by Johan Burger
2017 has again been a year of turmoil for some African countries, while others experienced stability and good economic growth. While 2016 saw the effects of the slowdown of China’s economic growth due to its rebalancing of its economy and the end of the commodity price super cycle, 2017 brought some relief. Africa saw a continuation of several of the trends observed in 2016, such as urbanisation, the growth in the middle class, the continued need for infrastructure development, the prominence of fintech, and political volatility and stability, to name but a few.
The NTU-SBF Centre for African Studies publishes a weekly newsletter. These were studied to pick up on the trends prominent in 2017. Some of these trends are more elaborate than others.
Trend 1: Economic Trends in Africa
At the end of 2017, when we look forward to 2018, the following African countries have been ranked on the Top 10 Global Economic Growth countries: Ghana (1st – 8.2%), Ethiopia (2nd – 8.0%), Cote d’Ivoire (4th – 7.2%), Djibouti (5th – 7.0%), Senegal (8th – 6.9%) and Tanzania (9th – 6.8%). This continues a trend identified in 2017.
The World Bank identified the Top 10 African economies, as ranked in the 2017/2018 Doing Business report. Most of these have made many significant reforms, although some have not. Mauritius ranks at 25th place worldwide, up from its position at 49 in 2016/2017. It improved its ranking in 8 of the 10 business lifestyle areas. Rwanda emerged in the top 50 countries for the first time at 41st place (2nd in Africa), compared to the 56th position in 2017. It made 52 reforms over the last decade. Morocco is ranked at 69th position (3rd in Africa). Kenya gained 12 places to the 80th position. The improvements are driven by the government and the private sector. It has gained 53 positions over the last 3 years – a tremendous improvement. Botswana moved from 71st in 2016/2017 to 81 (5th in Africa), caused by a lack of interest to invest in the diamond industry. However, investments in the service sector are expanding rapidly. South Africa ranks 82nd (6th in Africa). Zambia has gained 13 places to the 85th position (7th in Africa). Currently, Zambia has been listed as one of the world’s top 10 economies with the most notable improvements. Tunisia, ranked at 88 (8th in Africa), has dropped 11 places from its spot at 77 in 2016/2017, dropping 46 spots in just 7 years. Seychelles is placed in the 95th position (9th in Africa), from being 93rd in 2017. Lesotho is ranked in the 104th position worldwide and 10th in Africa.
Mauritius has been ranked 1st in Africa for quite a number of years, but its massive jump to 25th in 2017/2018 can be seen as the result of a determined government and business community to make things work! The same goes for Rwanda, Kenya and Zambia. The sad news appears to be Botswana, South Africa and Tunisia. The latter could blame the Arab Spring of 2011, but it has had a lot of time to restore itself. The saddest story probably belongs to South Africa. It was ranked at number 35 in 2007/2008. It fell dramatically in 2015/2016 – 73rd; 2016/2017 – 74th; and then 2017/2018 – 82nd. Something clearly needs to be done. African countries conspicuous in their absence, are Nigeria and Egypt as neither feature in the Top 10. It appears that some African countries are doing their best to improve their attraction to foreign investors.
Trend 2: Africa’s Youth: A Vulnerable Grouping
Africa’s youth is a source of concern. The youth bulge is increasingly looking like a threat, with optimism turning to pessimism. Issues such as political disillusionment, an education to skills mismatch and the lure
of escape via “the back way”, or even terrorism, are creating severe challenges to African governments. Ethiopia is a ray of sunshine, however. Its unemployment and youth unemployment rate have remained relatively stable in the last decade at 5.7% and 8.1% respectively.
Having said that, Africa’s youth represents both an opportunity and a challenge. 41% of Africa’s population is below the age of 15. By 2035, more people will reach working age (15-64) in Africa than the rest of the world combined. This ‘demographic dividend’ is a massive opportunity for enhanced productivity and economic growth. However, it also represents challenges to societal progress and stability, as the youths that are marginalised, can place further pressure on already strained resources and become vulnerable to extremism and criminal behaviour. To deal with youth unemployment, both the quantity and relevance of Africa’s education to employers must be addressed.
Some employers complain that fresh graduates lack market skills, while young professionals accuse firms of exclusion, causing frustration and disorientation. Rwanda created an internship programme to support youths in transitioning to meaningful careers. Tertiary institutions must look at preparing graduates for the job market, which requires a stronger relationship between universities and industry. Various institutions have advisory councils that provide advice on what these tertiary institutions should be doing to better prepare their graduates.
Trend 3: Development of the African Motor Industry
Africa is the final frontier for the global automotive industry, with enormous growth potential; vehicle sales are expected to grow by 40% within the next 5 years in Africa. The need for a new business model in Africa is driven by the low relative levels of disposable income. Transportation is problematic, and innovative ways of providing in this service is essential. The global vehicle brands also need to take the newly developing home brands into consideration. In Kenya, Mobius Motors are producing low-cost vehicles for Africa’s off-road and rough terrain. In a race to create an identity for themselves as automakers, African nations are rising in this respect.
