The African century?

Tom Traill - 06 September 2018

Prime Minister Theresa May was recently on a tour of Africa, singing the praises of the host nations, extolling the virtues of UK commerce and the scope for deepening trade. From the relative peace and tranquility of a tour of Africa, she has returned to the war-zone of the House of Commons. While the 21st century has been dubbed the Asian century, there is room to wonder if it will turn out to be the African century. Demographics are not destiny: an expanding population can bring impoverishment as readily as aggrandizement. However, in Southern Africa, the demographics are the most favourable in the world. From a near-standing start, some African economies will soon start sprinting.

For investors prepared to take the long view, and who have the stomach for diabolical outcomes along the way, many African nations offer attractive possibilities. Some might consider this to be a risk too far, with off-putting concerns around corruption and the incompetence of governments, and the situation sensationalized by the western media. While corruption persists in some contexts, it tends to be in relation to the dealings with governments; in the private sector, it is far less common. Also, free(ish) elections are happening far more frequently and elected officials are being held to account. Generally, the risks to investing in Africa are frequently overstated.

There is a young, growing population which is becoming increasingly urbanized and a burgeoning middle class with all its attendant demands. GDP per capita is growing, admittedly unevenly, but overall it is increasing faster than in the rest of the world. Even if GDP per head remained constant, population growth in Africa relative to the rest of the world means that at the turn of the century – one lifetime from now – Africans will represent 40 per cent of the world’s working age population (figure 1).

Aside from the socio-political factors, one economic benefit to investing in African companies is the relatively lax state of competition regulation. A well-run African company can take a 90 per cent stake in a marke. Barriers to entry for competitors can be exceedingly high and hence firms can be very profitable. Governments tend to be reluctant to interfere in profitable businesses since they are the major sources of tax revenue, particularly true in the mining industries. For example, Colin Smith of Kariba Group has highlighted Shoprite, a South African supermarket chain, which has nearly 3000 stores in 15 countries across Africa and has seen a 20 per cent return on equity for well over a decade. Econet, a Zimbabwean telecoms company, has a 70 per cent market share in mobile voice and data, and an effective monopoly in mobile money in a country embroiled in another currency crisis.

No-one is suggesting Africa will become an economic powerhouse overnight. Yet, from such a low starting point, a phase of rapid economic and investment growth should be expected. There is ample room for improvement in economic productivity and political efficiency. It is a lot easier for a country, or countries to catch up with the average than it is to pull away in the lead. Frontier economies do not need to make technological leaps, as they are able to capture the benefits of proven technologies. Despite the material risks, African investments offer outsized opportunities. Overstated concerns, favorable demographics and potential for relatively rapid economic catch-up means that there are a lot of countervailing positives to consider.

 

Figure 1

Data source: UN



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