Africa and the Mediterranean:

the worlds next growth frontiers

1.

Africa is now at a turning point:

Africa has become one of the worlds top growth areas (5.6% per annum), thanks to structural reforms
and its demographic dividend. From an empty rural space 20 years ago, Africa is fast becoming an
urban, booming continent, which will soon host 20% of the worlds population. Its middle class will reach
250 million people representing a USD 2 trillion market, equivalent to Chinas. This major demographic,
urban and revenue shift brings considerable investment opportunities. Africa represents the worlds next
growth frontier.

1.1. Favourable economic and business environment

A vast continent
Africa is the second largest continent after Asia and represents a territory larger than America,
China and Europe combined. With more than 1 billion people representing around 15% of the
worlds population (Table 1), Africa is also the second most populated continent with a
population that is set to double to 2 billion over the next 40 years. Africa holds some of the
worlds largest natural resource deposits and 60% of the worlds uncultivated arable land.
However, Africa still represents less than 3% of the worlds GDP (Table 2) and strong
economical drivers are currently at work to correct this anomaly.

Table 1: World population

Table 2: World GDP

Since the mid-nineties, after two decades of structural adjustment programs,

Africa has recovered growth and good macroeconomic fundamentals.
Africa is being increasingly integrated into the globalization process and its economic growth
has significantly accelerated over the last decade.
Six of the fastest growing economies in the world will be in Africa. In eight of the past ten
years, Africa has grown faster than East Asia, including Japan.
The IMF forecasts that Africas GDP will grow by 5.5% in 2011 and by 5.8% in 2012. It may
even reach 6-7% in 2012 in oil exporting countries like Ghana, well above the worlds GDP
growth for 2010 (4.2%).

Table 3: Africas economic growth accelerated after

Source: IMF, World Bank, McKinsey Global Institute

The commodity boom, with a high global demand for raw materials and the surge of
commodity prices, is one of the factors in the economic take-off of Africa but it represent only
25% of African GDP. Africas sustained economic growth is triggered by a lot more than a
simple resource boom. Favourable demography is another cause, but the development of the
manufacturing and service economies are certainly the main drivers.
Africas growth is actually widespread across all economic sectors. Natural resources directly
accounted for only 24% of Africas GDP growth from 2002 to 2007. Wholesale and retail,
agriculture, transportation, telecommunications, manufacturing, financial services, tourism
also enjoyed accelerated growth over the recent years as illustrated in table 4.
Table 4: Africas growth is widespread across sectors :

At the same time, more and more multinational companies have entered the African market
or are in the process of doing so, attracted by a cost-effective manufacturing situation and
above all looking to tap into one of the worlds most dynamic consumer markets, growing two
or three times faster than those of OECD countries1. For example, Unilever is now present in
21 African countries while Standard Chartered operates in 14. In this context, regional players
such as Ecobank or MTN are emerging and rapidly expanding across the continent.

A better political and macroeconomic stability

Another important driver of Africas economic growth is political and macroeconomic stability.
In the context of a sustained economic growth, currencies have remained relatively stable,
and in many cases, have appreciated against the U.S. dollar over the past five years. This
stability has been mainly supported by the reduction of Africas outstanding debt as a
percentage of GDP from 48.7% to 20.4% between 2003 and 20122 thus, freeing up capital for
investment and improving the creditworthiness of these countries. Its fiscal deficit as a
percentage of GDP has grown slightly from -2.0 in 2003 to -3.2 in 20123 mainly driven by
growing investments in infrastructure and development. The increase in the regions Gross
International Reserves (from USD 82.9 billion in 2003 to USD 301.5 billion in 2012)4 led by the
rising global demand and higher prices of primary commodities, indicates the growing ability
of African countries to service their foreign debt and the increased liquidity of the market,
providing viable exit opportunities for investors via trade sales.
Table 5: African governments have improved macroeconomic stability

Inflation dropped from 22% in the 1990s to 8% in the past decade. Regardless of the
growing inflationary pressure driven by high food and fuel prices across Sub-Saharan Africa
(consumer price inflation reached an average 10% in June 2011 against 7.5% in June 2010),
consumer price inflation has been relatively stable over the last 5 years, following a
decreasing trend which reached a 10 year low in 2007 (approximately 6.6%)5.

