How Exciting is Africa’s Potential?

telecoms and natural resources have been the main beneficiaries so far. For example, Vodafone, the UK operator, has operations in Ghana, South Africa and Sub-Saharan Africa. France Telecom has presence in several North and West African countries. Severstal, a Russian company, has mining and gold assets in West Africa. There are many other examples.

More investment is on its way. In addition to the traditional areas of focus, other sectors, such as retail and financial services, are attracting greater attention. Recently, Walmart has made a preliminary bid for Massmart, South Africa’s third biggest retailer, which would be their first venture into Africa. HSBC and Standard Chartered, the UK banks, have been competing for Nedbank, South Africa’s fourth largest bank, which could give the winner a sizeable foothold in Africa.

Given the rising investor interest in the region, and greater political efforts on the part of the US and the BRICs countries to forge stronger political links with Africa, many people are asking whether the «s» in BRICs should be capitalised and bestowed upon South Africa. And with a number of African nations appearing to have escaped the hang-over from the global credit crisis, the question we hear more and more frequently is whether Africans collectively share the same bright future as the Brazilians, Russians, Indians and Chinese.

The continent’s combined current gross domestic product is reasonably similar to that of Brazil and Russia, and slightly above that of India. Moreover, of the «Next 11» countries – as GS Global Economics, Commodities and Strategy (ECS) Research has dubbed the group of populous emerging countries after the BRICs with the most promising outlooks – two are in Africa: Egypt and Nigeria. In this context, and as South African officials talk enthusiastically about their aspirations for a quasi-BRIC status, it is interesting to think about Africa’s potential to become a BRIC-like economy, especially given its poor performance for many decades.

In this piece we look at the potential growth through 2050 of the 11 biggest African economies (by population and GDP), and highlight the following observations:
– While individual African countries are likely to remain small relative to the BRICs and N-11 economies over the next several decades up to 2050, as a group they have the potential to become larger than either Brazil or Russia (but not China, India or US).
– In terms of incomes per capita, South Africa is likely to keep its status as the richest economy out of the African 11, through 2050, ranking just after Brazil and above many of the N-11 as well as India. However, it will no longer be richer than China.
– Although most African countries are likely to remain poorer than the BRICs and some of the N-11, the absolute rise in income levels is still very important. Egypt, Kenya, Nigeria and Sudan could become middle income countries by 2050.
– The rise of the middle class in Africa is only starting, and we do not anticipate any peak in that growth over our horizon. Various economic, social and political changes resulting from this rise are still to come, but some shift in spending patterns in certain categories of consumer goods has already emerged.
– Africa’s growth conditions, based on the Growth Environment Score (GES) produced by GS Global ECS Research1, remain relatively weak, but impressive progress in certain areas, particularly in macroeconomic stability, has been made over the last decade. We believe it is crucial for African countries to improve their growth conditions and keep them in place as benefits in terms of additional growth and productivity could be significant.

Africa’s Path to 2050
Today, the combined GDP of 11 most populous economies in Africa ( which include Congo, Egypt, Ethiopia, Kenya, Morocco, Nigeria, South Africa, Sudan, Tanzania, Uganda and Zimbabwe) is just over one-tenth of the BRICs GDP and one-fifth of the N-11. As a group, the African 11 economies are somewhat bigger than Mexico or Korea individually (and each of the other N-11 countries), and rank below Russia in the BRICs/N-11/G7 ranking . On an individual country level, South Africa is currently the largest in this group, followed by Egypt and Nigeria, and four of the N-11 (Pakistan, Philippines, Bangladesh and Vietnam). The rest of the African 11 rank even lower on their GDP size, as the chart below illustrates.

If you were to think about Africa collectively, and consider it in the same framework that forms the 2050 scenarios for the BRICs, Next 11 and other major economies, you would see an economy potentially as big as some of the BRICs. By studying their likely demographics, the resulting changes in their working population and their productivity, GS Global ECS Research estimates that the combined GDP of the African 11 countries could reach more than $13,000bn (in 2007 USD) by 2050, making this group bigger than both Brazil or Russia, but not as big as China or India (or the US). Indeed by 2050, the African 11 countries collectively might become as big as any G7 economy outside the US. As early as 2030, the combined GDP of largest 11 African economies could overtake Italy and Canada and all other N-11 countries and grow almost as large as France.

Interestingly, nearly half of this 2050 GDP would originate from Egypt and Nigeria, so the progress of those two nations is crucial to the continent’s potential. Nigeria could top the African ranking, overtaking South Africa and Egypt. With its current population of around 160 million, it could, if it got everything right, become larger than the majority of the N-11, including South Korea, and two of the G7, Canada and Italy. In terms of its absolute size, Nigeria could grow as large as Germany is today.

Among the other 11 countries in the African 11, South Africa has a critical role to play as it is more developed today than the other countries in this group, and of course is also somewhat of a gateway to southern Africa. The country, however, does not have enough people – just 50 million – to be a BRIC by itself. South Africa’s potential is less than Nigeria, but bigger than Egypt among African economies, and Vietnam, Pakistan and Bangladesh among the non-African N-11. Amongst the other seven African economies, while they have much less potential to be as big, the absolute increase in size could be quite considerable. Uganda could become over 30 times its current size (this is the largest increase across all the countries for which these projections exist, although it does occur from a very low base), and the GDP of each of Ethiopia (a country with the second largest population in Africa, of around 85 million), Zimbabwe, Tanzania, Kenya could be around 20 times as large as today.

