The Underpinnings Of Africa's Growth Boom

BMI View: Sub-Saharan Africa's robust economic growth performance of the last decade has been more than a commodity-based boom and we therefore believe that economies in the region will prove more resilient to lower commodity prices, which we are forecasting on the back of our below-consensus view on Chinese growth, than many fear. Greater political stability, improved macroeconomic management and sovereign profiles and infrastructure development - particularly in the telecoms sector - have all been at least as important as high commodity prices.

Sub-Saharan Africa's (SSA) growth boom since the turn of the century is well-documented and undisputed. Indeed, in the period between 2000 and 2012, the region's average annual, GDP-weighted growth rate was 5.3%. Excluding South Africa - which drags the overall average down with its large weighting and slow growth rate - the region expanded by an average of 6.3% during the period. This compares to an average growth rate of 2.4% during the 1990's and 2.0% in the 1980's. What is more debated is what the main driver of this growth has been. Because the period of robust expansion has come at a time when commodity prices have been elevated, some observers argue that SSA's strong performance has largely been a resource boom. This obviously raises questions about what the prospect of lower commodity prices, which BMI is forecasting on the back of our below-consensus view on Chinese economic growth, will mean for the growth trajectory of SSA economies in the years ahead. While high commodity prices have certainly helped commodity exporters through increased production and investment, we believe that the expansion has been relatively broad-based, fuelled by a strong performance of domestically-oriented sectors.

The data support this view. As the first chart illustrates, on an average annual basis sectors such as construction, transport and communications and wholesale and retail trade have expanded more quickly than both the SSA economy as a whole and the mining and utilities component in particular during the growth spurt of the 2000s. As such, the mining and utilities component has seen its contribution to total output contract over the course of the decade. This not only suggests that strong growth has been about more than just resources; more importantly, it indicates that SSA economies, in general, will prove more resilient in the face of lower/falling commodity prices, than they have been in the past.

Domestically-Oriented Industries Booming
Sub-Saharan Africa - Average Annual Growth Of Sectors, 2002 - 2011

The Underpinnings Of Africa's Growth Boom

BMI View: Sub-Saharan Africa's robust economic growth performance of the last decade has been more than a commodity-based boom and we therefore believe that economies in the region will prove more resilient to lower commodity prices, which we are forecasting on the back of our below-consensus view on Chinese growth, than many fear. Greater political stability, improved macroeconomic management and sovereign profiles and infrastructure development - particularly in the telecoms sector - have all been at least as important as high commodity prices.

Sub-Saharan Africa's (SSA) growth boom since the turn of the century is well-documented and undisputed. Indeed, in the period between 2000 and 2012, the region's average annual, GDP-weighted growth rate was 5.3%. Excluding South Africa - which drags the overall average down with its large weighting and slow growth rate - the region expanded by an average of 6.3% during the period. This compares to an average growth rate of 2.4% during the 1990's and 2.0% in the 1980's. What is more debated is what the main driver of this growth has been. Because the period of robust expansion has come at a time when commodity prices have been elevated, some observers argue that SSA's strong performance has largely been a resource boom. This obviously raises questions about what the prospect of lower commodity prices, which BMI is forecasting on the back of our below-consensus view on Chinese economic growth, will mean for the growth trajectory of SSA economies in the years ahead. While high commodity prices have certainly helped commodity exporters through increased production and investment, we believe that the expansion has been relatively broad-based, fuelled by a strong performance of domestically-oriented sectors.

Domestically-Oriented Industries Booming
Sub-Saharan Africa - Average Annual Growth Of Sectors, 2002 - 2011

The data support this view. As the first chart illustrates, on an average annual basis sectors such as construction, transport and communications and wholesale and retail trade have expanded more quickly than both the SSA economy as a whole and the mining and utilities component in particular during the growth spurt of the 2000s. As such, the mining and utilities component has seen its contribution to total output contract over the course of the decade. This not only suggests that strong growth has been about more than just resources; more importantly, it indicates that SSA economies, in general, will prove more resilient in the face of lower/falling commodity prices, than they have been in the past.

FDI Growing And Diversifying

SSA's strong performance has not been lost on foreign investors and firms - the trajectory of foreign direct investment (FDI) is reflective of, and in many cases a cause for, robust headline expansion of recent years. FDI into SSA has increased from US$6.8bn in 2000 to reach US$41.0bn in 2012. While this is still only a small proportion of global FDI flows at 3.0% of the total, it is an increase on the 1.3% average of the 1990's suggesting that Africa is taking greater prominence in asset allocation decisions.

