenya above Kazakhstan and Nigeria above Russia.”

In terms of other indicators, many countries in Sub-Saharan Africa are making it easier for companies to do everything from start a business, to register property and export goods. In Rwanda, for example, it takes just three days to start a business, while in Mauritius it takes six; Senegal and Mali, eight; and Ethiopia, nine. 

Angola saw the cost of starting a business fall from 1,316% of income per capita in 2004 to 163% of income per capita in 2011, while Ethiopia has one of the lowest costs to register a property at 2.1% of the property’s value, and Eritrea has cut the time it takes exports to cross its border by 19 days between 2004 and 2011. 

As for poor governance and political instability, Robertson argues that as wealth levels rise, countries will shift away from autocracy towards democracy and corruption should lessen.

To be sure, infrastructure bottlenecks (road, rail, water freight/ports, electricity) are a challenge, he adds, and power supply is a particular cause for concern. According to one study, Malawi is losing about 6% of gross domestic product because of power outages. Robertson estimates that GDP growth in Sub-Saharan Africa could rise by 2% if infrastructure bottlenecks were improved.

“The real question is not whether Africa can grow at 7% annually and 10% in dollar terms, but whether 10-15% is possible annually and 15% or more in dollar terms,” Robertson says. “With the right push on infrastructure we believe this is plausible for a number of countries, with the main constraint being financing and potential overheating if growth is geared too much towards consumption rather than investment.”

Countries in Sub-Saharan Africa that Robertson is confident have good long-term prospects are: Nigeria, Kenya, Ghana, Rwanda, Zambia and Zimbabwe. And countries that “we should watch closely” are Sierra Leone, Cote d’Ivoire, the Democratic Republic of the Congo, Ethiopia, Uganda, Tanzania, Malawi, Mozambique and Angola.