By Peter Klang, Director, Trade Finance Bank Management, Middle-East and Africa, Nordea
High expectations, dashed
From 2000 to 2012, Sub-Saharan Africa boasted some of the world’s fastest growing economies. Its total merchandise exports grew from $100 billion to $400 billion, at an annual growth rate of 14%, on the strength of an unparalleled richness of commodities: Africa is home to a tenth of the world’s oil wealth and a third of its minerals, plus a young and ambitious workforce.
Considering these raw ingredients for success, Africa looked set to follow in the footsteps of the Tiger economies of South-East Asia. Many expected a period of rapid, sustained growth and an increase in living standards. There would be plentiful opportunities for foreign businesses to invest, finding new trading partners and markets for their goods and services in a burgeoning middle class.
That didn’t happen. In 2015, growth in Sub-Saharan Africa was as low as 3.4%. Excluding South Africa, just 6.2% of the region’s populace qualified as middle-class, with average earnings ranging between $10 and $20 a day.
What went wrong? And what are the prospects for getting Africa back on track?
Commodities exports: a blessing and a curse
In essence, Africa’s recent economic woes are a result of its dependence on exports of its bountiful commodities. When China’s demand for imports fell as its economy slowed, commodity prices tanked. Copper, for instance, is Zambia’s primary export. The metal’s value today is 50% less than it was in 2013, and prices are expected to drop further.
As export revenues evaporate, so does confidence in African currencies; shortages of hard currencies become severe. There’s little domestic trade or other economic activity to fall back on, so businesses default on loans and transactions. Public infrastructure projects are cancelled, unemployment spikes; there are food shortages and, ultimately, social and political unrest. Desperation drives people toward corruption and crime. Such effects are bad not only for business, but also for humanity, with poverty and humanitarian crises the natural conclusion.
In this vicious cycle, government economists have only limited leverage. So it goes in Nigeria, where oil accounts for 90% of exports. As oil prices dropped and its trade deficit grew, limited reserves of western currencies ran dry. The central bank attempted to peg the Nigerian naira against the US dollar in a move to curb inflation and prevent further currency devaluation — but recent growth figures suggest that such restrictions have only damaged the economy further.
Breaking the cycle
While African economies will eventually recover as world commodity prices bounce back, single-commodity export economies will always remain vulnerable to the next crisis that comes along, whatever causes it.
It’s in everyone’s interest — African citizens and businesses, and companies and governments around the world — to make Africa a stable and prosperous place to do business, one that’s resilient to the fluctuations of global economic forces and to social and governmental instability. Africa must establish secondary and tertiary industries to break the dependence on commodity exports.
But doing so requires putting in place a host of social, political and economic infrastructure, from roads and electricity to democratic political systems, plus broadly accessible healthcare and education — the complete infrastructure of a modern industrialised economy.
This, naturally, takes long-term investment. Fortunately, there are positive signs of this investment already happening in Africa, and of confidence in its future prospects.
Reasons for hope
As well as taking a more active approach to fiscal policy, many African governments are working on developing their infrastructure in an attempt to boost economic growth and attract international investment. Nigeria, for instance, is devoting a $25 billion investment fund to the renovation of its roads, rail networks and energy infrastructure — all of which are vital to supporting trade and industrialised economic activities.
From the international community, Africa received $54 billion of Foreign Direct Investment in 2015. Investment interest in Eurobonds is high, with many loan notes being oversubscribed — Zambia, for example, issued a Eurobond equivalent to $1 billion in 2014 and received $5 billion of investor orders, while Senegal’s $500 million bond was eight times oversubscribed. Countries like Kenya and Ghana have seen the number of foreign investor projects soar by 47% and 21% respectively, and there’s been interest from Russia, with investors raising $4.6 billion worth of capital investment in Uganda. Whatever challenges Africa is facing today, investor confidence is notably high in its tomorrow.
But little of this economic investment is coming from the mature economies of the EU and USA. The EU accounted for about 40% of all trade with Sub-Sahara in 2005. That figure is now below 20%. The US has reduced its imports down from $86 billion in 2008 to just $19 billion in 2015. Much of the value now comes from BRIC countries, and in particular China.
China is engaged in countless aid schemes, trade arrangements and infrastructure projects in many African nations. And the Chinese approach is much more direct than that of European and American investors, with a simplified credit process and bold vision. One Government official from Burundi explained to me, “a European businessman walks up to the front door and kindly knocks; a Chinese businessman takes charge and jumps through the window”.
If this trend continues, China will be positioned to dominate Africa’s economic future, potentially at the expense of not only western economies, but also of Africans themselves. Many reports suggest that Chinese investment in infrastructure is having little “trickle down” benefit on the employment, skills and economic prospects of native African workers. Indeed, there are a million Chinese expatriots now living and working in Africa.
Working together to make the most of what Africa has to offer
As a Nordic business, it’s understandable that you may be reluctant to do business in or with Africa. The reputation persists that Africa is corrupt and difficult to trade with, that the risk of default is high, that economic volatility may delay or scupper deals. China’s presence as a powerful and unregulated competitor is also a deterrent.
But there are economic challenges all around the world. And if you’re pursuing investment yield and growth opportunities, you will find little in Europe, where recession and sub-zero interest rates are becoming a fact of life. If you want to maximise gains, you need to look to Africa and its wealth of opportunity. But it’s vital to go in with eyes wide open: a local presence is crucial and building the right relationships takes time, trust and a lot of understanding.
At Nordea we are committed to doing business in Africa, and our extensive experience on the continent has convinced us that the long-term outlook of the so-called lion economy is bright. To help our customers do business with African firms, we maintain close links with local and international African banks within our network, and work extensively with organisations such as export credit agencies and private risk insurers that can help mitigate some of the challenges to trade right across the continent.
To find out more about how your business can take advantage of Africa’s potential, contact your Nordea Relationship Manager.
 P23 World Bank Jan 2016 spillovers amid weak growth.
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