How to identify new business opportunities in Africa Pat Thaker Director, Middle East & Africa

December 2014

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Looking ahead: What to expect in Africa in 2015

Bubble trouble? Jobless

growth

Africa urbanising

Hitting a BRIC wall

Making the most of

resources

Build it and they

will come

4

Global demand will gain some momentum in 2015

• Global economic growth is still slow and uneven, but should gain some momentum in 2015. Strong US The US economy is motoring ahead, will continue to create jobs and the Fed will tighten policy.

Fast China China is enduring a soft patch and will decelerate, but will continue to be a star performer.

Fragile Euro & Japan Japan and the Euro Area are fragile and a drag on global growth, and will contribute only slightly more next year.

Source: EIU

0

5

10

15

2010 2011 2012 2013 2014 2015

Global growth and trade (annual % change)

Real GDP (market exchange rates) Trade in goods

5

… but risks are stacked to the downside

Source: EIU Global Outlook

Scenario Risk : Impact Intensity (0-25)

Implications for Africa

Eurozone recovery derailed by deflation

High : V. High

• Currency instability • Higher financing costs • Weak export demand

Escalation of conflict in middle east or Ukraine

High : High

• Oil price spike • Higher import bills • Larger fiscal deficits

Policy paralysis slows major emerging markets

Mod. : V. High

• Slower export growth • Lower foreign investment • Weaker currencies

US economy stumbles amid monetary policy tightening

Mod. : V. High

• Capital flight • Higher interest rates • Financial stress

Tensions mount over economic management policies

Mod. : High

• Protectionism • Trade disputes • Reduced trade

20

16

15

15

12

6

Africa will remain the fastest growing major region in 2015

• Many African economies should continue to benefit from a range of positive factors:

Fairly strong demand for raw and

processed commodities.

Close ties with fast growing Asia and intra-regional trade flows.

Inflows of foreign capital (FDI, FPI and development assistance).

Public and private sector investment (particularly on infrastructure).

Improving domestic demand and growing consumer markets.

Source: EIU

0 1 2 3 4 5

Sub-SaharanAfrica

Middle East &North Africa

Asia & Australasia

North America

Latin America

Transitioneconomies

Western Europe

Regional real GDP growth (% change at market exchange rates)

2014

2015

7

Commodity price movements should benefit the continent as a whole

• Global commodity prices are expected to slip further in 2015 but this will not be too painful for Africa:

Lower oil prices are problematic for the region’s oil suppliers but beneficial for most of the continent.

Lower food and beverage prices will help curtail inflation but farm incomes may suffer.

Recovering industrial raw material prices will help support solid mineral producers.

• The commodity super-cycle has ended but many commodity prices still remain high in historical terms.

• Plus hydrocarbon and solid mineral output looks set to rise on the continent. Source: EIU

80

100

120

140

160

2010 2011 2012 2013 2014 2015 2016

Global commodity prices (2010=100)

Oil FFB IRM

8

Fast growing China will remain a key player in the African growth story

• Bi-lateral Sino-African trade and Chinese investment has grown rapidly in the past decade.

• Access to oil, gas and mining reserves will be a key driver of Chinese trade and investment ties with Africa over the next 5-10 years.

• But focus is shifting agricultural, manufacturing, construction and consumer goods and services sectors.

The Chinese have made everyone else uneasy and their success is prompting a response from the US, EU, Japan and others.

0

50

100

150

200

250

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

China-Africa merchandise trade (US$bn) Chinese imports from Africa Chinese exports to Africa

Sources: EIU; UNCTAD, Ministry of Commerce.

Extractive industries

31%

Financial services

20% Construction

16%

Manufacturing

15%

Other* 18%

Chinese FDI in Africa (2011) *Business services, technology, wholesale and retail, agriculture and real estate.

9

China will remain the main export market …

10

Intra-regional trade will continue to grow rapidly

• Formal intra-regional trade is small compared with other regions but growing quickly.

• The informal sector is large and increases the role of intra-regional trade significantly.

• Intra-regional trade will continue to be driven by political and economic factors in 2015:

A push for regional integration and

reduction of trade barriers

Growing consumer markets focussed on rapidly expanding major cities.

