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Africa’s potential

The mood in South Africa has improved over the past few months due to a degree of pullback on the sabotage of the country’s mining sector through maladministration and corruption. A set of scenario studies envisaged the high road future for South Africa as one relying on civil society, not to mention a degree of international pressure, to keep obnoxious politicians in line, and this may have been a demonstration of that.

As Africa’s largest and most diversified economy, South Africa remains one of the continent’s engines, and for now is the entry point of choice for many people with an eye on investment in the region. Companies such as Walmart, SGS and General Motors are not interested in a presence in Africa, with South Africa as their base, because they are charitable. They are here because of very tangible reasons to anticipate significant development across the continent.

The widely respected McKinsey global institute’s research seems to point that way, and clearly companies such as Walmart have been paying attention. In 2008, Africa’s collective GDP was US$1.6 trillion, roughly equivalent to that of Russia or Brazil, and consumer spending on the continent was US$860 billion. Africa had seen over 300 million new mobile phone subscribers signed up since 2000.

McKinsey predicts that by 2020 the continent’s GDP will have increased to US$2.6 trillion, with Africa’s consumer spending being US$1.4 trillion at that point. Between 2000 and 2008 Africa’s collective economic growth was 4.9% annually, making it the third highest growing region behind emerging Asia (8.3%) and the Middle East (5.2%).

We all know of Africa’s great potential, its massive resource base, but the continent’s future is not only about resources. The resources sector, which includes oil and gas, accounted for 25% of this growth, a smaller percentage than some would expect. Governments across Africa did play a positive role, showing the importance of good policy and leadership. They trimmed foreign debt, managed their economies better and developed market friendly policies. There is a long way to go, but this allowed business sectors to emerge in many African countries.

It has been reflected in foreign direct investment into Africa which increased from US$9 billion in 2000 to US$62 billion in 2008, equivalent to the growth of FDI in China if one just looks at the per centage increase.

Also, a key trend is that by 2040, Africa will have 1.1 billion working age people, the largest number of any region, including China. Africa already has 52 cities, each with a population of greater than a million people, as urbanisation continues and by 2030 fifty percent of Africans will be living in cities.

However, Africa has shown glimmers of promise before, only for them to fade. What is different this time? For one thing, based on current trends, more than half of all African households – some 128 million households – will have discretionary spending power by 2020. The emergence of a middle class will have solidified.

It suggests that the industrialisation of China is not an isolated incidence and Africa could have its own massive growth path. As for resources, they will continue to play a major but not exclusive role. A most exciting trend is that while in the 1990s when 1% of the continent’s resource deals, then dominated by precious minerals, had an infrastructure or industrialisation programme, today that figure is 23%.

Even the diamond sector, which has historically played as much of a destabilising as a stabilising role across the continent, saw a positive development of this nature. It was a US$7 billion diamond deal undertaken between De Beers and Botswana in 2001 that added a sorting facility to create value locally and create some 3,000 jobs. China is a big factor too and governments and the private sector are spending US$72 billion a year on new infrastructure across the continent, though this is still not close to enough to make up backlogs and close the gap with other developing regions (the BRICs). However, there is scope for this funding to increase though through creative private public partnerships.

And already having increased its base, the continent’s resource sector is still expected to see growth of two to four per cent a year in all key commodities. The annual revenue from resource production, assuming no price increases from today, is expected to grow to over US$540 billion by 2020, up from US$430 billion in 2008. However, if the world and Africa follows more optimistic trends this growth could be much higher.

What it means is that while wars, natural disasters and bad politics and policies could halt growth in certain countries, the continent’s growth prospects overall are strong.