Over the last two decades, the region has consistently posted the highest rates of return on investment of any region in the world, a fact that is evident in several metrics. Using primary income from foreign direct investment (FDI) over total FDI stock as a proxy for returns on FDI, Sub-Saharan Africa delivered annual average returns on FDI of 8.3% in the period between 1990 and 2016, higher than South Asia’s 5.5%, Latin America and the Caribbean’s 5.7% and East Asia’s 3.6%.
Highest Returns On FDI In Africa
Global – Average Annual Return On Return On FDI 1990-2016, %
The high rates of return on offer in Africa are also evident in return on equity delivered by banks. In the 2000-2015 period, financial institutions in African countries posted returns well above the global average and far superior to global emerging markets (represented in the chart below by Brazil, Russia, India and China), which have broadly been the engines of global economic growth over the last 15 years.
ROE Earned By Banks Is Highest In Africa
Global – Annual Average Return On Equity Of Banks 2000-2015, %
Source: St Louis Federal Reserve
Of course many African countries were viewed as riskier propositions than other emerging markets during this period and investors required higher rates of return to compensate them for taking on this perceived risk. However, there is little doubt that the continent is becoming more prominent on the global investor radar. A natural consequence of this is that more information about actual conditions on the ground is becoming more readily available as investors conduct due diligence and the authorities in African countries improve data delivery in an attempt to attract investment flows.
This broad improvement in the availability of information means that investors are increasingly able to make decisions based on actual risks rather than perceptions of risk. Greater information availability also means that investors are able to quantify and manage these risks more effectively. All of this is leading to an improving risk return profile for SSA investment and this will help attract greater FDI flows in the future.
Various structural factors will drive growth across a range of sectors on the African continent over the coming years. Agriculture is arguably the continent’s most important sector, despite making up a relatively modest share of total output, given that around 60% of the population relies on farming for their livelihood. Yields on a range of crops produced on the continent, although largely below global averages, have risen steadily over the last 15 years as governments, multilateral and non-governmental organisations and the private sector have increasingly directed investment towards the sector. Given relatively achievable further productivity gains (from increased use of fertilizer and irrigation for instance) and the fact that there remain large swathes of unused arable land on the continent, productivity and total output is set to continue growing in the years ahead.
Agriculture Yields Are Broadly Rising And Will Continued To Do So
Africa – Agriculture Yields On Various Crops, rebased 2000=100
Higher productivity in the agriculture sector will contribute to a rise in demand for consumer goods and services as the purchasing power of the many Africans who rely on farming for income increases. The rapid rise in mobile phone penetration across the continent and the proliferation of a range of mobile financial services will help businesses access these largely rural customers. Improving infrastructure (albeit slowly) will also help to increase the reach of consumer businesses to meet this demand. Technology is helping to unleash the potential of human capital on the continent. Vibrant start-up scenes have developed in regional cities such as Lagos and Nairobi (among others), where ventures from e-commerce to low-cost recruitment outsourcing to education have raised close to USD500mn in the last three years.
Agriculture And Manufacturing Likely To Regain Share Lost To Services
Africa – Sectors Contribution To Total Output, %
Source: World Bank
The service sector will continue to grow strongly on the back of rising mobile phone use, which will make consumers of services easier to reach for banks, insurance companies and entertainment providers while increased demand for goods on the back retail models and payment systems based on mobile technology will drive increased wholesale and retail trade. Tourism will also grow steadily in the years ahead as improving political environments and infrastructure coupled with regional efforts to reduce the costs and visa barriers to travel will attract both intra-African visitors and those from abroad.
There is also scope for development of manufacturing industries in certain countries (such as Ethiopia and Kenya). Although technological advances and the gradual re-organisation of global manufacturing value chains to incorporate 'smart factories' will make emerging markets less attractive for manufacturing investment, this is likely to mostly impact higher-tech sectors such as electronics, pharmaceuticals, autos and aerospace. Low-tech manufacturing sectors such as textiles and agricultural processing are less exposed to these shifts and certain countries in Africa, with large pools of cheap labour and improving business environments, will remain well-positioned to attract investment into these sectors, which will have a positive impact on employment, external account stability and government finances.