FDI On The Up
Sub-Saharan Africa FDI - Into SSA As % Of Total Global Flows (LHS) & Total, US$bn (RHS)

Furthermore, while the majority of this investment continues to flow into resources, there are signs that foreigners are becoming more interested in non-resource sectors. According to the United Nations Conference for Trade and Development's 2012 World Investment Report, nearly 25% of total greenfield FDI projects were in consumer-related industries in 2012. This has been rising steadily since 2008 when only 7% of Greenfield projects were consumer-related.

What Underpins SSA's Strong Growth Performance?

That robust headline expansion is being driven, to a significant degree, by the non-resource sector raises questions about what has changed to stimulate this growth and to attract increasing foreign investment. We believe there are several explanations:

Political Stability: Although there are obvious exceptions, on the whole the region has been more stable during the 2000s than at any other time in its post-colonial history. Over the last 20 years, long-running wars and civil strife in countries including Angola, Sudan, Mozambique, Liberia, Côte d'Ivoire, Uganda and the Democratic Republic of Congo have diminished or come to an end. This has allowed at least a semblance of normal economic activity to be re-established in many nations. It has also allowed foreign companies to move in to explore for and exploit natural resources which were previously out of reach due to conflict.

African Countries And HIPC Initiative
Countries That Have Achieved HIPC Status Countries At Decision Point Pre-Decision Point
World Bank, BMI
Benin; Burkina Faso; Burundi; Cameroon; CAR; DR Congo; Ethiopia; The Gambia; Ghana; Guinea-Bissau; Liberia; Madagascar; Malawi; Mali; Mauritania; Mozambique; Níger; Rwanda; São Tomé Príncipe; Senegal; Sierra Leone; Tanzania; Togo; Uganda; Zambia Chad; Cote d'Ivoire; Comoros; Guinea Eritrea; Somalia; Sudan

Improved Sovereign Profiles: Thanks largely to debt forgiveness, many SSA countries have had stifling debt burdens substantially reduced over the course of the last decade. Fiscal resources which would have been used to service this debt have therefore been freed up to spend on infrastructure, health and education. Debt forgiveness has also substantially improved sovereign profiles, which has allowed several African countries to issue Eurobonds, the proceeds of which have largely been allocated to infrastructure investment.

Forgiveness Has Reduced External Debt Burden
Africa - External Debt, % GDP

Macroeconomic management: In most cases, debt forgiveness has come as a result of the heavily indebted poor country status (HIPC) initiative. One of the major requirements for the achievement of HIPC status is for countries to demonstrate a sustained period of macroeconomic stability largely through a prescription of strict monetary and fiscal policy measures. The anchor of the HIPC initiative and other multilateral programs has led to a period of greater macroeconomic stability over the last decade and this has provided a platform from which economies can grow. As the chart below illustrates, inflation has remained at or below 10% since 2003.

Inflation: Low(ish) And Stable
Africa - Headline Inflation, % y-o-y

Commodity Prices: Although we believe that SSA's strong growth performance of the 2000s has been more than a commodities boom, there is no question that elevated commodities prices have played an important part in many countries. From a headline growth perspective, higher prices have increased returns and incentivised investment in places where infrastructure deficiencies and political risk make production costly. Additionally, firms entering underdeveloped countries have, in many instances, had to invest in the infrastructure required to facilitate production and transportation of resources. These have not only contributed to growth in and of themselves, but have also improved efficiencies for other sectors which are able to use the infrastructure.

Finally, high commodity prices have given a boost to the external and fiscal accounts of commodity-producing countries, which have allowed governments to enact pro-growth policies without threatening macroeconomic stability.

Infrastructure And The Telecoms Dividend: Deficient infrastructure, particularly in power and transport, remains a major constraint for economic development in many parts of SSA. That said, there is awareness of the problem and many governments have put into place ambitious investment plans. There has been (albeit slow) progress made in recent years thanks to both government and private sector involvement and this has stimulated growth to some extent.

One area of infrastructure where SSA has managed to almost keep pace with the rest of the world is telecoms, although there are exceptions to this. Telecoms growth is largely due to the fact that the liberalisation of the sector incentivised private sector investment. Early investors in many countries were also incentivised by low taxes and, duty- free capital goods imports. As a result mobile phone penetration rates have grown rapidly. This has not only contributed to economic growth via the telecoms component of GDP but has also led to efficiency gains for businesses and consumers in other sectors.

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