Expanding regional value chains in manufacturing and services

Source: WTO

0 20 40 60 80

Europe

Asia

North America

Latin America

CIS

Africa

Middle East

Intra-regional trade in 2012 (% of total trade)

11

Foreign direct investment will remain a major source of financing

• Investment in Africa is a small but growing share of global FDI projects.

• The total value of FDI in Africa is expected to continues to rise.

Natural resources (hydrocarbons, solid

minerals and land) are a big draw.

Intra-African investments are growing rapidly driven by regional integration and regional value chains.

MNCs are expanding their footprint to tap into future consumer markets, trade deals and low cost labour.

• There has been a shift from extractive to consumer facing industries and this trend is expected to continue.

Source: UNCTAD; FDI Intelligence

0

2

4

6

8

10

12

14

16

18

20

Technology,media andtelecoms

Retail andconsumer

goods

Financialservices

Businessservices

Metals andmining

Coal, oil andnatural gas

FDI projects in Africa (% total)

Pre-crisis 2003-07

2013

12

• Foreign investor appetite for African debt has hit a record high in 2014 and could remain strong in 2015.

• Debt issuance (local and foreign currency) plus international bank and corporate loans will play an increasing role in African finance.

• But yields will edge higher in 2015 owing to global (policy tightening) and local factors (structural issues).

• The IMF is cautioning African countries about taking on too much debt:

• Currency depreciation and rising yields could threaten debt sustainability.

• Zambia and Ghana are already seeking IMF support after taking on too much debt.

Foreign capital will be attracted by higher returns

Source: EIU

0

2

4

6

8

2006 2007 2008 2009 2010 2011 2012 2013 2014

Internationally marketed sovereign bonds (sub-Saharan Africa US$bn)

African states raised a record US$7.6bn from Jan-Sep

13

Vulnerabilities and weakness remain but Africa is more resilient

• Vulnerabilities remain that could result in financial stress and slower growth in 2015:

Fiscal pressures have intensified and

government debt is rising as countries struggle to rein in expenditure.

Some countries have developed large current account deficits and remain vulnerable to commodity price swings.

Foreign capital inflows are key to meet financing needs and fund economic growth.

• Issues could arise for some countries given:

The cost of international capital will rise. Foreign capital exchange rate risk is up. Exposure to global investor sentiment. Potential for market jitters in 2015.

Africa has built buffers and is more resilient: – Lower external debt levels – Higher levels of foreign reserves – Stronger domestic demand – More diversified trade and investment ties

-20

-15

-10

-5

0

5

Ang

ola

Cam

eroo

n

Côt

e d'

Ivoi

re

Eth

iopi

a

Gha

na

Ken

ya

Nig

eria

Sen

egal

Sou

th A

frica

Tanz

ania

Uga

nda

Zam

bia

Fiscal and external balances (% GDP)

Fiscal Current account

14

• Africa has an enormous infrastructure gap, to the detriment of faster economic and greater diversification.

• There are extensive plans to create and/or upgrade transport corridors to facilitate African trade and urban linkages:

Extensive road and rail corridors are

planned or under development.

Port infrastructure requires upgrading of physical facilities and systems.

Airport expansion is on the radar.

• Power supplies are erratic and have poor coverage but plans are being implemented in a number of countries to ramp up generation and improve transmission and distribution.

Infrastructure is a major constraint on growth and diversification

African “lights out” at night-time

15

Modern retail outlets, distribution networks and support services are under-developed. E-commerce is exploiting the infrastructure gap and availability of mobile technology.

Markets for consumer goods are growing in size and sophistication

• Population growth, rapid urbanisation and rising incomes will continue to create larger consumer markets. Markets are fairly small by

international standards, and highly price sensitive.

Poverty will remain widespread but more households will migrate to the middle class.

Small pockets of wealth open niche markets for high end products.