The improvement in productivity in agriculture combined with the development of labour-intensive light manufacturing and rising mobile phone use will help to ensure that rapid population growth will serve as an asset. Indeed, the region’s population will grow by an average of 2.5% per year over the coming decades with the number of Sub-Saharan Africans set to exceed 1.5bn by 2030. This rapid growth will ensure that the labour market remains well supplied with increasingly productive young workers. The growing number of young Africans with increased purchasing power on the back of rising incomes will boost demand for goods and services.
According to BMI forecasts, ten of the 20 fastest growing economies over the next decade will be from the African continent. Furthermore, on an aggregate basis, the Sub-Saharan African (SSA) region will demonstrate the second highest rate of growth rate after Asia. South Africa places a large drag on this aggregate figure because of its large weighting and relatively bleak growth outlook. If South Africa is removed from BMI’s regional aggregate growth forecasts, Sub Saharan Africa (ex South Africa) will be the fastest growing region in the world over the next 10 years.
Sub Saharan Africa Ex South Africa Will Be The Fastest Growing Region
Global – Aggregate* Regional Real GDP Growth, % y-o-y
Source: BMI Research. *Aggregates are derived using GDP-weighted country growth rates
These high rates of growth will come despite structurally lower commodity prices, which have had and will continue to have a negative impact for many economies on the continent. Lower commodity prices have brought countries with a more diversified economic base such as Senegal, Rwanda, Cote d’Ivoire and Ethiopia to the fore as these countries are less reliant on a single commodity to drive economic growth. Lower commodity prices for such countries has in fact been beneficial given that it has helped to drive down inflationary and external account pressures.
Half Of The 20 Fastest Growing Economies Over The Next Decade Will Be From Africa
Global – Annual Average Growth of 20 Fastest Growing Economies, % y-o-y
Source: BMI Research
For commodity-reliant economies such as Nigeria and Angola, the fall in prices has forced a sometimes painful structural adjustment process, which would unlikely have happened in the absence of lower commodity prices. These structural adjustments, which have included currency devaluations, import substitution drives and subsidy reductions or removals, will make these economies more resilient in the longer term by helping to improve competitiveness of non-commodity sectors. This will not only lead to a diversification of the drivers of economic growth but will also to a broader array of opportunities for foreign investors. Fiscal pressures in commodity producers have also led to much-needed fiscal consolidation. Furthermore, countries have been forced to turn to the IMF or international capital markets (or both) for funding and increased scrutiny that will accompany these two sources of financing will provide a policy anchor for economic policy-makers on the continent.
Mobile financial services are set to play an important part in increasing financial inclusion and boosting broad economic growth over the years ahead. Mobile operators across the continent have followed in the footsteps of Safaricom in Kenya in offering basic financial services via mobile devices. These systems offer many advantages to consumers and mobile operators as well as for banking institutions and governments interested in improving financial inclusion. Rapidly rising mobile coverage and penetration, ease of use of MFS and the broad range of services that can be offered suggest that it will be an important catalyst for economic growth in the years ahead as it helps increase financial inclusion, encourages savings and helps businesses reach customers living in more remote rural areas.
Rapid Rise In Mobile And Internet Usage Will Underpin Financial Innovation
Sub-Saharan Africa – Mobile Phone And Internet Penetration
Source; World Bank
The MFS ecosystem goes beyond simple device-to-device payment services to cover a much broader range of applications, which will only grow in the years ahead as developers in banks, telcos, corporates and entrepreneurs harness the opportunity presented by mobile to develop tailor-made solutions to match needs/demand in countries across the continent. At present, there are four major MFS services, which will form the backbone of future innovation:
mobile transfers and remittances - a peer-to-peer (P2P) form of mobile payment that has its basis in elementary airtime transfer services offered by mobile network operators. Popular among low-income users without access to formal banking services
mobile payments and transactions - an extension of the concept of mobile transfers and remittances but rather than P2P, it refers to person-to-business payments, allowing for the purchase of goods and services at a point-of-sale (POS) terminal
mobile banking - the connection between a mobile phone and a bank account, encompassing a range of personal banking services (such as account balance checks, paying for goods and services, applying for credit etc) via a mobile device
mobile wallet - enables handset owners to convert prepaid airtime on their SIM card into physical or virtual cash, which can be exchanged for goods, services or other virtual assets
The rapid growth in mobile penetration has also led to banks on the continent (particularly in East Africa) rolling out an agency model in which they use third parties such as petrol stations, supermarkets, kiosks and pharmacies to conduct basic transactions on their behalf.