VW is expanding in Africa, hoping to open an auto assembly plant in Rwanda. They recently started production in a low-volume car assembly plant in Kenya. VW is counting on new revenue sources such as pay-per-use transportation to increase business in countries with poor transport infrastructure. VW’s move into “app-based integrated mobility” in Rwanda, is significant for 2 reasons. It’s happening in a city in Africa and it’s a new business model for future urban mobility. Emerging markets with poor transportation links have become a battleground for establishing new mobility services.
Rwanda is joining an increasing number of African countries (Ghana, Nigeria and Uganda) bent on developing an own motor vehicle industry. We see that Kenya and Ethiopia, amongst others, have also been targeted by companies such as VWSA, Toyota and Kia as a base for vehicle assembly. VWSA is diversifying its risk in South Africa – the CEO of VWSA has recently indicated to the South African government that should it reduce the incentives for motor vehicle manufacturers, it would consider relocating to elsewhere in Africa. East Africa has become quite prominent in this industry.
VW also wants to link with other German companies to establish a local technical academy to ease transfer of technology and skills. The move is also part of Volkswagen’s plan to develop markets in Africa.
Various French manufacturers have targeted Morocco. Others will also be assembling in countries such as Kenya and Nigeria. These initiatives will be creating much needed jobs, many at a higher level of complexity. Africa in general is clearly becoming more attractive, given the increase in the population and the rise in the numbers of the middle class on the continent.
Ethiopia’s first engine manufacturing plant, Mekelle Engine Production Factory, will manufacture 3 types of engines; small, medium and heavy engines. Their aim is to get 60% of its input from companies operating under the Ethiopia Power Engineering Industry. The company targets vehicle assemblers operating in Ethiopia. In 2016, Ethiopia’s import for engines, engine spare parts and accessories reached US$515.2 million. The import for the same products during the first 4 months of 2017 was only US$101 million. The significance thereof is self-evident.
Trend 4: Mobile Money
Mobile money has become a global phenomenon. A sizable portion of Kenya’s economy is deeply ingrained in the M-Pesa platform at levels that are starting to concern officials on the economic consequences in the event of system-wide collapse or compromise. Anecdotal evidence has shown that the Kenyan authorities were not hesitant to contact Vodacom directly when their systems went done, as it directly impacted the economy of Kenya.
Many other applications are being developed with M-Pesa as the basis, including M-Kopa, M-Akiba and M-Shwari, to name but a few. The M-Akiba bond, the world’s first mobile-only government bond, went on sale in 2017 after a delay of almost two years, selling in small denominations. This new instrument is a form of crowdsourcing.
Equity Bank initially cooperated with M-Pesa, and later on developed its own unique application. Banks have come to realise they either have to start cooperating with M-Pesa or develop their own mobile money applications to avoid being disintermediated. They have now launched Pesa-Link, a mobile and electronic money transaction service. At least 40 banks used Pesa-Link to grow their deposits, issue loans and facilitate bills payments, serving over 3.1 million customers every month. Given M-Pesa’s brand image, it will be difficult for the banks to significantly disrupt the relationship between consumers and M-Pesa. M-Pesa has been largely responsible for increasing the level of financial inclusivity from 40% about 6 years ago to more than 75% at the end of 2015. This has created some powerful brand equity for them.
At the start of 2017, M-Pesa had 30 million users in 10 countries. It was also lauded for its social value; offering opportunities for small businesses and playing a significant role in reducing poverty.
TerraPay is the latest mobile payments platform to enter the crowded space with its launch in Tanzania. Tigo launched an international remittance service and South Africa’s Mama Money is expanding to Tanzania.
KongaPay will now be offering a distributed banking service to its customers in Nigeria. Gulf African Bank and Safaricom are set to launch a Sharia-compliant banking service through M-Pesa to allow customers to open and operate M-Sharia bank accounts.
The strong competition developing in the region should help to keep the players honest and customer-oriented. It will be interesting to see what effect this will have on Kenya’s banking sector, as they already have a situation of over-supply with many small banks cluttering the environment. We are bound to see some consolidation in both these sectors.
Safaricom plans to introduce an e-commerce platform, targeting formal retail and informal online trading in Kenya. Masoko will offer products ranging from electronics to beverages and cosmetics, and provide a tool for people currently buying and selling goods on social-media platforms such as Facebook. It seems that Safaricom is becoming the Amazon of Africa. Distribution remains a challenge.
Rwanda’s Ignite is another mobile app for solar power. It has managed to become the largest rural utility in Rwanda in less than a year. The reality is that there are far too many people who cannot afford the high upfront cost of solar energy. With more than 600 million people without access to electricity, the need is
great. In the provision of this service, the M-Kopa’s and the Ignite’s of the world are also supporting the High 5 Priorities of the AfDB, the AU’s Agenda 2063 and the UN’s SDG’s.
Trend 5: Renewable Energy
Electricity is a source of major concern in Africa, to the extent that the president of the AfDB has identified it as one of his “High 5” priorities.
In Africa, renewable energy is continuing its march to progress. By latching on to renewables as a major business model (especially solar), Africa is leapfrogging the conventional coal-fired system. Small-scale renewable energy production is especially important in remote, rural locations for several reasons. It is incredibly expensive and time-consuming to lay large-scale grid connections and build large, central power stations. Smaller systems are faster and cheaper to set up and can also be tailored to the needs of a particular location. They are scalable and adaptable as needs change and don’t require a massive transmission network. Local renewable energy projects can create opportunities for construction jobs. Small, easy-to-install, home solar, for instance, is making energy affordable to rural populations, and challenging banks to come up with less costly funding solutions. Hydro, solar and wind energy have all become cheaper and more pervasive.
