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A new year brings new challenges and opportunities， none more so than for African economies and the continent’s overall development. ChinAfrica invited two respected experts in the field of economic affairs to share their vision on the risks and areas of benefit for investors in Africa in 2017.
Martyn Davies
Managing Director of Emerging Markets & Africa at Deloitte
Risk-On， Risk-Off
Africa had its own Lehman shock moment in July 2014. From mid-2014， the oil price began its steep decline from a high of $142 in mid-July 2008. As the price of oil reduced， so did the growth prospects of a large number of African economies. This has had major developmental implications for many African economies as well as for many companies that have invested in their economies. Seemingly， the blanket “Africa Rising” narrative led to a general lack of inability to foresee and mitigate risk on the part of many multinationals in the region. Intra-regional multinationals in Africa must now adapt to what is dubbed Africa 3.0 - the emerging post-crisis African economy.
The global economy remains in an almost-daily“risk-on， risk-off” state of mind. Africa is no different and due to the overall lack of economic diversification， it is very vulnerable to external factors and shocks. There is thus a heightened sensitivity to risk， but what then is the real risk environment facing investors in Africa in the year ahead？
A rising debt crisis： Many African states are experiencing a fiscal blowout - they have taken on too much public sector debt and are unable to service it. In total， African states owe just more than $35 billion in Eurobond debt. Debt-to-GDP ratios across most of the continent’s economies are in the red zone of unsustainable debt. For frontier-type markets， any figure approaching 60 percent is considered unsustainable and governments need to reduce budgetary expenditure as a result. South Africa currently stands at 51.3 percent. The worst regional performer is Mozambique with a debt-to-GDP figure of 130 percent and will shortly be facing sovereign default. The general trend in 2017 indicates increased involvement of the IMF （International Monetary Fund） in specific African states， the necessity of structural reform and an overall reduction in state spending.
Captured capital： Many African states are rapidly imposing capital controls in order to shore up their forex reserves. As a result of dwindling forex reserves - often compounded by authorities trying to defend currencies haemorrhaging in value -many invested corporates are finding themselves in situations where sudden foreign exchange restrictions are imposed on them and they cannot repatriate their dividends and invested capital， and have limited access to forex. Countries where this is currently prevalent are Nigeria， Angola and Zimbabwe. The question for investors in Africa will increasingly be how to mitigate currency risk and repatriate or reinvest “captured capital.” rising regulatory risk： Regulatory action in some African states can be described as being somewhat “aggressive” over the past year as they seek to extract large sums from invested firms for regulatory infractions. Key examples include MTN’s （reduced）$1.7 billion fine in Nigeria and ExxonMobil’s extraordinary fine of $75 billion in Chad. Companies need to tread very carefully going forward in light of states’ need to increasingly extract rents.
Currency risks： With the commodity price collapse over the past three years， currency volatility for many emerging and frontier economies has been a severe buffeting force to contend with. Currencies worst affected include the Mozambican Metical， the Nigerian Naira and the Angolan Kwanza. Devalued currencies - often compounded by errant monetary policies - has deterred foreign investment and impacted negatively on the fiscal state of all African resource-driven economies. Currency risk will continue to be front of mind in 2017， mostly for oil-propelled countries.
Possibility of bank failures： The rapidly declining health of many African economies will undoubtedly result in many banks going out of business this coming year. Many African countries sim- ply have too many undercapitalized banks. Economies at risk include Nigeria， Ghana， Mozambique， Angola， the Democratic Republic of the Congo（DRC） and Kenya. Ronak Gadhia from Exotix Partners LLP in London told Bloomberg in November 2016 that “...the smaller Kenyan banks are facing a potentially dangerous cocktail of declining margins， declining liquidity and deteriorating asset quality， which could at best force consolidation within the sector， or at worst precipitate a full-blown banking crisis.” How governments react to prevent or manage banking failures will determine their future economic trajectory over the longer term. A similar situation was experienced in Southeast Asia and South Korea following the Asian financial crisis of 1997. Lessons can be drawn from these countries’experiences.
