Afri-can or Afri-can’t?

Euler Hermes sets out to assess the 10 key myths to debunk regarding Africa’s attractiveness as a business hub and FDI opportunity

Euler Hermes, the worldwide leader in trade-credit insurance, analyses the current African economic situation in a report entitled Afri-can or Afri-can’t? 10 Myths to debunk on Africa. What are the strengths and weaknesses of the African continent?

“Africa is lagging behind the rest of the world, but this is paradoxically an advantage for the region. It approaches development differently and has already taken concrete steps to address the backlog,” says Ludovic Subran, chief economist at Euler Hermes.

With the help of 10 myths, Euler Hermes decrypts reasons why Africa is a special continent of many resources, which will find its way of growing and becoming a key player in the global economy.

1: All African countries are the same

Most African countries have a complicated business environment; even Nigeria. However the continent’s driver is ranked 169th in the World Bank’s Doing Business 2016. Nonetheless, there are differences among African economies in the pace of growth and level of diversification.

“There are three groups of countries in Africa. First, the strong links such as South Africa and Morocco with an attractive business environment, but their growth remains moderate, although stable. Then the change champions, including Ivory Coast and Ethiopia: these economies record strong growth rates (7.5 percent and seven percent respectively in 2016), pushed by their will to diversify and improve their business environment. Finally, lagging behind are countries such as Nigeria or Cameroon where change needs to be fostered,” says Subran.

2: Africa only relies on raw materials

Africa has tremendous raw material sources and is often viewed as an indispensable pool of labour for the near future. But the African economy is also a hotbed of innovation.

“Compared with Singapore and its two percent of GDP spent on R&D, Africa ranks lower. But this gap is going to narrow very rapidly thanks, for example, to hubs and the will to overcome the infrastructure deficit,” explains Stéphane Colliac, senior economist at Euler Hermes.

Each region has its own champion: Kenya (0.9 percent of GDP) in the east, South Africa (0.75 percent) in the south, and Morocco (0.8 percent) in the north. This innovation effort is also reflected in the creation of technologic hubs, whose number is steadily increasing in the African continent. At present there are 24 hubs in South Africa, 11 in Kenya and seven in Uganda.

“In Kenya, the technologic incubator iHub has contributed to the development of 150 companies since 2008, an evidence of its role in the growth of African economy,” underlines Colliac.

3: African infrastructures are non-existent

The infrastructure gap (water, electricity, internet, transport) in Africa remains important. The example of Nigeria is striking: to fill its infrastructural gap, the country must spend US$ 1,900 billion by 2030,that is nearly US$ 130 billion a year (25 percent of its current GDP). This gap penalises African economies and costs two percent of growth to the region every year, according to the African Development Bank.

But the development of African infrastructures is also an economic opportunity. “African countries cannot finance these infrastructural investments themselves. In the long-term, this should trigger significant investments in the region, that will contribute to finance the regional economy,” adds Colliac.

4: Africa is isolated from the world

African foreign trade continues to grow. Well, almost. In 2016, Africa is expected to lose US$12 billion exports by value because of the commodity shock. In 2017, demand to Africa should increase by US$30 billion.

“This is not only in the short-term. Actually, by 2025 African countries should continue to open up and the continent’s heavyweights, i.e. Nigeria, South Africa and Egypt, will see their trade with the rest of the world soar,” continues Subran.

The favourite destination of African exporters remains China. However, the raw material part in African exports to China has decreased from 97 percent in 2010 to 83 percent in 2015, in contrast with low-value-added manufactures (three percent in 2010 versus seven percent in 2015).

5: African institutions are non-existent

Next to countries where institutions do not (or have stopped to) evolve, there are countries launching important reforms. Rwanda for example has strengthened its fight against corruption, by setting up a national anticorruption council and an entity supervising the award of public contracts. The purpose of this is to reduce the differential quality between institutions in Rwanda and those in more developed countries such as Brazil or Italy.

On the other side, the needs of public-service users are changing and the same occurs with demands for social security. Moreover, institutions have to respond differently: “The digital revolution can help African institutions to skip several stages of development. South Africa, Rwanda and Ghana have already developed online public services of relatively good quality, and this is how institutions in these countries are catching up with international standards,” says Subran.