In Ethiopia, we find its renewable energy sector making continuous rapid progress. Ethiopia is pressing ahead with ambitious development plans, and clean energy is core to the mission. Their next target is to become the wind power capital of Africa. Three factors are driving Ethiopia’s shift to wind: the devastating droughts that have diminished the value of hydro energy, the falling cost of wind power technology, and evidence that Ethiopia is blessed with ideal sites for harvesting wind.
We have also seen Ethiopia’s Waste-to Energy project, the Reppi Project in Addis Ababa, and South Africa’s bio-methane and carbon dioxide projects as notable. Regarding South Africa, two questions are a concern. Firstly, why is the New Horizons WTE plant only using 500 tons of waste, 10% of Cape Town’s waste? Secondly, Johannesburg also has 5000 tons of waste daily. Why haven’t they also started with developments in this regard? Africa’s cities should be copycatting each other and not reinvent the wheel.
Solar projects in countries such as Morocco and South Africa are adding scale. Kenya is using biogas to complement its energy supply. This project will provide energy to the local environment and sell electricity to the national grid. Kenya is also building a wind energy farm to generate 20% of its power. Kenya’s first large-scale solar energy storage battery will be linked to the national power grid.
Nigeria is investigating solar energy use, while Cote d’Ivoire has inaugurated a hydroelectric power station. The Export-Import Bank of China financed 85% of the project and Cote d’Ivoire the remainder. These are but examples.
Trend 6: Diversification and Transformation of Africa’s Economies
Many of Africa’s economies have been dependent on exporting raw commodities, e.g. Nigeria and Angola. Both receive more than 90% of government revenues from oil exports. African countries were recently urged to use the next upward cycle to diversify away from raw commodity exports. A handful of countries, such as Madagascar, Senegal, Morocco and several in East Africa, were successful in avoiding this situation. Several East African countries had actively promoted export diversification and showed strong growth prospects due to this.
Africa must focus on productivity, and train larger numbers of skilled artisans. The latter has been a particular challenge for a number of countries. Industrialisation and growing the manufacturing sector has been widely punted as requirements for Africa to address many of the objectives of the UN’s SDGs and the AU’s Agenda 2063.
Botswana moved to transform its economy by diversifying away from an over-dependence on the diamond industry. The government launched a fiscal stimulus programme to tackle unemployment, estimated at 19%, and is promoting Botswana as a hub for tech firms or green energy producers. Attracting tourists is also a realistic strategy as Botswana has a lot to offer the foreign tourist.
To propel itself into a middle-economy status by 2020, Rwanda’s experts are calling for increased investment and more PPPs. Rwanda needs to strengthen economic integration with other African countries and the rest of the world as this will improve its balance of trade position. Rwanda must create alternative sources of income for farmers through product diversification, and institute measures that help cut public spending and emphasise production to achieve key economic goals and make them sustainable.
Ethiopia is in the process of constructing 17 Integrated Agro Industrial Parks (IAIPs), that help the country speed up its economic transformation from farming to being industrial-led. Ethiopia aimed at fostering rapid industrialization through nurturing manufacturing and agro-processing industries. Ethiopia is growing its textile industry, which has transformed into a source of garments for companies in the USA, Sweden, and the UK, amongst others.
Other countries looking at transforming their economies, include Kenya (e.g. textile), Zimbabwe (cotton) and Angola (agro-industry). These are by no means an exhaustive list, and it has become commonplace to see African governments taking action to diversify their economies.
Trend 7: Politics and Transfer of Power
Africa has again seen a number of peaceful transfers of power. Nana Akufo-Addo was peacefully elected in 2017 as Ghana’s president. Peaceful transitions are increasingly becoming the norm, in spite of highly publicised cases of the opposite. The case of Gambia was such an unfortunate example.
In East Africa, we find Tanzania’s John Magufuli looking out for the benefits for Tanzania, to the detriment of the EAC’s efficient functioning. In addition to “stealing” Uganda and Rwanda as clients, he refused to sign the EU’s EPA and to approve the regional tourism visa project. Magufuli is being criticised for his clampdown on the opposition, and hobbling press freedom. Whether his “good work” would be enough to cancel the negative attitudes towards his poor human rights record, is uncertain.
The new President of Angola, João Lourenço, is expected to force major changes in his economic policy. Lourenço is willing to reopen negotiations with the IMF, attract more foreign investors to Angola and improve the business environment, by changing its visa policy, improving governance and diversifying the economic base, beyond oil.
In Kenya, the High Court annulled the results of the presidential elections of August 2017, finding severe irregularities with the counting process, ordering a re-election. Odinga refused to participate in the re-election and Kenyatta was re-elected with an overwhelming majority. Odinga has subsequently had himself sworn in as the “people’s president.” This has the makings of a disaster. 2018 will reveal all.
Given these and other challenges, some have been calling for benevolent dictators; autocracy is punted as the political solution to Africa’s economic problems. Focusing on the authoritarian leadership of African countries as a driver of economic success, is a dangerous conclusion.