Mc Kinsey Global Institute, Lions on the move: the progress and potential of African economies, June 2010
African Development Bank Group
African Development Bank Group
5
African Development Bank
5
Merrill Lynch&Co.
2
4

On the political side, regional stability has been strengthened by the resolution of conflicts in
Liberia, Sierra Leone, Guinea Bissau and the normalization in Ivory Coast. The implementation
of structural reforms in public administration in Sub-Saharan Africa has improved governance
and increased transparency. Democracy in the region has been relatively more stable. The
Corruption Perception Index for 2010 shows improvements in the score of 26 among 43
African countries6. Even though corruption remains one of the main obstacles to invest in the
region, the reduction of perceived corruption has rendered the prospects of investing in Africa
generally more attractive in recent years.
Table 6: Inter-African trade

This political and macroeconomic stability also results from a more regional integrated
approach as illustrated by the creation of several intra-regional trade areas such as the
Common Market for Eastern and Southern Africa (COMESA) or the Economic Community of
West African States (ECOWAS). This regional economic integration reduces trade barriers and
is a first step in the development of intra-African trade which remains low compared to other
regions.
The last two decades have also seen the introduction of political and economic reforms in
some Sub-Saharan countries such as fighting corruption, improving the enforceability of
contracts and privatizing government-owned enterprises. Many countries are striving to break
out of the old downward spiral of catastrophic political governance, national debt and high
inflation. Governance has improved significantly in many countries and regulatory reforms
have partially opened markets. Numerous privatisations (more than 100 in Nigeria alone)
have reduced the role of the state in many countries.

The arrival of new players

The improved business and political environment has encouraged investments on the
continent as witnessed by the flow of private capital and the increasing presence of large
multinational companies.

Transparency International

Table 7: Private capital flows have risen sharply since

In 15 years, the percentage of African exports to China has multiplied by 20 while in the
meantime those to Europe were halved. The development of new technologies is accelerating
the inclusion of Africa in the globalization process.
Trade between Africa and the rest of the world has increased by 200% since 2000. The rate
of foreign investment has soared around tenfold in the past decade. In 2010, total foreign
direct investment ("FDI") was more than USD 55 billion, five times what it was a decade
earlier, and much more than what Africa receives in aid.
With less than 5% of global FDI projects7, Africas potential upside remains strong especially
when one considers that it has one of the fastest economic growth rates and highest returns
on investments in the world.

Africas rich resources are hiding the real endogenous growth drivers of most of its
economies
With more than 40% of the worlds uranium, 50% of the worlds cobalt and 80% of the
worlds platinum reserves, Africa has an abundance of available natural resources and is home
to major leading producers of some of the worlds major commodities such as coffee, cocoa,
cotton, oil, natural gas, etc. The growing international demand for raw materials that is mainly
coming from developing countries in Asia makes Africa the "worlds raw materials
storehouse".
Table 8: Africas resources

It's Time for Africa: Africa Attractiveness Survey. Rep. Ernest & Young, 2011

China purchases approximately 30% of its oil requirements from Africa (primarily Sudan); the
U.S. now purchases more oil from Nigeria, Algeria and Angola (which combined make up 20%
of U.S. oil imports) than from the countries surrounding the Persian Gulf.
The commodity boom has led to the development of the mining industry and the related
infrastructure in Africa. African countries are now seeking to retain more of the value derived
from natural resources by constructing local processing facilities and encouraging the
participation of local firms in production activities.
However, the African primary sector represents only 24% of Africa official GDP (and probably
less given the importance of the informal sector) and less than 20 % of its long term
investment.
As explained below, most of the growth in Africa will come in the near future from its
domestic markets.

1.2. Africas diverse growth path

While Africas collective long-term prospects are strong, the growth trajectories of the 54
individual countries across the continent differ significantly as illustrated by table 9.

Table 9: African GDP by country

A good understanding of each individual situation is essential in order to determine the

appropriate investment and risk strategy. According to the "Lions on the move" study by the
McKinsey Global Institute, four groups of countries can be distinguished:

Diversified economies represent Africas most advanced economies, with significant

manufacturing and services industries, an established middle class market and the most
stable GDP growth in Africa. They stand to benefit greatly from increasing ties to the
global economy. However, their exports are less competitive in international markets
(higher unit labour costs than China or India) and they must move toward competing in
higher value industries. They face the challenges of expanding exports to both global
and regional markets, investing in human capital development to ensure the supply of a
skilled workforce essential in advanced industries and building the infrastructure needed
to support growth.

Oil exporters have the continents highest GDP per capita but the least diversified
economies, relying mostly on oil exports. Manufacturing and services remain relatively
small. They stand to benefit greatly from the reinvestment of oil revenues in the
development of other sectors in the economy. Africas oil exporters face the same
challenges as others around the world, including maintaining political stability and
momentum for economic reforms, resisting the temptation to overspend and overinvest
and creating a favourable business environment.

Transition economies have a lower GDP per capita than the countries in the first two
groups but their economies are growing rapidly. The agriculture and resource sectors
account for 2/3 of exports. However, manufactured goods share of exports is increasing,
particularly to other African countries. Expanding intra-African trade and creating larger
regional markets will be key to the future growth of transition economies. These
countries could also compete globally with other low cost emerging economies if they
improve their infrastructure and regulatory systems. The services sector is expanding
rapidly with penetration rates far lower than those in diversified countries, creating an
opportunity for businesses to satisfy unmet demands in the local market. Finally, some
of these economies could also benefit from increasing resource exports.

