Africa on a continuous growth trajectory

Robust economic growth has paved Africa’s past decade. In 2012, the African continent is projected to reach an overall economic growth rate of close to 6%. This growth will be driven by improved macroeconomic and political stability. Policies adopted to energize markets involve lowered inflation, trimmed foreign debt, and other cautious monetary and fiscal policies, privatization of state-owned enterprises, reduced trade barriers, cutting of corporate taxes, and the strengthening of regulatory and legal systems. Africa has in recent years become home to seven of the world's ten fastest-growing economies. With EUR 900bn in 2011 and a growth of 27% from 2010 to 2011 Africa also achieved its largest-ever share of global foreign direct investment (FDI). Angola attracted the highest FDI, followed by Egypt and Nigeria respectively in 2011. This is largely attributable to past decade’s dramatic improvements in doing business in Africa.

There have long been close ties between Africa and the currently booming economy of Brazil. More than 30 African nations are presently benefiting from over 250 projects with Brazil organized by the Brazilian Co-operation Agency (ABC). Its increasing role as an important player in Africa has historic roots dating back to the days of the slave trade in the 16th century. Brazil has more people of African descent than any other country outside of Africa. Brazil's state and private enterprises have made huge inroads in various parts of Africa, operating mostly in strategic sectors such as infrastructure, mining, and energy. Angola, Nigeria, and South Africa are Brazil’s main trading partners in Africa. Using Portuguese-speaking countries like Angola and Mozambique as an entry point, they are the African countries with the most Brazilian investments. Ghana has recently become another important investment destination for Brazilian capital. Brazil’s successful business model is based on an almost seamless interaction between government, private sector, and development institutions. Brazilian companies tend to hire and train local workforces and offer social projects to foster home-grown development.

China, Africa’s biggest financer of infrastructure projects and trading partner, used to have an unconditional policy in its business dealings with African countries, but has recently switched to a new “corporate social responsibility” approach, aimed at establishing responsible policies when securing economic deals on the African continent. According to China’s Commerce Minister Chen Deming total trade between China and Africa hit a record high of EUR 128 bn in 2011. Also Chinese direct investment in Africa reached EUR 11.5 bn over the past decade and it is growing rapidly – 60% between 2009 and 2011. Chinese companies are building infrastructure across the continent, from dams and airports to mines and wind farms. The Chinese government claims that it does not seek economic takeover in any of the African regions but is poised to assist in the realization of the development of badly needed infrastructure and interconnectivity.

In October this year, China signed yet another agreement on infrastructural development concerning the building of a 2000 km trans-West African highway, which will go through nine West-African states. It follows a long string of similar agreements that China has signed with African state leaders in recent years. China also supported Tanzania and Zambia in constructing the Trans Sahara railway line and claims to not have asked for anything in return. Nigeria also announced the signing of a EUR 1.1 bn railroad project to be built by the state-owned China Civil Engineering Construction Corporation. South Africa has also attracted significant Chinese investment as it seeks to market itself as the gateway to other African countries. In the summer of this year China pledged EUR 15 bn in loans to Africa, doubling the amount agreed to three years ago. Sino-African diplomatic relations were first established in the mid-1950s. These ties grew significantly stronger in the late 1980s and the 1990s, when China began concentrating on Africa because of its rapidly growing domestic economy and export-focused manufacturing sectors.

In general, Africa’s natural resources attract many investors. In terms of raw materials, Africa is a very rich continent: Africa holds almost 98% of the world chromium reserves, 90% of the world’s cobalt reserves, 50% of gold reserves, 90% of platinum reserves, 70% of tantalite reserves, and 64% of the world’s manganese reserves, as well as important deposits of uranium, diamond, copper, iron, and zinc.

Despite all the wealthy resources in its possession and a growing economy, Africa still has a very long way to go. On the negative side for companies seeking ventures on the continent, corruption and poor governance remain major issues in many of the African economies. The average corruption perception index score still lies below 3.0 out of ten in 2011, with ten being the least corrupt. However, 21 countries out of 53 improved their score with Mauritius, Cape Verde, and Rwanda even reaching scores above 5.0. Botswana in Southern Africa remained the sole African country in 2011 to have ever exceeded a score of 6.0. In Southern Africa the most corrupt country is Angola with 4.4 points. Corruption cases involving the ANC drove South Africa’s score down from a peak of 5.1 in 2007. In Northern Africa the scores are worse. The least corrupt country is Tunisia with a score of 3.8 points, followed by Morocco with 3.4, while the most corrupt is Libya with 2.0. In West Africa, the least corrupt country is Ghana with 3.9 points.

Poor infrastructure – including poor roads, railways, water systems, lack of telephone landlines – is also still a key hindrance to economic development in most African countries. Largely due to these poor transport, communications, and energy infrastructures, Africa's share of manufacturing is only about one percent of the global total, while 15 percent of the world's population lives in Africa. A situation that is not uncommon in Africa is typified by the case of one of the region's biggest post-independence infrastructure projects, Tanzania-Zambia Railways (Tazara), which actually uses less than two percent of its cargo-carrying capacity. Heavy goods have to be transported by other, more expensive means.

Sub-Saharan Africa also has one of the weakest penetrations of landlines in Africa, making it almost impossible to conduct business via telephone landlines. This is the main reason that it also has one of the fastest growing mobile phone markets on the African continent. An estimated 40 million new mobile cellular subscriptions were added in sub-Saharan Africa in 2010, still leaving much of the population unserved. Potential for further growth thus remains strong and makes the telecommunications sector one of the strongest recipients of foreign direct investment flows to the region.

Africa’s economic outlook is nonetheless strong for the years to come. Schlegel and Partners is able to assist its customers by providing the required market intelligence. Besides in-depth desk research, we carry out telephone and face-to-face interviews with the main players in the focused markets. Schlegel and Partners has already executed many projects related to the Northern and Southern parts of the continent, e.g. with focus on the use of specialty products in various process industries (mining, cement, oil and gas, beverages, food, paper, wood), market opportunities for new concepts in industrial engineering, the use of specialty chemicals in various African industries, opportunities in the paints markets.