Political and governance risk： Ultimately the emerging market story is nothing more than a governance story. In many countries in the region there is an obvious need for a shift in approach toward political and economic governance. Some countries are able to de-risk political transitions - i.e. Ghana - whilst others are characterized by instability. Recent examples from this past year include Gabon and Gambia. Countries that may present political shocks in 2017 include Angola， Kenya and the DRC. Even the leadership succession in South Africa’s ruling African National Congress in late 2017 and policy uncertainty resulting from it has the potential to negatively impact the economy. Lower for longer commodity prices： Of continued concern for Africa’s growth outlook are persistently low commodity prices， in particular oil. It appears that the new ceiling for oil is $60 per barrel indicating prolonged sub-trend growth of oil-propelled economies compared to recent years. There is no resource that raises such high hopes of development but ultimately results in such little return as oil. This is especially true of Western African economies. Commodity-driven economies have little resilience to weather commodity price declines and are thus facing lower GDP growth pressures.
China’s rebalancing as a risk： Inextricably linked to commodity prices is China’s growth outlook. The country’s growth model has been incredibly commodity intensive， driven by rapid urbanization and substantial infrastructure investment. This has underpinned commodity exporting economies. There is also no clear consensus on how China’s economic story is going to unfold. An economic crisis- a so-called “hard-landing”in the Chinese economy- would result in a severe negative knock-on effect in Africa. The supercharged days of double digit growth in China are clearly over. The economy is now “rebalancing” from one driven by over-investment toward a services-driven economy. As China’s growth recalibrates and its resource-intensive growth model subsides， the implications for resource-exporting economies are being dramatically felt in Africa.
Africa is now rising from the bottom of the commodity cycle but the global economy still faces systemic risk. Frontier economies are characterized as having a high risk operating environment. Whilst a gradual recovery is imminent for Central and Western African economies later in 2017， companies must continue to be able to identify emerging risks and mitigate the impact on their business. The strategy of “fortitude” will continue in 2017 with investors in the region having to review their risk mitigation strategies to match the changing and diverse set of territories across the African continent.
Omid Kassiri
McKinsey & Company Partner in the Nairobi Office
Bullish on Africa
Africa consists of 54 separate countries and a number of different regional trade blocks， each with its own dynamic opportunities and challenges. Despite a narrative of slower growth over the past five years， a number of countries have shown strong growth over this same period. While the economies of Egypt， Libya， and Tunisia were negatively affected by the political turmoil of the “Arab Spring，” and Africa’s oil exporters were left vulnerable after the decline in oil prices， the rest of the continent continues to enjoy strong and often accelerating growth. Overall， the growth picture is positive， and the fundamentals for continued growth are in place. Africa has a young population and a growing labor force， which is a highly valuable asset in an aging world. The continent is expected to enjoy the fastest urbanization in the world， with over 190 million people moving to urban centers by 2025. By then， the number of cities with a population of over 5 million people is expected to reach 15. The continent is also home to significant and vast natural resources which have not yet been fully utilized. The economic landscape of Africa is quite vibrant， with 700 companies generating revenues of over $500 million each on the continent， including 400 companies that earn more than $1 billion. Together they form a very colorful landscape of successful and thriving companies. There are still opportunities and need for that figure to double.
Manufacturing vital： Manufacturing is a vital engine of economic development. Africa’s manufacturing base is quite low and has been growing slowly. There is a potential to double manufacturing output in Africa over the next 10 years， merely by addressing the importation of products that could be manufactured locally or regionally. To achieve this， African countries and government policymakers will need to take bold action.
