From African Business
This is going to be a tough year for Africa. Not because conditions are getting tougher – although in some ways they will. But because 2014 is going to be the year when Africa has to deliver.
By Richard Walker
The year just past was a year of steeply rising hopes, as the world finally caught on to the fact that Africa is already a zone of rapid growth, and immense potential. The year to come is when Africa will have to begin to deliver on that promise, or risk turning investors away empty-handed and disappointed – and if the past is any guide to the future, there will be plenty of bumps on the road to prosperity.
But first, the politics. In emerging economies business always means politics, and the tone that political leaders set will do a lot to shape investment flows and the mood of asset markets. Two big elections will be on everyone’s minds in 2014 – even though one of them will not actually take place until 2015. The two most important economies in sub-Saharan Africa are Nigeria and South Africa, and both of them will be in election mode in 2014. South Africa is important because it is the biggest and most advanced economy in the region; Nigeria is important because eventually it will overtake South Africa to become the biggest – although how long that will take is a matter of fierce debate.
In 2014 Jacob Zuma will be re-elected president of South Africa: the psychological hold of Zuma’s African National Congress over South Africa, plus the weakness of the opposition, will see to that. But after the death of Nelson Mandela in December 2013, the country is re-evaluating the performance of the ANC. This will be the toughest election yet for the party, as painfully slow progress on creating infrastructure and eradicating poverty gradually undermines the cohesion of the party. Add to that resentment over growing corruption within government, and you have a recipe for a bitter struggle that could set the scene for the eventual removal of the ANC from power. That is very unlikely to happen in 2014: what will happen is that business will be watching very closely the new government’s attitudes to private industry: the current government has hinted at plans to intervene in industries such as mining, even to introduce nationalisation, only to draw back. With commodity prices set to stagnate or even to fall in 2014, the economy and the government will be under pressure and populist measures could prove politically tempting. South Africa will not have an easy year.
Nigeria has an economy worth $260 billion, compared to South Africa’s $380 billion – but Nigeria also has a population more than three times the size of South Africa, and a GDP growth rate of more than double South Africa’s 3.3%. In other words, it is the African giant in waiting. Businesses at home and abroad quite like the government of President Goodluck Jonathan, which has put capable people in cabinet posts and recognised the huge infrastructure deficit that afflicts Africa’s most populous country. So, business would be re-assured in 2014 if President Jonathan manages to win his People’s Democratic Party nomination to seek re-election in 2015. It is not a done deal though: politicians at home are fed up with the President’s inability to defuse conflicts between north and south, between religions and ethnic groups, and half the party would prefer a northern candidate.
One other big political story will continue to make the news and influence business sentiment, and that is the question of whether the recently elected President Uhuru Kenyatta of Kenya (and his vice-president William Ruto) will face trial by the International Criminal Court in The Hague over their role in the violence that followed the 2007 election in Kenya. But the outcome of that argument is pretty easy to forecast: they won’t face trial. The reason is stark: there is little international backing for the plan, and no African backing at all. Western governments see Kenya as an island of relative stability in the continent, and neither they nor the businesses that lobby them want to rock that boat.
South Africa is growing, and Nigeria is growing fast: that’s no surprise, because all of Africa will be growing in 2014. Indeed, in the ranking of fastest growing economies in 2014 compiled by the Economist Intelligence Unit, there are four sub-Saharan states in the top 12 fastest growing economies in the world – they are Zambia, Eritrea, Sierra Leone and South Sudan. But what will this growth mean? In some cases African growth is the result of fairly high commodity prices (although these may well fall somewhat during 2014), fairly sensible economic policies, and the effects of more open trade, more private investment, and especially of a population that is younger than in China, India or Brazil. But in other cases it is, paradoxically, the result of terrible management.
Take South Sudan: according to the EIU, South Sudan will be the world’s fastest-growing economy in 2014 with a projected growth rate of 35% – always assuming that the world’s newest country does not return to civil war. Yet even at peace, South Sudan is hardly a success story. The reason its economy is set to grow so fast is because it collapsed so dramatically in the wake of the country’s independence in 2011 – any growth at all registers as a massive improvement on what went before, and the country symbolises Africa’s biggest problem when it comes to handling high economic expectations, the problem of ‘false growth’. It looks good, but only because the past was so bad. The biggest single real project that South Sudan might progress in 2014 is the country’s projected oil pipeline through Ethiopia, or through Kenya, or possibly both, to by-pass the current export oil route through Sudan to the north. Our progress forecast: nothing will happen, not because it makes no economic sense (and it doesn’t), but because it requires real cooperation and compromise in the East African Community.