Pre-transition economies are very poor with annual GDP per capita of just USD 353
but are growing rapidly. Such countries usually lack strong and stable governments and
other public institutions, infrastructure, good macroeconomic conditions and sustainable
agricultural development. The key challenges of this group of countries include
maintaining political stability, getting the economic fundamentals right and creating a
more predictable business environment.
Table 10: African countries segmentation

A major urban and revenue shift, which brings growth and a booming middle class market
Africas population, which is set to double from 1 billion to 2 billion over the next 40 years, will represent
20% of the worlds population in 2050.
Africas median age is now 20, compared with 30 in Asia and 40 in Europe. With fertility rates dropping,
this median age will rise. In each continent, the ratio of people of working age to those "dependents"
(i.e. younger or older), the dependency ratio, is improving once in history. As shown in the graph below,
it has been the case in China in the last 40 years and India is still in this process. Africa is beginning this
process and this "demographic dividend" offers a huge opportunity to Africa today and will be a very
strong growth driver.

Table 11: Dependency ratio in Sub-Saharan Africa, China and India

With more than 500 million people of working age, Africas labour force is growing rapidly. By 2040, this
number is projected to exceed 1.1 billion, more than China or India. This potential labour force will drive
global consumption.
The second driver at work is Africas urbanization. As shown in the graph below, the number of urban
Africans will increase from less than 100 million 30 years ago to more than 800 million in 30 years.
Table 12: Evolution of urban & rural population in SSA from 1950 to

2000
1800

0 Urban population

1600

Rural population (in millions)

1400
1200
1000
800
600
400
200
2050

2045

2040

2035

2030

2025

2020

2015

2010

2005

2000

1995

1990

1985

1980

1975

1970

1965

1960

1955

0
1950

2.

This urbanization brings higher productivity and incomes as shown in the graph above "Urban
Transition" which shows the explosion of the urban gross product in West Africa in the last two
generations.
Table 13: Urban transition West Africa example
Gross Regional Product (US$ bn)

Urban

Source: WALTPS OCDE

The IMFs Regional Economic Outlook for 2011 highlights a sharp rise in consumption of the poorest
households in high growth countries in Africa. The emergence of a growing middle class market in Africa
is also generated by the already important growth of the urban population from 30% in 1990 to around
40% in 2011.
Africa is almost as urbanized as China and has as many cities of 1 million people and more as Europe.
As more Africans move from farm work to urban jobs, their incomes will rise. In 2008, roughly 85 million
African households earned USD 5,000 per year and more - the level above which they start spending
roughly half their income on items other than food. The continents households spent a combined USD
860 billion in 2008, more than those in India and Russia8.
The middle class market in Africa is expected to reach more than 250 million people by 2040,
representing a USD 2 trillion market. This huge and dynamic urban market opens up new opportunities
in consumer goods and service markets.
Table 14: Explosion of the middle class market

8
Mc Kinsey Global Institute, Lions on the move: the progress and
potential of African economies, June 2010

Consumer facing sectors (consumer goods, telecoms, banking, etc.) will represent the largest
opportunity in Africa. Their estimated annual revenues will reach USD 1 380 billion in 2020, far higher
than the revenues from resources (USD 540 billion), agriculture (USD 500 billion) and infrastructure
(USD 200 billion). Indeed, for the first time, the highest returns are in the sectors delivering goods and
services to Africans themselves. This growth will create markets large enough to attract multinational
companies and favour the development of regional companies.
Technology with mass market applications will be a strong driver of the economic growth. The
dynamism of the mobile sector across Africa is a good illustration. It has more than 600 million mobile
phone users, more than America or Europe. Mobile internet and mobile banking services will follow the
trend. Around a tenth of Africas land mass is covered by mobile internet services, a higher proportion
than in India.

3.

Experience and facts show positive returns and lower risks than captured by the financial
markets
African countries are generally seen as high risk countries. This perception is partially inaccurate as
experience and facts show positive returns and lower risks than captured by the financial markets.
Most of non-investment grade countries are currently in Africa, and obviously they still present high
country risks, but real risks are lower than expected: the international rating system with country ceilings
reaches its limits in Africa, where private risk is better than public risk.
According to World Bank data, non-performing loans ("NPLs") in banks are similar to other emerging
markets for large/medium sized companies (6.8% versus 5.1%). This is confirmed by the low loss rate
of DFIs.
Table 15: Rating agencies perception of NPL & final losses compared to reality

Indeed, there is a market gap between the perception of NPLs by rating agencies compared to reality:
for a single B country like Ghana for instance, rating agencies would assume 30% of final losses on a 10
year period compared to around 5% in reality as measured by DFIs. As a consequence, the returns on
foreign direct investment in Africa rank amongst the highest in the emerging world and have consistently
increased in the last decade.