Africa cannot achieve a meaningful increase in its share of global manufacturing purely on the basis of low labor costs. African economies need to boost their competitiveness in manufacturing on seven dimensions： labor productivity， electric power， industrial land， movement of goods， business environment， financial systems， and tariffs. Depending on which categories of manufacturing present the best opportunities for competitive growth in their country， governments should act accordingly and prioritize specific interventions.
recommendations for Africa： While opportunities abound， African governments need to make sure they take decisive steps to ensure they can transform opportunities into reality. Some of those steps include mobilizing domestic resources to fund the infrastructure required for future growth， aggressively diversifying their national economies， enabling the grooming of much needed talent for the future， aggressively pursuing an agenda of regional integration to create larger markets， and finally improving the continent’s own governance and leadership capabilities.
Africa needs to create a sound environment for companies to grow， as demonstrated by the proportionally low number of large companies across many parts of the continent. China has become an increasingly important partner in Africa’s growth agenda. African countries need to develop a robust and fact-based Chinese strategy and come up with their own approach to engaging with China in a proactive way. African leaders and entrepreneurs need to sit together with their Chinese counterparts and develop policies and strategies that help strengthen ties between the two sides.
Mindset is key： It is now obvious that China has become a major partner for Africa’s growth. Currently， Chinese companies are operating in a large range of sectors. Far from limiting themselves to construction or trading， they are now actively investing in building various manufacturing and services businesses across the continent. In the McKinsey Global Institute’s report， it was found that the most successful multinationals in Africa are those which have been operating on the continent for over 10 years. This long-term mindset has paid off well. These companies came， they learned， they invested and they saw through both good times and bad times. Also， many of them have expanded beyond one market， and are operating in over 10 countries.
Thus， it is crucial for Chinese companies investing in Africa to have this kind of long-term mindset. It is interesting that we found that African large companies both grow faster and are more profitable than their counterparts in other parts of the world. As companies enter the market and establish themselves， they need to make sure they learn about the local culture and opportunities and integrate themselves with the local business community.
McKinsey’s preliminary analysis on a follow-on research piece that looks at the nature of the China- Africa relationship suggests that China’s economic activity across Africa is deeper and wider than most people assume and that these businesses are， for the most part， having important socio-economic impact on the continent. Having said that， the opportunity is much larger. African governments and companies will increasingly find themselves turning toward China as a partner in their economic growth. Both sides will need to think proactively about how to shape this growing relationship in a way that is mutually beneficial and sustainable in the long term.
Martyn Davies
Managing Director of Emerging Markets & Africa at Deloitte
Risk-On， Risk-Off
Africa had its own Lehman shock moment in July 2014. From mid-2014， the oil price began its steep decline from a high of $142 in mid-July 2008. As the price of oil reduced， so did the growth prospects of a large number of African economies. This has had major developmental implications for many African economies as well as for many companies that have invested in their economies. Seemingly， the blanket “Africa Rising” narrative led to a general lack of inability to foresee and mitigate risk on the part of many multinationals in the region. Intra-regional multinationals in Africa must now adapt to what is dubbed Africa 3.0 - the emerging post-crisis African economy.
The global economy remains in an almost-daily“risk-on， risk-off” state of mind. Africa is no different and due to the overall lack of economic diversification， it is very vulnerable to external factors and shocks. There is thus a heightened sensitivity to risk， but what then is the real risk environment facing investors in Africa in the year ahead？
A rising debt crisis： Many African states are experiencing a fiscal blowout - they have taken on too much public sector debt and are unable to service it. In total， African states owe just more than $35 billion in Eurobond debt. Debt-to-GDP ratios across most of the continent’s economies are in the red zone of unsustainable debt. For frontier-type markets， any figure approaching 60 percent is considered unsustainable and governments need to reduce budgetary expenditure as a result. South Africa currently stands at 51.3 percent. The worst regional performer is Mozambique with a debt-to-GDP figure of 130 percent and will shortly be facing sovereign default. The general trend in 2017 indicates increased involvement of the IMF （International Monetary Fund） in specific African states， the necessity of structural reform and an overall reduction in state spending.
