Thursday 18 January 2018

Democracy winning battle to stabilise Africa's 55 states

Following Nelson Mandela's death, Daniel Moroney looks at Africa's potential for investors

Members of the public sing and dance at an event in Soweto commemorating the life of Nelson Mandela
Members of the public sing and dance at an event in Soweto commemorating the life of Nelson Mandela
Global demand will increase for investors

IMAGINE a continent with ravaging diseases, terrifying poverty, escalating corruption, never-ending wars and stagnant economies. A continent that appears inviting only to those in search of precious metals and hidden gems.

Conversely, imagine a bustling landscape, rising levels of foreign investment, a marked increase in GDP year-on-year, a rising middle class, a clearly-defined consumer and an economy that is transforming -- not just on the merit of its natural resources, but also in sectors like technology and telecommunications. Both scenarios describe the same continent -- Africa -- a continent that has emerged from a stereotypical framework into a region that is being described as "the next growth market."

The changes the continent has witnessed over the past few decades has been remarkable. The majority of the continent's 55 states are making conscious efforts at putting infrastructure and systems in place in order to encourage investors to take a second look at their economies. Governments are working hard to create a better environment for business. There is a clear recognition of the potential that exists and also of the changes which need to be made in order to match up to the growth offered by other "emerging" regions.

Africa is not far behind other developing regions. Its economy is flourishing; most countries are at peace; record numbers of children go to school; mobile phones are as ubiquitous as they are in India; in the worst-affected countries, HIV infections have fallen by up to 75pc; life expectancy rose by 10pc in the past decade and foreign direct investment has tripled.

Consumer spending is projected to almost double in the next 10 years, as the number of countries with average annual incomes above $1,000 per capita will grow from less than half of Africa's 55 states to around 75pc.

What's holding Africa back?

For Africa to bridge the gap between emerging and developed nations it will require the establishment of sound, sustainable business institutions and the opening up of the private sector. Countries need to invest heavily in developing infrastructure, building transport links and creating solid strategies to encourage further investment.

Clearly, an environment which is supportive of entrepreneurs is required. The viability of small businesses is essential to the health of any economy, as entrepreneurial companies create a multiplier effect. On this note, there is clearly a need for improved transparency, accountability and lower levels of corruption.

Countries like China and India can recognise the dangers of colonialism and foreign intervention. China, with its hunger for natural resources, has approached Africa and offered a commitment to invest in infrastructure; India began its involvement at a later stage and has identified some non-resource related skills that can be transferred easily to an expansive continent with a growing population. Given the size of the continent and the variety of countries, cultures and assets, almost any country could participate in the continent's potential growth.

Meanwhile, the socio-political environment in sub-Saharan Africa (SSA) is impossible to forecast. Nevertheless, democracy seems to be generally winning against autocracy, government finances and macroeconomic policies have improved dramatically and the continent has opened up to trade and investment. All of these are stabilising forces, as there is a clear correlation between stable democracy and economic development.

SSA has plenty to offer the world, not least an abundance of natural resources and a young, growing labour force. Sustainable demand for its resources is important for SSA's continued evolution from largely primary economies to more diversified economies.

SSA is endowed with a wealth of natural resources. It has 10pc of the world's oil reserves, 40pc of its gold, and 80-90pc of its chromium and platinum -- and those are just the known reserves. SSA is estimated to possess about 60pc of the world's uncultivated, arable land (approximately 600 million hectares). Four key areas of growth opportunities will be in resources, agriculture, infrastructure and consumption.

It is plausible to assume that global demand for SSA resources may continue to grow due to resource bases becoming depleted in other areas of the world. If this is the case, SSA may be able to achieve structurally-higher economic growth.

Africa has made significant strides in important areas in order to achieve this growth. It has embraced democracy as opposed to autocracy; by way of illustration, there were three SSA democracies in 1990, but today there are 25. The generalised case is no longer one in which countries are affected by internal conflict and where governments do not respect democratic institutions. Africa has broadly embraced prudent fiscal management, leading to improved macro-economic stability and it has opened up to trade and investment in order to service Asia's massive demand for commodities.

Clearly Africa's economic future looks bright.

Daniel Moroney works for Investec Wealth & Investment. Oliver Kirby and Neil Urmson from their South African office also contributed

Irish Independent

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