6: No-one is going to finance African growth

Once the oil aftershock has worn off, Africa will resume growing at an average three-plus percent a year. Some countries still post record growth rates higher than five-plus percent, despite the hard shock. In addition, the financing and rebalancing of growth, including investments to be made, will be the key to a sustainable takeoff.

“The mix of funding will be crucial. In addition to external resources, particularly from foreign direct investment (FDI), some countries are already able to finance at least part of their growth with budgetary resources. This is the case in South Africa, Egypt and Senegal where they account for 25 percent and 30 percent of GDP in 2016. Household confidence and investor confidence will be indispensable to collect savings,” adds Subran.

Nevertheless, the way ahead will be thorny. Budgetary revenues make up only 14.5 percent on average of the African GDP, compared with 30 percent in developed countries; and FDI is only two percent of GDP, compared with 2.4 percent in developed countries.

7: African consumers are not bankable

Consumption growth in Africa is well under way. In 2016, Africa reports the highest consumption growth rates, led by Côte d’Ivoire, Uganda and Nigeria, compared with 1.4-plus percent in OECD countries or two-plus percent in Asia-Pacific.

“Consumption development in Africa is driven by the continent’s exploding urbanisation. By 2045, African towns will be flooded with 24 million people, compared with only nine million in China and 11 million in India," reports Colliac.

But African consumption development should follow a different path from that of developed countries. “The wealth effect and internet access add to the volume growth of African consumption. Consumers in Africa are going to skip some steps and force business sectors to reconsider their approach. This is especially striking in distribution, financial services or transports. For example, 70 percent of Moroccans have internet access (55 percent in China), and 14 percent of Kenyans use contactless payment cards (60 percent in France),” says Subran.

Euler Hermes has worked out a proprietary consumption potential indicator combining these three determinants. The verdict is final: Nigeria, Kenya, Morocco, Egypt and South Africa are the leading pack, followed by Ghana, Ivory Coast, Tanzania, Sudan and the DRC.

8: It’s hard to work with African companies

Given the payment terms granted by foreign suppliers to African companies, it is undisputable that stronger confidence would free considerable resources for growth.

“Out of €800 billion of goods imported every year by Africa, approximately 60 percent are paid cash. If transactions were settled at 30 days, this would free €40 billion of working capital requirements, equal to the GDP of Tanzania, or to 1.6 percent of the GDP of Africa,” says Subran.

This situation engenders a sort of vicious cycle for African companies. Their cash flow suffers from the multiplication of cash payments, and this makes them more exposed to possible economic risks. As for domestic trade, this calculation in a country like Nigeria generates €10 billion of additional cash flows: a foot on the ladder for growth-seeking SMEs.

9: Agriculture, something of the past

Agriculture is the driver of economic growth in Africa. It remains the first contributor to employment and lifts millions of people out of poverty every year. Nevertheless, what is needed is a true green revolution to accelerate the catalyst role of the farming sector, by focusing productivity, market access and technologic contents.

“In terms of growth by value of agricultural exports from 2005 to 2015, Ethiopia, Ivory Coast, Kenya and Rwanda have specialised in high-value cash crops. Other countries, such as Zambia, Senegal and Morocco, have managed to use mechanisation and technology to increase agricultural productivity,” highlights Subran.

10: It’s hard to find entrepreneurs and talent in Africa

Education levels are increasing in Africa. In particular, access to university education in Cameroon has grown from 4.6 percent in 2000 to 13 percent in 2013. However, even in South Africa, the most proficient student, the percentage of youth entering university is only 20 percent by age group. Furthermore, official statistics on entrepreneurship are disappointing: in South Africa, just to make an example, only two companies are set up every 1,000 inhabitants.

“These low figures mask the rampant informal entrepreneurship that is set to remain the basis for human capital development in the short-term. Therefore, attention should be focused just on this entrepreneurial environment, apart from access to education.

“In Nigeria and Uganda for example, the towns of Lagos and Kampala have only recently reformed their registry system, a big problem for all those wishing to start business,” concludes Subran.