Captured capital： Many African states are rapidly imposing capital controls in order to shore up their forex reserves. As a result of dwindling forex reserves - often compounded by authorities trying to defend currencies haemorrhaging in value -many invested corporates are finding themselves in situations where sudden foreign exchange restrictions are imposed on them and they cannot repatriate their dividends and invested capital， and have limited access to forex. Countries where this is currently prevalent are Nigeria， Angola and Zimbabwe. The question for investors in Africa will increasingly be how to mitigate currency risk and repatriate or reinvest “captured capital.” rising regulatory risk： Regulatory action in some African states can be described as being somewhat “aggressive” over the past year as they seek to extract large sums from invested firms for regulatory infractions. Key examples include MTN’s （reduced）$1.7 billion fine in Nigeria and ExxonMobil’s extraordinary fine of $75 billion in Chad. Companies need to tread very carefully going forward in light of states’ need to increasingly extract rents.
Currency risks： With the commodity price collapse over the past three years， currency volatility for many emerging and frontier economies has been a severe buffeting force to contend with. Currencies worst affected include the Mozambican Metical， the Nigerian Naira and the Angolan Kwanza. Devalued currencies - often compounded by errant monetary policies - has deterred foreign investment and impacted negatively on the fiscal state of all African resource-driven economies. Currency risk will continue to be front of mind in 2017， mostly for oil-propelled countries.
Possibility of bank failures： The rapidly declining health of many African economies will undoubtedly result in many banks going out of business this coming year. Many African countries sim- ply have too many undercapitalized banks. Economies at risk include Nigeria， Ghana， Mozambique， Angola， the Democratic Republic of the Congo（DRC） and Kenya. Ronak Gadhia from Exotix Partners LLP in London told Bloomberg in November 2016 that “...the smaller Kenyan banks are facing a potentially dangerous cocktail of declining margins， declining liquidity and deteriorating asset quality， which could at best force consolidation within the sector， or at worst precipitate a full-blown banking crisis.” How governments react to prevent or manage banking failures will determine their future economic trajectory over the longer term. A similar situation was experienced in Southeast Asia and South Korea following the Asian financial crisis of 1997. Lessons can be drawn from these countries’experiences.
Political and governance risk： Ultimately the emerging market story is nothing more than a governance story. In many countries in the region there is an obvious need for a shift in approach toward political and economic governance. Some countries are able to de-risk political transitions - i.e. Ghana - whilst others are characterized by instability. Recent examples from this past year include Gabon and Gambia. Countries that may present political shocks in 2017 include Angola， Kenya and the DRC. Even the leadership succession in South Africa’s ruling African National Congress in late 2017 and policy uncertainty resulting from it has the potential to negatively impact the economy. Lower for longer commodity prices： Of continued concern for Africa’s growth outlook are persistently low commodity prices， in particular oil. It appears that the new ceiling for oil is $60 per barrel indicating prolonged sub-trend growth of oil-propelled economies compared to recent years. There is no resource that raises such high hopes of development but ultimately results in such little return as oil. This is especially true of Western African economies. Commodity-driven economies have little resilience to weather commodity price declines and are thus facing lower GDP growth pressures.
China’s rebalancing as a risk： Inextricably linked to commodity prices is China’s growth outlook. The country’s growth model has been incredibly commodity intensive， driven by rapid urbanization and substantial infrastructure investment. This has underpinned commodity exporting economies. There is also no clear consensus on how China’s economic story is going to unfold. An economic crisis- a so-called “hard-landing”in the Chinese economy- would result in a severe negative knock-on effect in Africa. The supercharged days of double digit growth in China are clearly over. The economy is now “rebalancing” from one driven by over-investment toward a services-driven economy. As China’s growth recalibrates and its resource-intensive growth model subsides， the implications for resource-exporting economies are being dramatically felt in Africa.
Africa is now rising from the bottom of the commodity cycle but the global economy still faces systemic risk. Frontier economies are characterized as having a high risk operating environment. Whilst a gradual recovery is imminent for Central and Western African economies later in 2017， companies must continue to be able to identify emerging risks and mitigate the impact on their business. The strategy of “fortitude” will continue in 2017 with investors in the region having to review their risk mitigation strategies to match the changing and diverse set of territories across the African continent.