In Zimbabwe, Emmerson Mnangagwa was recently sworn in as the new president. Although some focus on the similarities between him and Robert Mugabe, others feel he represents a decisive break with the past. Mnangagwa has committed to elections by August 2018. He created positive expectations at the WEF’s Davos meeting in January 2018. On balance, it seems 2017 was a good year for the political environment.
Trend 8: Industrialisation and Boosting Manufacturing
The AfDB supports industrialisation in Africa and sees private sector participation an important driver to grow Africa’s economies. Developing the skills and competencies of Africa’s labour force is going to be crucial in the path to economic development.
Industrialisation includes efforts in both the manufacturing and agriculture sectors. The manufacturing sector plays a vital role, such as employment generation, using local raw materials and contributing significantly in the payment of duties and taxes. Some countries have been more successful than others.
China is supporting Tanzania’s industrialisation efforts. This includes support with the launch of 200 factories, providing work for 200 000 people. Other projects include the improvement of the Tanzania-Zambia Railway Authority, the construction of Bagamoyo Port and the Central Line to a standard gauge railway standard.
In 2017, Djibouti invested in its transport infrastructure – roads, rail, ports and free zones – as well as in the energy sector. Over the last 3 years they’ve invested US$2 billion and will invest $15 billion in the next 5 years. Djibouti is trying to attract factories and industries from countries where labour costs are rising, e.g. China.
Kenya’s sluggish manufacturing sector is a concern. It only grew by 1.9% in the third quarter of 2016, down from 3.3% at the same point in 2015. In Nairobi, dozens of factories are closing down or relocating to other regions, blaming high production costs, counterfeits and a tough business environment. Cheap imports, mostly from China, are the main reason behind the slump in the manufacturing sector.
Ethiopia is developing as a manufacturing hub for the global textile market, with 124 foreign investors expressing an interest in Ethiopia’s textile and clothing sector over 3 months in 2017. Chinese and Indian companies will be significant future players. Reasons for relocating to Ethiopia include moving closer to their raw material base, abundant cheap labour (10% of the cost in China), using Africa as a gateway to emerging markets in Africa and Europe, and tapping into favourable benefit packages from the Ethiopian government.
Countries such as Tanzania, Ethiopia, Rwanda, etc. are doing their utmost to stimulate entrepreneurship, especially amongst women and the youth. More needs to be done in the field of education and capacity-building as well. The SADC region’s industrialisation strategy stresses the urgent need to use its abundant and diverse resources. Its key aim is to foster industrialisation through value addition. However, growing the manufacturing sector without careful consideration can backfire in several ways. An example is the development of steel in South Africa, which now needs to compete with steel manufactured in the East at a much lower cost.
Many African countries benefit from preferential market access, such as AGOA of the US. Countries are taking full advantage of these opportunities, since they might not be extended for an unlimited time.
Various countries, e.g. Ethiopia, Tanzania, Uganda, Ghana, Rwanda, etc are creating the requisite business-enabling policy framework for manufacturers to grow and develop. Ethiopia’s development experience in various sectors, including agriculture, shows what can be done with the right political will and dedication to industrialise the economy, in the process also developing the manufacturing sector.
Trend 9: Agriculture Development
Africa has tremendous potential in the agricultural sector. With 65% of the world’s uncultivated land, Africa will determine the future of food for the world. However, Africa produces only 10% of the global food output and spends $35 billion annually importing food. By 2025, this figure will reach $110 billion. AfDB president Akinwumi Adesina recently said its investment in the agriculture sector would rise by 400% to $24 billion over the next decade as it looks to the industry to create more jobs in the future and to unlock its full potential.
The mechanisation of agriculture is a priority in many African countries as Africa gears up to exploit its potential to become the world’s food basket. Currently, African farming systems remain the least mechanised of all continents. Some 70% of farmers cultivate parcels of less than 2 hectares by hoe. The challenge is to enable smallholder farmers to access equipment like tractors.
A number of issues are prevalent in the agriculture sector on Africa. Firstly, the importance of agriculture in Africa to feed the continent. While it has the potential to feed the world, it cannot feed itself. By growing its own food and stopping imports, Africa can spend these funds other important issues. Secondly, the need to industrialise the agriculture sector, as it could raise the productivity levels in the sector. Thirdly, the issue of job creation in the agriculture sector. Currently, on average, approximately 70% of Africa’s population is employed in the agri sector. Fourthly, the issue of keeping the youth in the agriculture sector, as well as providing them and women with jobs. Fifthly, the need to approach agriculture as a business and accessing working capital. Making agriculture attractive enough will also help to curb the denuding of the rural areas. Better techniques and equipment, better developed marketing and distribution channels, and better financing models will contribute towards generating more wealth for the farmers. Lastly, agriculture is a systemic phenomenon in which all the factors must be aligned.
Tanzania signed a $1 billion partnership agreement with a Chinese firm to commercialise cassava farming and processing, raising hopes of growers struggling to access reliable markets. More job opportunities, many which will be more highly-skilled, will be created. There will also be good export opportunities.
We have also seen the development of livestock and cattle farming. Africans are demanding an increased percentage of meat in their diet. Ethiopia is an investor favourite for three reasons: population, economic growth, and supply/demand. Both Tanzania and Nigeria are attractive meat markets.