The price of the oil that South Sudan will continue to export through Sudan to the north will be of interest to everyone in sub-Saharan Africa, and particularly to the big oil producers (Nigeria, Angola) and to the new oil-and-gas-producing kids on the block (Ghana and Uganda, Kenya and Tanzania, and Mozambique along with South Sudan). The price of a barrel of oil has been on a slow trend upwards since the end of the Global Financial Crisis, but now seems to have settled at a little over $100. That’s a price that makes most discoveries in Africa profitable, but not wildly profitable. There are reasons to expect that the price will not rise much further in 2014, and maybe fall: Chinese demand is slowing, European demand is gradually recovering but will not grow rapidly, while the US is now producing most if not all the oil it needs domestically. Add to that the likelihood of more exports from Iran, and it looks if anything like there is more than enough supply to meet global demand. So one thing Africa won’t enjoy in 2014 is a new oil bonanza.
Same Old Same Old
Commodities – of which Africa probably has more than any other continent, even if the bulk of them remain undiscovered – are another story. Agricultural commodity prices have been static or falling for the last two years (a basket of all agricultural commodities fell about 17% in 2013). It is a trend that will continue in 2014 – the EIU’s index of food, feedstuffs and beverages is forecast to fall by over 6% next year, and some important African commodities will fall further than that – maize prices for example are forecast to fall by almost 20%. These agricultural price falls are largely the result of the price boom of the previous decade, which brought new investment and new production which is just now coming on stream. Industrial metals have fared even worse: the prices of most base metals (which include aluminium, copper, lead, nickel, tin and zinc) have fallen sharply since 2011 – The Economist’s metals index fell by over 9% in 2013 – and prices are not likely to stage anything more than a weak recovery in 2014.
But the good news is that lower prices in 2014 are not all bad for Africa. What counts in the commodities business is not just the price that products command, but also the cost of production. Africa’s average cost of production for ‘soft commodities’ is rather high, but that is a reflection of long-term under-investment in the sector. As capital flows into African agriculture, it is likely that the share of agriculture as a percentage of GDP will grow (it has already risen from about 2% to about 4% over the last decade) as growing food and feedstuffs becomes more profitable. But it will be a steep hill to climb: according to the African Development Bank Africa’s agricultural productivity is still only 56% of the world average, and only 5% of agricultural land is artificially irrigated.
Capital Investment Please
So in 2014, look for more signs that investors are willing to put real money into African agriculture. In the last two years there have already been some big investments made – private equity specialists Carlyle Group put $210 million into Tanzania’s Export Trading Group, and in late 2013 Swiss Syngenta announced $500 million of investment designed to improve productivity in the fast-growing markets of East and West Africa – a big vote of confidence from a company up to now focussed exclusively on South Africa. The African Union has declared 2014 ‘the year of agriculture’ in Africa – the next twelve months will show whether private investors agree.
Mobile telephony in Africa might seem like the other end of the economic spectrum to agriculture – but it is not. The sight of farm workers making mobile calls in the fields is already a common one, and in 2014 it will be more common still. According to GSMA, a global mobile industry association, sub-Saharan Africa currently has around 250 million mobile subscribers, the majority of which are in urban areas, but the next 100 million subscriptions will come from predominantly rural communities. In 2014 Africa’s farmers will be using mobile handsets to check market prices (and football scores) more than ever before. What they won’t be doing – yet – is downloading much data on smartphones, even though those smartphones are set to become as cheap as old-style traditional mobile phones over the next few years. Mobile operators have spent around $44 billion over the last six years in extending mobile coverage, but GSMA says they will have to spend more than that over the next six years to deploy 3G and 4G mobile broadband.
The biggest prize for the mobile operators will be the Nigerian customer: Nigeria has almost 50 million mobile subscribers but only 6% have mobile broadband (and according to the National Broadband Plan the country needs to build at least 35,000 more mobile towers to catch up – both Kenya and South Africa are way ahead). But in 2014 the continent’s mobile operators will be caught in a financial trap: to get to the next stage in the mobile revolution, they will have to invest in faster networks, but as new subscribers come from poorer rural communities, revenue per subscriber is falling. The solution? In 2014 look to see whether governments allocate more mobile radio spectrum to the mobile industry, what they charge for it, and above all how they tax the industry – will others follow Kenya’s lead and start to tax mobile money transfers? If they do, it could be a long, long wait for that mobile broadband connection.
Amid the hype about the rapid emergence of African economies it is important to remember that in 2014 real change in Africa will continue to be slow – and perhaps slower than before. Commodity prices will stagnate, and asset prices in financial markets – the corporate shares and official and private bonds that have done so well in 2013 – are quite likely to come of the boil. The countries that do well in 2014 will be the countries that did well in 2013 – for example, the Financial Times FDI Intelligence ranking of African ‘countries of the future’ for 2014 still puts South Africa top of the ranking, based on economic potential, infrastructure and business-friendliness.
Of those three categories, the most important for the futurist is economic potential – how far and fast a country can develop in 2014 and beyond, based on its capacity to attract, absorb and profit from investment. According to FDI Intelligence South Africa also holds top spot for potential in the whole of the continent, including North Africa. But tellingly, the next three places are all held by sub-Saharan countries – Kenya, Nigeria and Ghana. They are not the best on business-friendliness, and they are very far from the best on infrastructure. But in 2014, they could all continue to improve.
First published here.