Looking broadly, Sub-Saharan Africa’s economic picture in 2016 is going to be a relatively grim one, particularly in light of the past 15 years’ robust growth. China’s struggles are a big reason for this; slower Chinese growth and reduced demand for primary commodities will hammer African exports, meaning job losses and lower government revenues. Low oil prices are going to be particularly damaging to exporters like Nigeria and Angola, which could face fiscal crises. These pressures probably will likely continue to buffet African currencies, which means affected countries will be forced to cut imports and struggle to service debts, particularly on Eurobonds coming due this year. Throw into the mix bad weather, security concerns (most recently in the wake of the Burkina Faso terrorist attacks), a spate of enduring local conflicts, and uncertainty around several of the continent’s 16 elections this year—tough times certainly appear on the horizon. The IMF projects growth of just over 4 percent for the sub-Saharan region; not bad, but one of the lowest rates since 2000.
Given this state of affairs, potential investors—particularly Africa debutantes—are likely to think twice about doing business on the continent in the next year. However, the picture is not entirely bleak. First, the continent’s economies are wildly diverse; not all are dependent on primary exports. So while states like Zambia (copper) and Equatorial Guinea (oil) will face some serious challenges, non-export dependent Ethiopia could still touch 10 percent growth. Second, investors need to think about underlying fundamentals and long-term potential—African countries are investing a great deal in transport, communications, and electrification infrastructure, which will benefit the continent for decades to come. Plus, demand for primary commodities will not remain depressed indefinitely, particularly with Indian growth on the rise. In the end, any investor looking at Africa must be prepared to commit for the long term; there will be downs like 2016, but plenty of ups as well.
So what should potential investors looking at Africa in 2016 think about? We at ISI see a few trends and possibilities of which to take advantage:
Look East: East Africa, the best integrated region on the continent, will have the continent’s most robust growth in 2016 and has the best medium- to long-term potential for economic performance. Coming from a low base, Ethiopia is likely to be the continent’s fastest growing economy this year, and its Grand Ethiopian Renaissance Dam on the Nile will transform the country when it comes online in 2017, doubling power generation capacity overnight. Kenya, the region’s most developed economy, is the continent’s technology leader and is rolling out an ambitious national electrification program. Rwanda is seeking to challenge Kenya as the region’s technology capital and also looks to have strong growth in 2016. Not everywhere will benefit in the near term; development of Tanzania’s massive gas fields looks to be slow in the face of low hydrocarbon prices, although the country’s long-term potential cannot be denied. But overall, investors in nearly every sector should look at this region for opportunities.
Promising acquisition targets…: The continent’s currency worries will hinder exports to many African countries, but they also pose opportunities for investors looking to snap up African firms and assets at bargain prices. South Africa, and southern Africa more broadly, offer particularly appealing possibilities, especially given that South African firms have actively sought out footholds elsewhere on the continent. Investors obviously need to do their due diligence about the underlying fundamentals of acquisition targets, but for investors looking at long-term plays on the continent, these cut-rate purchases could have enormous future payoffs.
…particularly in manufacturing: Manufacturing has long been held up as the sector where Africa is squandering its potential, with the sector contributing just 16 percent of the continent’s GDP. The perilous state of African currencies (and the possibility of a strong dollar for the foreseeable future) combined with improved infrastructure suggests potential for investments in expanding African production capacity, both for export and domestic consumption. The favorable exchange rate means inputs, infrastructure, and labor costs will remain manageable over the medium term, while African governments and multilateral institutions are likely to look favorably at such job-creating enterprises.
Power generation not slowing down: African governments, with the support of Western donors and multilateral lenders, continue to pour resources into power generation and transmission schemes. The Obama administration’s Power Africa program, which aims to establish 60 million new electricity connections and generate 30,000 megawatts of electricity from new (clean) sources, is just one high-profile example of this effort, and one that US firms in the sector should probe for opportunities. Power shortfalls remain the single largest detriment to the continent’s development, so efforts to address this will continue no matter the near-term pressures on African economies.
Take advantage of low oil prices: Oil exporters are going to face rough times for the next few years, but they are in the minority of African countries. The rest will benefit from lower gas prices and reduced transport costs, which could boost sales of cars, trucks, and motorcycles; boost exports; and even increase tourism. At the end of the day, low oil prices will be a significant long-term boon to at least 75 percent of sub-Saharan African economies, something that will benefit investors in non-hydrocarbon sectors.
ISI Consultants assists U.S. companies to enter or further expand their business in Middle East and African markets. From small projects to longer-term engagements, we put our knowledge and experience to work for you, saving you time and money and minimizing your risk. And our results-oriented approach means we don’t just advise you on what to do to be successful – we work with you to get it done.
As part of our commitment to the National Export Initiative (NEI), ISI Consultants offer a limited number of COMPLIMENTARY STRATEGY SESSIONS each month to qualified U.S. companies.