Ghana and Ivory Coast are the largest cocoa producers in the world, accounting for more than 60% of the global share, but cocoa price volatility has been unfavourable to them both. Both recently agreed to deepen collaboration and coordinate their production strategies. They export a basic commodity to The Netherlands where value is added and the margins are made. It shows upon an inappropriate business model for the producers in Africa.
The mechanisation of agriculture must address the whole value chain in order to take up the employees that would be otherwise unemployed with the mechanisation drive. Africa cannot afford more unemployment. On the other hand, it cannot ignore the benefits of mechanisation.
African governments are also adopting regulations to support local farmers, to prevent the export of basic food commodities without adding value, and to forbid the import of food from foreign sources. Ghana, Rwanda and Nigeria are examples of these countries. Buying local is boosted by quite a few countries.
FarmDrive in Kenya is addressing the lack of access to finance for smallholder farmers. Banks are unwilling to provide them with financing. FarmDrive has developed an innovative alternative credit-scoring model that can be used by banks to assess the creditworthiness of farmers and allow them access to financing, while still protecting them from defaults.
Africa needs between $30 and $40 billion a year over the next 10 years to transform its agriculture.
Trend 10: Food Retailing Sector
Africa’s macroeconomic environment has slowed down overall, in spite of several bright spots. McKinsey projects household consumption will grow at a rate of 3.8% from 2016 to 2025, to reach some $2.1 trillion. Growth will mostly be driven by the continuing urbanization of Africa. Supermarket chains like South Africa’s Shoprite might be small relative to global players, but the consumer markets they serve are attracting the attention of several investors. Shoprite has continued to expand across Africa and is now looking to become even larger with another merger.
The story of successful supermarkets, however, have hit a wall in East Africa. Tuskys and Choppies have found small niches in the market with smaller and more localized spenders. Bigger international brands Game and Carrefour have planted themselves in large shopping hubs to take advantage of significant foot traffic and bigger spenders. The local struggles by Nakumatt and Uchumi also further expose retail challenges in the region. In April 2017, various indicators showed that reduced spending, the rising cost of living and high interest rates were making it difficult for retailers to operate in the region.
These challenges are in spite of the fact that Kenya ranks as the second-highest formalised retail sector and the average value of consumer spending has risen as much as 67% in the past five years, making it Africa’s fastest-growing retail market. The sector’s growth has outperformed the economy in the last 5 years due to households’ rising disposable income. With a formal retail penetration estimated at 30%, ahead of Nigeria and Tanzania, the Kenyan market is uniquely positioned to offer investors strategic access to the growing spend, not only in Kenya, but also the wider eastern Africa.
Shoprite is in talks to open its first stores in Kenya by filling retail space left empty by the struggling Nakumatt chain. This indicates a higher risk appetite than before. One reason could be that they believe that they can obtain some of the Nakumatt stores very cheaply. Another could be that they have done their homework properly and understand the Kenyan consumer better than they understood the Tanzanian consumer before 2014. Also, if it allows the likes of Game, Carrefour and Choppies unfettered access to the Kenyan consumer, these companies could use Kenya as a base from where to attack Shoprite elsewhere.
The increased numbers of the retailers will provide greater access for the consumers, as well as employment opportunities for prospective employees. In addition, the greater number of retailers will create more competition and therefore lower prices, all to the benefit of the African consumer.
Trend 11: Digital and Mobile Applications and Platforms in Africa
Mobile applications in Africa have had a major influence in various sectors in industry and in all walks of life. Africa’s approach to mobile technology is one of the bright spots on the continent. The application fields span from mobile banking (peer-to-peer) to health, agriculture, transport, washing, energy, etc. Africa is quite creative in developing these technologies, and it seems that funding for them are becoming more readily available.
Businesses looking to deliver utilities in African countries are surpassing their Western world counterparts, maximising the mobile networks to deliver innovative utility services to millions. One such business is M-KOPA, which provides solar-powered light to more than 400,000 homes in East Africa. EWaterPay in West Africa is a sustainable solution that allows local water distribution schemes to become self-sustaining. Ensuring access to credit and services, organisations can open further access to infrastructure, increase job opportunities and deliver a boost to local and national economies.
Nigeria’s first digital agricultural platform, Farmcrowdy, aims to help smallholder farmers improve their production. Farmcrowdy connects farmers directly with local investors to generate a healthy return for both the investors and the farmer. Investment options include maize, poultry, cassava and tomato farms. Farmcrowdy plans to expand into markets in West and East Africa. This has the potential to bootstrap the industrialisation of the agricultural sector.
Africa is not only the fastest growing region when it comes to mobile phone usage, but it is also the cradle for creative innovations. These range from iHub and Nailab in Kenya, ActivSpaces in Cameroon, BongoHive in Zambia, MEST in Ghana, IceAddis in Ethiopia, to the Co-Creation hub in Nigeria.
Dr Rafiq Raji, adjunct researcher of CAS, formulated it very succinctly when he said that “Africa Tech is the true Africa Rising.”
Trend 12: The Status of Infrastructure in Africa
In 2015, Africa needed an annual investment of $93 billion to deal with its infrastructure needs in roads, railways, ports, airports, energy and water. In the beginning of 2018, this figure was adjusted to an annual investment of between $130 and $170 billion.
