Here are five elements investors should examine to assess whether growth across African markets is sustainable.
There are clear limitations to the idea of a single and definable story behind Africa’s recent economic and political momentum. This narrative of Africa “rising” was always a concerning one, given that the largely commodity- driven growth would at some point temper; that exogenous risks would remain pronounced; and that political change would be bumpy and temperamental.
Now that these cracks have begun to re-emerge - symbolised most powerfully by factors such as the slump in commodity prices and the slowdown in China - those who had propped up the idea of Africa’s seamless “rise” are faced with a dichotomous dilemma: if Africa is no longer singularly “rising”, then by inference, it must be “falling.”
Of course, neither narrative provides an accurate reflection of the dynamics of change taking place across Africa’s 54 economies. The continent is too fragmented and complex to allow such glib and linear propositions to define its trajectory.
Now, more than ever, discussion needs to move towards the merits of individual economies, or regions, as a means of providing a more reflective account of the continent’s merits. This does not mean that we are unable to consider wider trends as indicative of the fundamental potential the continent offers, or the pervasive cross-cutting risks that it equally presents to investors. But it does implore us, when considering the sustainability of growth in Africa, to be far more honest and nuanced in our evaluations.
Commodity prices demonstrate the tremendous divergence inherent in Africa’s outlook. The slump in energy and base metal prices has had a profound and lasting impact on large commodity
-exporting economies, such as Angola, South Africa and Nigeria. Yet, the majority of African economies are net oil importers, with oil imports equivalent on average to 20 percent of imports and 7 percent of GDP. Though the gains of lower oil prices will be offset for many of these economies by the slump in metals prices, several important economies - in East Africa in particular - will still notably benefit.
Across the board, there is a 25 percent differential between Africa’s best-performing economy (in terms of GDP growth) this year (the DRC, 9.2 percent) and its worst-performing (Equatorial Guinea, -15 percent). The next five years will likely expand this divergence: the IMF expects Mozambique to grow at an average annual rate of 9.2 percent, with South Africa at best mustering an average of 2.5 percent.
Returning to the question of sustainability, I would suggest that the following factors are particularly definitive for determining the future trajectories of individual economies and, to an extent, regions: First, political stability. Key disruptions over the past eight years have served to further underline the importance of relative political calm as a support mechanism for sustained economic momentum. As shown by Ethiopia and Angola, democracy and political stability - at least as far as the momentum of economic growth are concerned - are not inherently intertwined. That said, over time, those economies that enjoy the soundest levels of stability will be those that have engaged proactively and progressively in the realisation of individual liberties. Read More