Africa’s Wealth and Middle Class
While some African countries might be able to become as big as some of the BRICs, N-11 and G7 by GDP size, their incomes per capita are unlikely to rise as dramatically (see the charts on the next page). South Africa is likely to keep its status as the richest economy out of the African 11, by 2050 (with income per capita equal to that of the US today) ranking just after Brazil and above many of the N-11 as well as India, which is similar to today’s positioning. However, it might not be able to be as rich as some rapidly rising BRIC and N-11 countries, including China itself. By 2027 China’s income per capita could exceed that of South Africa. Morocco could improve its wealth considerably and get closer to South Africa’s income per capita by 2050. While the 2050 income per capita snapshot does not reveal seismic shifts for this group of countries, the extent of the rise in income levels is still very important. By 2050, Egypt, Kenya, Nigeria and Sudan could already become middle income countries (we define the middle class countries as those with the average income per capita between $6,000 and $30,000 in 2007 PPP terms). More and more people in these countries will cross the $6k income per capita threshold, adding—rapidly—to the pool of the global middle class.

Over the last decade, we have already seen a significant rise in the global middle class, but this dramatic emergence is in its early stages. Today, China and India are the main drivers of this dynamic—and their middle class will continue to grow rapidly. Even without these two giants, the expansion of the middle class elsewhere is striking. In Africa, this process is only starting. By 2050, the African 11 might have almost as many middle class people as China has today, well over 400 million, relative to just around 50 million in Africa now, as the chart below shows. By 2050, Africa’s middle class could be bigger than China’s. In terms of annual changes, when the middle class numbers in all of the BRICs and most of the N-11 will be slowing, the middle class in the majority of the African 11 countries, except Egypt, Morocco and South Africa, will continue seeing this group expand all the way through to 2050 .

Shifting Consumption Patterns
The gradual rise in incomes across and within countries has a number of important implications, leading to various economic, social and political changes. These will include changing spending patterns, increased pressure and competition for resources, greater threat of environmental degradation. In addition, rising wealth and aspirations may lead to strong desires for greater freedoms. One of the most direct implications—and the one that is most relevant for investors—is the shift in spending patterns. The BRICs, some of the N-11 and other big developing countries are already dominant markets for discretionary consumer goods and services, agricultural commodities and energy. Although Africa’s pace in this area is relatively slow, it will pick up gradually over the next few years.

We have already seen an explosion in mobile networks in Africa and the resulting demand for mobile phones over the last few years. According to the World Bank, the number of mobile phone subscribers in the African 11 countries increased by almost 20 times between 2000 and 2008, from about 13 million to 235 million, the fastest and biggest rise in the world. As a result, mobile penetration (the number of mobile phone subscribers per 100 people) rose from around 3 to almost 40 in this period. Today, the share of population covered by mobile telephony is close to 50% across the continent. A World Bank report (Information and Communications for Development 2009) concluded that in developing countries for every 10 percentage-point increase in mobile penetration, there is an increase in economic growth of 0.8 percentage points. The growth effect of internet penetration is even stronger, at 1.1 percentage points per every 10 percentage-point increase in penetration. The number of internet users in Africa has also risen significantly in recent years (from under 1 internet user per 100 people to over 10), raising demand for personal computers, software packages.

Shifting Consumption Patterns
The gradual rise in incomes across and within countries has a number of important implications, leading to various economic, social and political changes. These will include changing spending patterns, increased pressure and competition for resources, greater threat of environmental degradation. In addition, rising wealth and aspirations may lead to strong desires for greater freedoms. One of the most direct implications—and the one that is most relevant for investors—is the shift in spending patterns. The BRICs, some of the N-11 and other big developing countries are already dominant markets for discretionary consumer goods and services, agricultural commodities and energy. Although Africa’s pace in this area is relatively slow, it will pick up gradually over the next few years.
We have already seen an explosion in mobile networks in Africa and the resulting demand for mobile phones over the last few years. According to the World Bank, the number of mobile phone subscribers in the African 11 countries increased by almost 20 times between 2000 and 2008, from about 13 million to 235 million, the fastest and biggest rise in the world. As a result, mobile penetration (the number of mobile phone subscribers per 100 people) rose from around 3 to almost 40 in this period. Today, the share of population covered by mobile telephony is close to 50% across the continent. A World Bank report (Information and Communications for Development 2009) concluded that in developing countries for every 10 percentage-point increase in mobile penetration, there is an increase in economic growth of 0.8 percentage points. The growth effect of internet penetration is even stronger, at 1.1 percentage points per every 10 percentage-point increase in penetration. The number of internet users in Africa has also risen significantly in recent years (from under 1 internet user per 100 people to over 10), raising demand for personal computers, software packages and other related technologies. Judging by the example of other economies at more advanced stages of development, higher demand out of Africa for other consumer durables, such as washing machines, cars, and TV sets, is in the pipeline.