Africa is increasingly looking towards its own sovereign investment funds to help fund its infrastructure gap. The funds, which have about $150 billion between them, are offering co-investment opportunities and guarantees to attract foreign capital. Africa is still viewed in some circles as a difficult investment, hampered by corruption, war and political risk. Now African sovereign wealth funds are seeking to change this perception and kick-start projects themselves. Examples include Angola’s sovereign fund, FSDEA, which has just committed $180 million to a new deep-sea port project using a PPP structure. The involvement of African sovereign wealth funds could stimulate foreign private equity funds and venture capitalists to increase their involvement.
Upgrading transport infrastructure will support regional integration, long punted as a solution to some of the economic woes of Africa. This will facilitate trade and the movement of people, which will have significant economic benefits for Africa. In spite of progress, there is such a tremendous backlog that it will take time before significant progress is made.
A valuable source of current infrastructure funding is that of foreign countries, e.g. China, Japan, India, USA, Germany, etc. In addition to the upgrade of transport infrastructure, upgrades in housing, energy, water, agriculture and manufacturing sectors are required for Africa to diversify its economies away from resource exports and to escape the resource curse, while creating meaningful jobs at the same time.
Trend 13: Investing in Africa
In spite of scepticism amongst various investors, Africa is an attractive destination for various foreign investors. Strong economic growth across Africa, better governance, business-friendly reforms, regional integration, growing intra-Africa trade and investments have created various business opportunities.
Africa must take greater responsibility for its own destiny and create the investment climate that would attract global investors. These people need policy certainty, political stability and a good economic climate. They also need a pool of well-educated potential employees that are not too expensive. In addition, there needs to be the requisite infrastructure to support the investments, or at least the opportunity to benefit from the investment in these infrastructures, such as roads, rails, ports, and buildings.
While concerns over FX risk and an economy adjusting to low oil prices dampened appetite for M&A in Nigeria, Kenya and other east African jurisdictions became more favoured investment destinations. Some identified “Africa Tilting”, with investments moving from West to East Africa, where countries such as Ethiopia, Kenya, Rwanda and Tanzania are presenting good investment opportunities.
Ethiopia is attracting foreign investors, based on the prevalence of peace, smooth business transactions, and a conducive custom and tax system. In addition, development of infrastructure such as roads, railways and energy are playing a crucial role in encouraging investment flows. Ethiopia has prioritized areas such as manufacturing, agro-processing, horticulture and mining. Among the investors are Chinese, Indian, and Turkish companies.
The numerous infrastructure challenges in Africa also present investment opportunities to foreign companies, should the investment climate be healthy. Unfortunately, some African countries run afoul of this requirement.
A report by Control Risks shows that Kenya and Ethiopia might soon outshine Africa’s economic giants, Nigeria, South Africa and Egypt, in the competition for investment. While Nigeria and South Africa have recovered, there are still some risks. Ethiopia outperformed all African countries in the survey. While Nigeria’s energy sector gives the country an appeal, risks include insurgent attacks on the Niger Delta and a fall in oil prices. South Africa enjoys a reputation as Africa’s pre-eminent constitutional democracy, but several of its key institutions have gradually weakened over the past decade.
It is important that one identifies the sectors with potential, the risks inherent in the country and the sector, and develop risk mitigation strategies. Failure to do so, will be expensive.
Trend 14: Mining and Commodities in 2017
Africa is still finding new sources of oil and minerals. Various countries have also decided to exploit the previously-discovered ore reserves.
East Africa as a region seems to be a late entry into the mining sector, with new findings of minerals, gas and oil. This has stood them in good stead as their economies have done well, given that they were primarily, but not exclusively, focused on non-commodity factors. While Nigeria and Angola were suffering from the oil price slump, East African countries such as Kenya, Ethiopia, Rwanda and Uganda were experiencing very good economic growth and were benefitting from a low oil price.
Ethiopia wants to boost its economy through the development of its mineral resources sector. Its mining sector has been identified as a development priority, shifting from an agriculture-led economy to an industrial one. Ethiopia’s policy framework envisages the minerals sector to be the backbone of industry by 2023. The government wants to increase the sector’s contribution to GDP from 1.5% currently to 10% by the year 2025.
Kenya recently discovered a rich gold stream. Realising that Kenya’s oil finds have limited potential, it’s betting big on minerals. The government believes Kenya is sitting on significant mineral wealth, including gold, diamonds, iron ore, coal and titanium. The hope is that these could be exploited to shore up an economy heavily dependent on agriculture. The discovery of gold, as well as the potential discovery of other minerals, will be great for the Kenyan economy. Kenya must, however, ensure that the revenues are spent on pro-poor projects, to boost inclusive economic growth.
Trend 15: Urban Resilience/Urbanisation
While not new, urbanisation in Africa is going to continue and the portion of urbanised people will rise from the current 40% to more than 50% by 2050. The rapid growth is driving the African phenomenon of the megacity (at least 10 million residents). While these African megacities have various economic benefits, they struggle to combat challenges like inadequate physical infrastructure, low quality social services, congested slums, high unemployment, etc. The expectation of a large concentrated market of middle class people purchasing middle class goods and services, has led to MNEs developing city strategies, rather than country strategies.