Africa’s business environment is improving. In the World Bank’s 2018 Ease of Doing Business Report which predominately covers ‘soft’ infrastructure and bureaucratic challenges, four African countries (Nigeria, Malawi, Djibouti and Zambia) made it into the top ten improvers relative to the previous year’s report. According to the report, Sub-Saharan Africa as a region adopted 83 reforms in 2017, the most by any region in a single year since the report’s inception 15 years ago, beating its record of 80 reforms set in 2016. Since the inaugural Doing Business report in 2003, Rwanda is the economy that has made the greatest improvement globally while as a region Sub-Saharan Africa’s 798 reforms is the highest of any region, over 100 more than second-placed Europe and Central Asia and more than double third-placed Latin America and Caribbean.
Sub-Sahara Africa Is The Most Reformed Region
Global – Total Number of Reforms Since 2003
Source: World Bank 2018 Ease Of Doing Business Report
The lack of adequate infrastructure on the continent, a perennial weakness, is also being addressed. According to BMI Research’s Key Infrastructure Projects database, which tracks infrastructure projects across the globe, there are over 2,700 projects that have been recently completed, are underway or at a relative advanced stage of planning across 50 African countries. These projects are in broad a range of sectors including transportation (railways, roads, ports, airports), energy and utilities (generation and transmission) and commercial infrastructure (shopping malls, industrial space and hotels). They will go a long way towards improving the productivity and reducing costs faced by businesses operating on the continent.
Snapshot Of Infrastructure Projects On The Continent
The rapidly improving business environment and infrastructural development highlighted above mean that the continent’s cheap labour pool is becoming increasingly attractive. Indeed, a combination of low GDP per capita, high formal unemployment rates and a young and growing population together mean that African countries broadly have a large pool of cheap labour. Business environment challenges, which raise other input costs, have prevented domestic and international investors from taking full advantage of this asset.
Ongoing regional integration is another process that stands to significantly lower the costs associated with trading across borders and therefore operating costs in general. Greater integration will allow firms based in African countries to more easily target the continental market as a whole rather than individual countries, leading to increased economies of scale and lower costs. It will also offer the opportunity to address supply-side constraints through more efficient cross-border value chains allowing countries to more effectively leverage competitive advantages.
The regional integration drive is multipronged. The Tripartite Free Trade Area (TFTA), officially launched in June 2015 with an estimated finalisation date of 2025, aims to bring together three of Africa's major regional economic communities (the Southern African Development Community - SADC; the East African Community - EAC; and the Common Market for Eastern and Southern Africa - COMESA) into a single market comprising 26 countries, 650 million people and an aggregate GDP of approximately USD1.3tn.
TFTA Stands To Accelerate Integration
Africa - Trade Bloc Memberships Of TFTA States
There is also a drive to decrease the high costs and bureaucratic difficulties that characterise intra-African movement of people. The Single African Air Transport Market (SAATM) initiative was launched at the January 2018 African Union summit, aiming to completely liberalise air transport on the continent. So far, 23 African countries have signed up to the SAATM, which will significantly lower the cost and increase the efficiency of intra-African air travel. Countries on the continent are also reducing visa requirements for intra-Africa travel with the proportion of Africans not needing a visa to travel to other African countries rising to 22% in 2016 from 20% in 2015. The AU is targeting complete visa-free travel on the continent for African citizens by 2020 following the mid-2016 launch of an AU passport.
Currency policy on the continent has also become more flexible in general over recent years with several major economies including Angola, Ethiopia, Egypt, Nigeria and Sudan devaluing their currencies over the course of the last 12 months. While it is true that this has been made necessary by lower commodity prices and/or deteriorating fundamentals rather than by a voluntary shift in policy, the moves will help to make countries more competitive and lower the hard currency cost of establishing operations.