Africa’s Growth Conditions: Needs to Do Better!

Up to now, we have discussed Africa’s potential but what is the reality? How realistic is it, today, for the largest African countries to still become as big as the likes of Brazil by 2050?

GS Global ECS Research maintains an index of 13 different variables (which fall into 5 main categories including macroeconomic conditions, macroeconomic stability, political conditions, human capital and technology) that are critical for sustainable growth and productivity. It is called the Growth Environment Score (GES), and is estimated annually for nearly 180 countries around the world. The scores can range from 0 to 10, with higher scores representing higher productivity or sustainable growth.
For the BRICs economies the 2009 GES average is 4.9, which is somewhat above the developing countries average of 4.6, as the chart below shows. The N-11 GES is also just above this average, at 4.7, but this is primarily driven by South Korea whose score is highest, at 7.4, a level consistent with the best of the developed world. At the other end of the N-11 is Nigeria, with a score of 3.5, the second-lowest, just below Bangladesh and above Pakistan. For the African 11 countries, the 2009 average score is 3.5. Morocco, South Africa and Egypt have the highest scores in this group, while Zimbabwe and Congo are at the bottom of the ranking .

For the BRICs economies the 2009 GES average is 4.9, which is somewhat above the developing countries average of 4.6, as the chart below shows. The N-11 GES is also just above this average, at 4.7, but this is primarily driven by South Korea whose score is highest, at 7.4, a level consistent with the best of the developed world. At the other end of the N-11 is Nigeria, with a score of 3.5, the second-lowest, just below Bangladesh and above Pakistan. For the African 11 countries, the 2009 average score is 3.5. Morocco, South Africa and Egypt have the highest scores in this group, while Zimbabwe and Congo are at the bottom of the ranking .

The cross-country GES progress over the past decade or so has been variable as the top right chart illustrates. On average, Africa has shown the lowest improvement in the GES between 1997 and 2009 of all the major groupings. Morocco started in the third place but rose to the top a couple of years ago, overtaking Egypt, whose growth conditions stagnated up until 2006, and South Africa, which has recently seen some deterioration in its GES.

Nigeria, despite its low absolute score, has made most progress of the African group. It has improved its score by over 2 points, moving from third-lowest to above average among the African 11 countries. Tanzania and Sudan have also made notable improvements. On the other hand, Zimbabwe, whose growth conditions have actually deteriorated over the years—despite a few patchy years of progress, has not managed to go back to its initial GES levels after a significant drop in the middle of the current decade. Most African countries continue to lie at the bottom of the 180 country GES ranking. We believe a lot more progress is needed.

To achieve their 2050 potential, the African countries have to raise their scores significantly. Stable macroeconomic policies focused on low inflation and avoiding excessive government and external debt are perhaps easiest to target for improvement. As the chart below shows, macroeconomic stability is the highest ranked category within Africa’s GES, and the one which has seen most progress over the past decade or so—particularly in Nigeria. Among the micro components, political conditions (including political stability, the rule of law and corruption) have worsened over the years, although much of it is driven by Zimbabwe. This remains one of the weakest areas where a lot of work is needed. Eradicating chronic corruption might be the most important step on the path towards higher productivity and sustainable growth. Technology development (the use of computers, mobile phones and the internet) also remains low and, although we have already seen impressive developments in this area, the scope for progress is enormous across the board. Improving human capital, including the most basic levels of education and life expectancy, also remains critical, particularly in Nigeria, Congo and Uganda.
Improving conditions for growth significantly and maintaining them is critical for African development. In Global Paper 170 (‘The Expanding Middle: The Exploding World Middle Class and Falling Global Inequality’, July 7 2008), GS Global ECS Research found a robust link between the GES, productivity and growth. Even small improvements in the growth environment can have an enormous impact on a country’s growth trajectory. For example, if Nigeria could improve its GES to «Best in Class» levels, its growth rate could be around 4 percentage points higher—clearly a massive premium. The progress Nigeria has already made over the past decade has possibly resulted in around a 2 percentage point improvement in terms of growth rate. Other African countries could reap even higher benefits: over 7 percentage points in the case of Ethiopia and Zimbabwe, which is clearly a tall order, but even a fraction of this premium could put these countries on a more sustainable path. South Africa, Morocco and Egypt could gain around 5 percentage points each if they improved their GES to the ‘best in class’ levels. While this simulation exercise is clearly subject to various methodological and data issues and so these exact numbers should not be taken literally, it still illustrates the crucial importance of addressing weaknesses in the key growth areas we have highlighted.

Conclusion
The potential of Africa is vast. While the African economies as a group are unlikely to challenge the BRICs or the N-11, they could deliver significant growth and higher incomes over the next several decades. The rise of Africa’s middle class is already slowly changing consumption and production patterns. This process is set to accelerate in the years to come. But for our 2050 scenario to materialise, improving growth conditions remains critical. Transparency and an environment conducive to business are what African leaders should be concentrating on. Otherwise, the dream of an African BRIC will remain just that—a dream.