Can Africa’s Growth Momentum Last?

Can Africa’s Growth Momentum Last?

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This question was addressed by Mutsa Chironga, from McKinsey & Company’s Johannesburg office, who spoke at the University of Stellenbosch Business School (USB) on the McKinsey research paper entitled Lion’s on the Move: the progress and potential of African economies. In his presentation, Chironga urged the attending executives and prominent business figures not to ignore the continent’s immense investment potential. However, he did raise the important issues of where the growth comes from, and whether it will last. Without this knowledge and an understanding of the continent’s economic position, growth cannot be leveraged.

Driving economic development

Africa’s collective GDP growth accelerated over the past decade, reaching 1.6 trillion in 2008 – a level similar to Brazil or Russia. According to Chironga, several trends have been responsible for this growth surge. The research isolated these trends into four main forces driving the economic development of the continent, namely: Africa’s growth acceleration over the past decade; stable macro-economic and political environments; widespread, pro-business reforms and increasing productivity and innovation.

In terms of the source of the growth, Chironga is confident that it cannot be purely attributed to commodities as both oil exporting countries and non-oil exporting countries have contributed to growth figures. “Africa’s GDP growth, which grew 4.9% each year from 2000 through to 2008 during the past decade reaching 1.6 trillion dollars and widely increasing economic momentum, is more than just a resource boom.”

However, Chironga predicts that Africa will continue to profit from rising global demands for oil, natural gas, minerals, arable land and other natural resources due to the fact that the continent currently produces abundant amounts of commodities, including 10% of the world’s oil and 40% of its gold. Furthermore, raw materials account for approximately half of Africa’s trade.

A focus on commodities

As Africa is driven by these growth forces, Chironga says there are important factors for investors to monitor going forward, primarily commodities. “While Africa’s cost position for extracting resources is favourable, infrastructure and political stability do still pose some challenges. However, our findings indicate that these factors are becoming less threatening and overall, I would say that Africa is well positioned to take advantage of the global race for commodities.”

Access to capital will also play a very important role. Banking assets in Africa have more than doubled since 2000 and there is growing supply of foreign investment. According to the research, total capital flows to the continent, including foreign direct investments, bank lending and investor purchases of equity and debt security from African issuers increased from just $15 billion in 2000 to a peak of $87 billion in 2007. “This bodes well for the continent’s growth as foreign companies supply not just capital, but also new management skills and technology, as well as increased competition in the local market.”

According to Chironga, while Africa’s long-term growth paths are strong, the trajectories of individual companies will differ. “If recent trends continue, Africa is sure to play a crucial role in the world economy. By 2040, one fifth of the world’s younger generation will live in Africa and the continent will have the world’s largest working-age population.

“Global and local investors alike would be ill-advised to ignore this potential,” concludes Chironga.

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