Urban planners are excited to create the smart African city. Entrepreneurs use mobile services to address traffic problems and deliver energy and other related resources, such as water, to smaller cities. Smart grids and transmission are central to this process. An efficient energy system, growing broadband connection and mobile phones will underscore the physical infrastructure of the African smart city.
City development in Africa has always been a challenge. Unfortunately, the provision of the requisite infrastructure could not keep pace with the needs. Neither could the financing required for the development of the infrastructure. The end result has been urban sprawl, slums, poor services (water, sewerage, energy, transport), poor education, unemployment, and health problems.
Cities in Africa are responding by developing urban resilience strategies, e.g. Senegal’s capital, Dakar. It aims to boost its ability to weather floods, disease, unemployment and other shocks through a strategy for urban resilience.
Governments have also responded to urban population pressures by building new cities, such as Diamniadio in Senegal, or rehabilitating older cities, such as Kigali in Rwanda. Governments must plan “urban and industrial development through deliberate policies and investments as a priority for the sustainability of both cities and industries.”
The concept of smart cities is more than just hype. It is embracing technology to deal with the challenges of urbanisation and the problems of slums, unemployment, poor service delivery, inadequate infrastructure, transportation problems, inadequate energy provision and weak security.
In addition to addressing the development of its cities, Africa must also create a strategy for the development of its rural areas. Denuding the rural areas of Africa cannot be good for Africa’s development.
Trend 16: The Informal Economy in Africa
Africa’s informal markets represent a large part of its trade and employment: 41% of Sub-Saharan Africa’s GDP and 72% of total employment, which means they cannot be ignored. Given they are essentially hidden, Africa is not tapping into the huge opportunities offered. They represent a huge community-based value chain with enormous potential for investment. Key areas for exploration are agribusiness, textiles, timber and forestry. Local and international retailers should be enabled to buy legally from suppliers in the informal sector. There is a lack of information, which masks the potential of this sector. A major issue is that a large investment is required to reach critical mass in informal markets as it is a volumes-based business with low margins.
Since the mid-1970s, spaza shops have been the backbone of South Africa’s township economy. These informal spaces in residences stand in stark contrast with consumer landscapes of the formal economy such as malls. It is estimated 300 000 jobs are created by the spaza economy and it contributed R9 billion to the economy per annum. To improve growth in the South African economy, government must remove the barriers that constrain growth and sustainability for spaza shop owners. Access to formal credit must be supported by extensive skills development programmes, as the owners suffer from inadequate retail and merchandising knowledge and insufficient bargaining power to effectively negotiate discounts.
Mastercard is collaborating with Spazapp to bring secure, seamless and convenient mobile payments to thousands of informal traders and spaza shops in South Africa. Informal traders can order a wide variety of products at competitive prices directly from big FMCG brands (like Unilever) and use Masterpass to digitally pay for stock and accept cashless payments from their customers with their mobile phones.
Trend 17: Asia in Africa
Many Asian countries, led by China, have moved into Africa and are thriving. Some of the top recipient countries are Nigeria, South Africa, Zambia, Ethiopia, Kenya and Ghana. African governments are happy as they seek to attract Chinese money to their countries and hope to spur employment and advance industrialisation.
Many Chinese entrepreneurs are moving into Africa, tapping into entrepreneurial opportunities in numerous sectors of the economy. In addition to G2G support from China, large corporates are also moving into Africa. As such, China is involved in the R84 billion Modderfontein development in South Africa. There are a number of such projects in Africa.
With the apparent isolationist approach of the new US president, and the uncertainty associated with Brexit, Africa will increasingly be looking towards China and other Asian countries. The markets in the East are large and many African countries are keen to tap into the billions of consumers in the East. China is not the only investor in Africa. Countries such as Japan, South Korea and India have also targeted Africa in a meaningful way. The West should take note, lest they find one day that Asian countries have become entrenched in Africa.
Chinese investments in Africa have risen sharply in recent years, from $7bn in 2008 to $26bn in 2013. By July 2016, Chinese investments had increased by 515% from full-year 2015 figures. China has opened opportunities for Africa in ways of massive infrastructural development for economic facilitation.
China’s Belt and Road Initiative (BRI) has now been complemented by India and Japan’s Asia-Africa Growth Corridor (AAGC). These two initiatives clearly demonstrate the momentum the East is beginning to develop in Africa. They both provide African countries with choices they lacked previously.
China is Africa’s largest economic partner and its involvement is bigger and more multifaceted than previously suggested. There are over 10,000 Chinese firms operating in Africa; about 90% of these are private firms, with about 33% in manufacturing. China’s financial flows to Africa are 15% larger than official figures suggest when non-traditional flows are included. There are three main economic benefits to Africa from Chinese investment: 1) Job creation and skills development; 2) Transfer of knowledge and new technology; and 3) Financing and development of infrastructure.
China is also the largest source of infrastructure financing in Africa. This kind of exposure to China does create a certain kind of dependency, a vulnerability that can be unhealthy to Africa. There are other players in the market, with new players entering stronger than before. The USA remains a large provider of aid. Germany is looking at developing its “Marshall Plan” for Africa. Turkey and several Middle East countries are reaching out as well.