Table 16: Rate of return on FDI in Africa

4.

However Africa remains a continent with risks and strong political, social and environmental
tensions
In spite of the progress made in terms of political and macroeconomic stability Africa remains a
continent with high risks and challenges.
Limited progress to reduce poverty
In 2004, more than 30% of the African population lived with less than 1 dollar a day and more than
60% with less than 2 dollars9. Failure to reduce poverty has created important socio-economic
challenges in terms of security, social unrest, health, education and productivity.
Table 17: Local income

Source: Reuters EcoWin

Reuters

Bad harnessing of natural resources

Natural resources overexploitation and unbalanced profit sharing between the local population and
foreign developers have contributed to destroy value on a global basis, as illustrated in the graph below.
Setting up extractive industries for the export of raw materials with little value added has failed to
encourage the development of local skills and capacities as well as the promotion of related local
industries (lack of manufacturing capacity).
Table 18: Real Growth in Africa

Gross National savings

Net national savings

Real savings
Source: World Bank

Continuing sanitary risks

Sanitary risks, which remain high in Africa, continue to put an enormous strain on growth and
development in the region. With more than 5% of the active population in Sub-Saharan Africa infected
with HIV and the risk of other infectious diseases spreading, health issues are a heavy burden for both
governments and the local population in terms of spending and productivity. Household providers are
often forced to stop working either because they are ill themselves or have to take care of a sick family
member, thereby significantly hampering economic activity.
Even though no category of society is unaffected, poor households are the most vulnerable to infectious
diseases and for whom the consequences are most severe. While two thirds of the global population
infected with HIV lives in Africa, fewer than half of Africans who need treatment are receiving it. Limited
and unequal access to treatment is the result of a relative increase in demand for health services and
the already limited and decreasing supply of healthcare providers either due to migration or because
they are affected by the epidemic themselves. Botswana for example lost 17% of its healthcare
workforce due to AIDS between 1999 and 2005.

A major water deficit

Estimates show that in 2100, 1 to 3 billion people globally will be exposed to water scarcity. Africa will be
particularly affected. The lack of access to water is one of the main impediments to reducing poverty
and encouraging development especially in rural areas in Africa. Isolated from the official water
distribution network and heavily reliant on agriculture for their livelihood both in terms of food and
income, water scarcity is likely to put an important strain on the economic activities and subsistence of
households in rural areas.

Table 19: Distribution of mortality risk after

People migration to be anticipated

Africa is witnessing growing regional and national disparities within the population with a widening gap
in terms of income, access to water, health services and education between the top and bottom tiers of
society. The growing social unrest on the continent translates into a growing flow of migrants from
Africa to OECD countries but also between African countries as illustrated below.
Table 20: North Africa and West Africa migration

These disparities and challenges reinforce risks of conflict

Disparities in revenues, control of natural resources, sanitary risks, access to water, and interregional
migration are all factors that affect the stability of a region and could cause a conflict eventually. Africa
is the continent that contains the most refugees in the world with more than 2.7 million refugees. Africa
also concentrates the majority of the operations dedicated to peace preservation as illustrated by the
map to the right.

Table 21: Cost of operations dedicated to peace

Strong environmental issues

With a heavy reliance on extractive industries for economic growth and a lack of clear environmental
policies and enforcement, Africa also faces important environmental challenges. In effect, Africa has
16% of the global forest area and lost 10% of its forests between 1990 and 2005.

Table 22: Evolution of forest area in % between 2000 and

5.

Conclusion: despite these challenges, Africa represents a real opportunity for patient and
responsible investors
Africa is in rapid transition. From an empty continent with low added value despite a rich soil, that faced
numerous conflicts, sanitary crises and strong poverty, Africa is moving towards an accelerated growth
that will create a middle class of more than 250 million people representing a USD 2 trillion market.
Africa represents vast opportunities for private investors but also important challenges in terms of
political and social stability and respect of the environment. Even though risks in operating on the
continent remain high, returns may be even higher. Africa is expected to follow in the footsteps of Asia,
which two decades ago was facing the same challenges but managed to grow and develop thanks to the
newly found macroeconomic stability, dynamic demography and diverse growth drivers present on the
continent.
Indeed more and more countries in Africa show greater political stability, policy continuity and improved
governance that are prerequisites for attracting the long-term investments to generate sustainable
economic development. These investments will move from the historical commodities and natural
resources sectors to the sectors that will benefit from the booming emerging middle class market and
reinforce the internal growth of the continent.
The strength of these macroeconomic and demographic changes in Africa will definitely make the
continent a region of sustainable high growth over the next decades and the worlds next growth
frontier.