The continent is coming to the fore in respect of new growth within the global economy and is attracting more foreign investors, writes Alan Naughton and Razia Khan of Standard Chartered.
The global economy is insearch of new growth champions, and it is Africa coming to the fore. In the rest of the world,growth expectations have become uncertain due to the global environment and the increased inter-linkage between economies:decelerating growth in any of the major economies will have implications for developing countries. Sub- Saharan Africa (SSA) is decorrelated, with the impetus for growth primarily domestic.This growth has not gone unnoticed, and as the world’s newest growth champion, SSA has seen a 5.5% increase in foreign direct investment (FDI) flow to $37.7 billion in 2012,despite a 6.6% decline to developing countries.
Externally, there has been a tendency to see Africa’s growth as driven by higher commodity prices. Since 2001 it has been the rise of the African consumer that has characterised Africa’s outperformance.This has come off the back of an improved policy environment,greater savings, a more open embrace of the private sector, and gains in financial intermediation.Africa’s exports do remain dominated by commodities,but for the most recent period, rising levels of private consumption were far more important than net exports. Evidence has emerged of a sustained decline in poverty. This is difficult to square with the idea that resources are the key driver of growth. Resource-driven growth tends to be capitalintensive, with no obvious means of alleviating poverty.
The macro picture, supported by a more stable political environment, is helping convince foreign investors of the attractiveness of African assets. African stockmarkets have been outperforming,with the S&P Africa Frontier Index up over 50%over the past 12 months, compared with 14%for the S&P 500. Kenya and Nigeria were among the top ten markets globally in 2012, up 39%and 34%respectively. Regulators have made great strides to improve the business environment, resulting in growing interest in the pension, insurance, asset management and broker/dealer sectors.
Financial markets are also beginning to play an essential role for long-term economic stability on the continent, by addressing the need to channel existing resources into productive investments.
The development of savings, insurance and pension schemes in most African countries, investing in local and regional bonds and equities,will accelerate this process. South Africa, Botswana and Namibia are well advanced,with Kenya, Ghana, and Nigeria, among others, having enacted pensions reforms the appetite for long term investment assets will only increase.This is helping stimulate productivity, create employment, provide individuals and enterprises with a stable business environment, and contributing to more efficient natural resource management.
While the savings and investment market is still in its infancy in many countries, we believe the improvements governments and regulators have made to banking and capital markets infrastructure will be the catalyst for sustained growth and investment over the longer term. This infrastructure development is evident with local stock exchanges which have grown from only four pre-1990s to 19, many of which are modern with low transaction failure rates and improving liquidity, encouraging greater levels of securities investments.These improved conditions are resulting in substantial growth in the savings
and investment landscape:
• Assets under management experiencing a CAGR (compound annual growth rate) of 8%per annum over the past six years
• The regional insurance industry has grown its premiums from $2.2 billion in 2000 to $8.8 billion in 2011
• Pension scheme assets are growing at double digits with an already sizeable pension market in South Africa boosted by growth centres in Botswana, Ghana,Kenya and Nigeria.
The broadening of capital market product offerings has attracted increased direct investments resulting in improved market iquidity.One trend has been the growth of local currency as opposed to foreign currency sovereign bond markets.This has enabled local governments to meet an increasing proportion of their borrowing requirements by issuing securities in their own currencies which are being acquired by local pension, insurance and mutual funds. Foreign investors, through alternative investment funds, regional funds and institutional vehicles seeking higher riskadjusted yields are also turning to these markets.
There are still challenges for SSA – Africa must do more to boost its saving rate and exports would benefit from diversification – but the central picture is extremely positive.Three key trends will push the broader economy forward: Demographics: Africa is young and its population is growing rapidly. In contrast to the mature economies and China, the working age population is set to rise.Although formal-sector job creation remains a challenge, this demographic profile shift should boost Africa’s growth and this will benefit securities markets. We expect the shift to drive consumption and asset prices, as well as creating a greater pool of pension savings that can be invested in the region.
The scale of Africa’s population growth is also important.Nigeria, the region’s most populous economy, is ranked seventh in the world by population size. According to UN statistics, by 2035, it could be the fourth most populous country globally. By 2055, it could be third, overtaking the US.Only China and India are likely to have bigger populations.
But it isn’t solely a Nigeria story. Much of Africa is showing similar signs of rapid demographic growth. African economies have not yet exhibited the same fertility transition seen elsewhere. According to the same UN statistics,by 2100, roughly half of the world’s Top 20 most populous economies will be African. This growth potential is immense. Agriculture: In Africa this represents a significant opportunity, and though the same leap forward seen in other developing economies has not yet come, there are signs that African governments are ready to make changes and are taking productivity seriously. More Africans are employed in agriculture than in any other sector, so changes here will be vital to transformation. Africa has most of the world’s untapped arable land, with only an estimated 14%of potentially available farmland put to use. With increased investment, and greater policy prioritisation, African agriculture could realiseits potential.
Infrastructure: Investment in infrastructure is also gaining ground and will accelerate as domestic markets and yield curves develop to allow for more long-term borrowing.Africa’s infrastructure deficit is well documented, with the hinterland poorly served by major transport infrastructure,but this is changing.A higher rate of urbanisation has driven down the cost of infrastructure provision per capita, enabling scale economies. More African sovereigns are issuing Eurobonds and tapping into international capital to finance infrastructure spending. Standard Chartered has pledged $2 billion of financing for African energy projects in the next five years.
An increasing number of markets in which we operate will see GDP trend growth of 7% or more in the coming decade, doubling in size.These countries, including Nigeria, Ghana, Angola, Mozambique, Côte d’Ivoire, Zambia, Uganda, Tanzania and Kenya, represent opportunities and risks.
These factors underpin the investment by Standard Chartered in recent years in establishing and continuing to expand the most extensive pan-African securities services business of all of the industry’s service providers, and we aim to be there to service our customers needs throughout this exciting growth period. We have the benefit of more than 100 years experience in different African markets, and we believe that the recent growth outperformance signifies that this time, it is time to take Africa’s growth seriously.
Formore information, contact:
Stewart Adams regional head, I&I, transaction banking at [email protected]
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