Trend 18: Egypt’s Revival
Foreign investors are doubling down on their commitments to Egypt as they bet on its under-served consumers. Majid Al Futaim will invest $600 million to build another mega-mall in Cairo and make another shopping centre five times bigger. Retailers and producers, including Nestle SA, Mars and Turkey’s BIM, are expanding their business. Egypt is considered a high growth engine for multinationals and local companies. There are early signs of recovery and some producers expect sales to recover as early as 2018. Demand in Egypt is supported by the 8 million Egyptians abroad who transferred billions of dollars to their families at home.
The foreign interest in Egypt is very good news for its economy, and a sure sign these countries are comfortable with the political and economic stability in Egypt. Retail malls and shopping centres are major infrastructure projects, requiring a willingness to invest large amounts of money for the long-term. There is an acknowledgement, however, that there are still risks, which could trigger social unrest. It seems that the investors are comfortable with the low probability of this eventuality. The companies represent Middle East countries, and countries from Europe and the USA. Hopefully the economic growth that will be generated from these investments will create more political stability, which in turn will convince more investors to become involved in Egypt, all of which will create a positive flywheel of progress, in contrast to a doom loop of distress we saw in Nigeria during 2016.
Old Mutual Investment Group stated in early 2018 Egypt was offering interesting investment opportunities. It is now looking like the most attractive of all the larger African markets in which Old Mutual Investment Group invests. The reasons for this are: a stable currency; the EGX 30 index is reasonable at a P/E ratio of ~10; company earnings are expected to grow at around 15% in 2018; the economy is back on track, with a GDP growth outlook of 5% in 2018; and tourism is picking up again. Banks continue to make record profits as they benefit from the high interest rates. Fertiliser businesses are performing well. The relative weak currency means that export profits are strong. The Eastern Tobacco Company has been one of the best performers this year, up nearly 200%.
Egypt is looking like a very good growth prospect. A continuing stable political environment remains a precondition.
Trend 19: Startups in Africa
Startups in Africa have been growing in leaps in bounds, both in numbers and in size. Fintech start-ups have been receiving a lot of investor attention. Flutterwave, a payments company, has just raised $10 million. Investor interest is also linked to how important fintechs are for the future of business in Africa. Given the sheer size of the under-served market, this is a huge opportunity. African fintech startups can tap into two significant funding pools, early stage venture capital and social impact investors.
Fintech start-ups are very much the vogue in Africa, for various reasons. The prevalence (and growth) of mobile phone technology in Africa provides the means to push fintech products towards populations that need it. This creates lucrative investment opportunities for players in the field. Given the rate of technology development, it also requires companies to be at the cutting edge of development in order to be first with the new product.
Various other sectors are becoming quite attractive as well, such as the agriculture sector (FarmCrowdy and FarmDrive), the health sector, the transport sector, and the education sector. Technology, especially mobile technology, has become a game changer of note in Africa.
For startups, Lagos in Nigeria holds promise with its population of over 20 million people and a dynamic and energetic tech ecosystem. The local startup ecosystem is valued at $2 billion, making it the most valuable in Africa, despite only having an estimated 400 to 700 active startups, much fewer than the 1,200 in Cape Town. With a population of close to 200 million, a lot of disposable income, and an innovative and creative youth, Nigeria will inevitably be the scene of innovative startups. This also goes for Kenya, South Africa, and numerous other African countries. Various organisations have also started to help these startups, such as NEST in Nairobi and Cape Silicon in Cape Town.
French telecommunications operator Orange has launched an African startup investment initiative that will support innovative startups across Africa. It has earmarked $56 million for investment, half to be invested through funds that specialize in the digital sector, in partnership with Partech Ventures and AfricInvest.
Nigerian-American startup Releaf helps to create a B2B marketplace that enables Nigerian businesses to find customers and partners that they can trust. The startup has signed up around 1,000 African businesses since its public launch in Nigeria at the start of August 2017. Releaf aims to make the platform available for numerous sectors within Nigeria and Africa, as they will benefit from the verification and strengthened networking enabled by the startup.
Trend 20: Regional Integration in Africa
Regional integration in Africa has a major role to play in increasing intra-African trade and boosting economic growth. In addition to the regional economic communities such as ECOWAS, COMESA, EAC and SADC, we see the development of the Tripartite Free Trade Area (TFTA) and the Continental Free Trade Area (CFTA).
The EAC is negotiating the TFTA as a bloc, while COMESA and the SADC are pushing for individual countries’ agenda. Given work outstanding on rules of origin and tariff offers, the EAC agreed to extend the deadline to December 2017. Implementation of the deal is expected to start once 14 of the 26 member states ratify the agreement. However, only one of the member states (Egypt) had ratified the agreement and only 19 of the 26 have signed the agreement.
The CFTA will increase intra-African trade by more than 50%. This is a worthwhile aspiration to strive towards. The AU organised the third meeting of the CFTA Technical Working Groups in Durban at the end of August 2017 to move the CFTA forward. There are still many issues to be resolved. With a faltering TFTA, it is unlikely that the CFTA will be up and running within the envisaged timelines. In spite of the benefits thereof, regional integration on a continental scale is still quite a way off.
The author, Johan Burger, is the director of the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation. Johan can be reached at email@example.com.
From the weekly newsletter, Friday@Noon, published on the website of the NTU-SBF Centre for African Studies. Sources are as indicated in these newsletters.