By Edward George, Head of Research at Ecobank International
Despite a difficult few months for African markets, the continent has pockets of resilience and dynamism which informed, long term investors are returning to exploit. The start of 2016 was tough for both developed and emerging markets. China’s stock market fell by 20%, the S&P by 10.5% and oil prices by a further 20% from 2015 levels. Many emerging markets (EMs) were hit by uncertainty, volatility and slowing demand.
Growth sagged in global powerhouse China and other EM ‘flagships’ – Brazil, India and Russia, also had a poor first quarter. But the BRICs no longer accurately represent the whole asset class. For active investors not reliant on the rise of EM indices too often dominated by a few countries, sectors or stocks, it has been a useful period of consolidation and renewal.
Africa’s major oil producers like Nigeria and Angola suffered in Q1 and the continent’s major commodity exporters felt the effect of the strengthening UD dollar and the slowdown in China. However, other markets have defied the short period of weakness. In 2016, the International Monetary Fund (IMF) expects the region to recover from the global commodity price slump, with real GDP set to grow by around 4-5%. That ranks Africa alongside developing Asia as the fastest growing region in the world.
The total size of African GDP remains low at an estimated $2.3 trillion in 2015, similar to India’s GDP, and about 3% of global GDP. But Sub Saharan African countries are likely to maintain positive growth trajectories in the short term. The latest World Bank ‘Pulse Africa’ report singles out Kenya, Côte d’Ivoire, Tanzania and Rwanda as engines of growth.
Major LNG projects are planned for Tanzania and Ethiopia, which is considered a rising star, as the government boosts its garments and food processing sectors. Planned infrastructure development includes hydropower dams, railroads and ports as well as a 3G roll-out over the next three years. Real GDP growth in Ethiopia exceeded 10% a year in the decade to 2015. This year it is forecast at 7.6%.
Kenya has become one of the most attractive destinations in Africa for FDI inflows into a wide range of sectors, including infrastructure, energy, real estate and tourism. The Kenyan economy grew at over 5% per year in the decade to 2015, while neighbouring Tanzania delivered 7% over the period, a rate expected to continue in 2016.
Niche industries and commodity producers in Africa have stepped in where other emerging market supply chains have failed. Drought and other negative factors in Brazil have boosted demand for Kenyan and Ethiopian coffee, while financial services, telecoms and alternative energy providers have enjoyed renewed growth. In sectors like brewing, where stock prices have fallen in the last few months, value is drawing investors back.
Non-oil dependent economies such as Ethiopia, Mozambique and Côte d’Ivoire are continuing to build infrastructure to support more diversified economic activity which is set to deliver real GDP growth of between 7% and 8%. The global slump in oil prices has actually prompted many African countries to speed up the reform of their tax and subsidy regimes, which will support growth going forward.
Although exchange rate pressures remain, volatility in most African currencies has reduced. This is particularly the case for the Angolan Kwanza, Kenyan Shilling and Ghana Cedi, reflecting falling external risks and efforts by African central banks to strengthen their monetary environments.
Ghana was a prime focus of investor concern in 2015, but as the government has engaged with the IMF on a financial stabilisation plan, confidence has returned and real GDP growth is set to rise. More needs to be done to strengthen the fiscal position, but efforts to consolidate spending have seen a cash deficit of 5.6% of GDP (better than the target of 6.8%) for the first 11 months of 2015. Provisional data for the year show a budget deficit equal to 7.1% of GDP, against 10.2% of GDP in 2014. This suggests an easing of sovereign risk.
Overall, Sub Saharan Africa is faring much better than the BRICs, the previous darlings of the EM community, all of which are undergoing crises of confidence. GDP growth in many African markets is running at double the rate of most developed markets, with far more supportive long term factors, such as favourable demographics, plentiful resources and growing domestic affluence. Furthermore, Africa’s markets are less dependent on foreign investment since their domestic and intra-regional investor base has grown.
Passive investors tied to indexed products, or those struggling with price volatility, or quarterly target returns will clearly feel the pain of short term dips. Yet there has already been a strong rebound. The Institute for International Finance estimates that foreign investors poured US$37 billion into emerging market stocks in March, the highest level of inflows for two years.