Source: EIU

Households (‘000s) earning above US$10,000 per annum

16

Banking sector is expanding along with demand for services

• The banking sector remains under-developed but is gaining traction. 75% of sub-Saharan adults do not yet have

a bank account Mobile subscribers are increasing rapidly (up

20% a year for the past five years) Adoption of mobile technology has led to a

marked increase in financial inclusion

• Retail and corporate financial services are amongst the fastest growing sub-sectors. Rapid economic growth and rising incomes

create a positive backdrop Business sector risks can deter some

despite the promise of high returns

• Competition will intensify. International and African banks are

positioning for future returns Great scope for improving retail services and

SME access to finance

Source: World Bank Doing Business Survey (2015)

0.0 50.0 100.0 150.0

Euro area

SSA

South Africa

Kenya

Egypt

Angola

Cote d'Ivoire

Ghana

Zambia

Nigeria

Bank credit to private sector (% GDP, 2013)

17

Business environments are improving but still very challenging

• Africa is expected to see the most improvement in business environments compared with other regions over the next few years.

• The role of the private sector will increase but will continue to be held back by a difficult operating environment in many countries.

• Government bureaucracy, rampant corruption, severe infrastructure bottle-necks, skills shortages and structural difficulties will remain impediments to investment and growth.

• Nevertheless, improving business environments and expanding markets will pose important questions for companies seeking to invest in low-cost production bases or fast-growing consumer markets.

Source: World Bank Doing Business Survey (2015)

Africa monopolises the bottom places and 39 African countries are amongst the lowest third of all those ranked.

MauritiusSouth Africa

RwandaTunisiaGhana

MoroccoBotswana

SeychellesNamibiaZambia

MauritaniaRep. Congo

Guinea-BissauAngola

DR CongoChad

South SudanCAR

LibyaEritrea

Ease of doing business rank (of 189 in 2015)

28 43

46

60 70 71

74 85

88 111

176 178 179

181 184 185 186 187

188

189

18

Political hotspots in 2015

• Africa faces political issues that could threaten (or enhance) political stability in 2015: North Africa continues to struggle with

transition, although conditions in Egypt could improve following recent elections.

Ebola could spread and threaten civil order and cause political backlash depending on how the crisis is handled.

Ethnic conflict in Central Africa could destabilise affected and neighbouring countries.

The terrorist threat in East and West Africa will pose challenges for regional and international co-operation.

Incumbents will be under pressure in 2015/16 are term-limits could be challenged.

Political hotspots in 2015

Sources: EIU

Political transition in North Africa

Ebola epidemic in West Africa

Terrorist threat in East Africa

Ethnic conflict in Central Africa

Election time across Africa

19

Southern Africa will punch below its weight in 2015

• Growth in Southern Africa is forecast to slow from 3.9% in 2013 to 3% in 2014 before accelerating slightly to 4.4% in 2015.

• South Africa appears stuck in a slow growth cycle, weighed down by structural issues and its twin deficits. Some improvement is anticipated in 2015 but vulnerability to global capital flows is a concern.

• Angola should see oil production recover but lower prices will undermine export revenues and lower FX reserves. Non-oil growth driven by public and foreign investment will remain strong.

Source: EIU

-8

-6

-4

-2

0

2010 2011 2012 2013 2014 2015

South Africa’s twin deficits (% GDP) Current Account Balance Fiscal Balance

-5

0

5

10

15

2010 2011 2012 2013 2014 2015

Angolan current account (US$bn)

20

West Africa continues to grow apace despite Ebola

• West Africa is facing uncertain times and a wide degree of variance in trade, investment and growth prospects.

• Ebola is undermining trade and investment in directly affected countries (Guinea, Sierra Leone and Liberia).

• Uncontrolled spread of the disease to neighbouring countries could stifle growth across the sub-region.

• Africa’s giant, Nigeria, is still one of the fastest growing countries in SSA, although it is performing well below potential.

21

East Africa is the fastest growing sub-region

• Growth is expected to be fastest in East Africa compared with other sub-regions, just ahead of West Africa.

• The push for regional integration amongst EAC states will prompt additional FDI and intra-regional trade, as will the EPA with the EU.

• Trade ties with Asia and transport corridors through the EAC are growing.

• Economic imbalances and security risks linked to Islamist militancy are causes for concern.

• Kenya should consolidate its position as a newly established middle income country.

0.0

2.0

4.0

6.0

8.0

10.0

2010 2011 2012 2013 2014 2015

Sub-regional economic growth (real GDP annual % change)

East Africa Central & West Africa

22

Thank you!

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