Omid Kassiri
McKinsey & Company Partner in the Nairobi Office
Bullish on Africa
Africa consists of 54 separate countries and a number of different regional trade blocks， each with its own dynamic opportunities and challenges. Despite a narrative of slower growth over the past five years， a number of countries have shown strong growth over this same period. While the economies of Egypt， Libya， and Tunisia were negatively affected by the political turmoil of the “Arab Spring，” and Africa’s oil exporters were left vulnerable after the decline in oil prices， the rest of the continent continues to enjoy strong and often accelerating growth. Overall， the growth picture is positive， and the fundamentals for continued growth are in place. Africa has a young population and a growing labor force， which is a highly valuable asset in an aging world. The continent is expected to enjoy the fastest urbanization in the world， with over 190 million people moving to urban centers by 2025. By then， the number of cities with a population of over 5 million people is expected to reach 15. The continent is also home to significant and vast natural resources which have not yet been fully utilized. The economic landscape of Africa is quite vibrant， with 700 companies generating revenues of over $500 million each on the continent， including 400 companies that earn more than $1 billion. Together they form a very colorful landscape of successful and thriving companies. There are still opportunities and need for that figure to double.
Manufacturing vital： Manufacturing is a vital engine of economic development. Africa’s manufacturing base is quite low and has been growing slowly. There is a potential to double manufacturing output in Africa over the next 10 years， merely by addressing the importation of products that could be manufactured locally or regionally. To achieve this， African countries and government policymakers will need to take bold action.
Africa cannot achieve a meaningful increase in its share of global manufacturing purely on the basis of low labor costs. African economies need to boost their competitiveness in manufacturing on seven dimensions： labor productivity， electric power， industrial land， movement of goods， business environment， financial systems， and tariffs. Depending on which categories of manufacturing present the best opportunities for competitive growth in their country， governments should act accordingly and prioritize specific interventions.
recommendations for Africa： While opportunities abound， African governments need to make sure they take decisive steps to ensure they can transform opportunities into reality. Some of those steps include mobilizing domestic resources to fund the infrastructure required for future growth， aggressively diversifying their national economies， enabling the grooming of much needed talent for the future， aggressively pursuing an agenda of regional integration to create larger markets， and finally improving the continent’s own governance and leadership capabilities.
Africa needs to create a sound environment for companies to grow， as demonstrated by the proportionally low number of large companies across many parts of the continent. China has become an increasingly important partner in Africa’s growth agenda. African countries need to develop a robust and fact-based Chinese strategy and come up with their own approach to engaging with China in a proactive way. African leaders and entrepreneurs need to sit together with their Chinese counterparts and develop policies and strategies that help strengthen ties between the two sides.
Mindset is key： It is now obvious that China has become a major partner for Africa’s growth. Currently， Chinese companies are operating in a large range of sectors. Far from limiting themselves to construction or trading， they are now actively investing in building various manufacturing and services businesses across the continent. In the McKinsey Global Institute’s report， it was found that the most successful multinationals in Africa are those which have been operating on the continent for over 10 years. This long-term mindset has paid off well. These companies came， they learned， they invested and they saw through both good times and bad times. Also， many of them have expanded beyond one market， and are operating in over 10 countries.
Thus， it is crucial for Chinese companies investing in Africa to have this kind of long-term mindset. It is interesting that we found that African large companies both grow faster and are more profitable than their counterparts in other parts of the world. As companies enter the market and establish themselves， they need to make sure they learn about the local culture and opportunities and integrate themselves with the local business community.
McKinsey’s preliminary analysis on a follow-on research piece that looks at the nature of the China- Africa relationship suggests that China’s economic activity across Africa is deeper and wider than most people assume and that these businesses are， for the most part， having important socio-economic impact on the continent. Having said that， the opportunity is much larger. African governments and companies will increasingly find themselves turning toward China as a partner in their economic growth. Both sides will need to think proactively about how to shape this growing relationship in a way that is mutually beneficial and sustainable in the long term.