Dash for Africa: World's richest nations have a fresh look at the last great emerging market

Africa was the belle of the diplomatic ball this summer, with back-to-back official visits from European leaders promoting the continent as the latest investment destination.  

On the face of it, this surge of political attention suggests Africa could be following China and India to become the next big thing in emerging markets.

But it isn’t quite that simple.

Many of Africa’s 54 countries are certainly in need of investment to help build the infrastructure and commerce needed to fire-up their economies but the continent’s demographics complicate that task.

The Gates Foundation’s latest annual Goalkeepers Data Report, which tracks the progress of 17 sustainable development goals agreed by the United Nations in 2015, outlines the challenges Africa’s booming population poses to both economic and human development. 

It estimates that Africa’s population will double by 2050 to 2.5 billion, creating either a new economic powerhouse or socio-economic basket case.

“Today’s booming youth populations can be good news for the economy. If young people are healthy, educated, and productive, there are more people to do the kind of innovative work that stimulates rapid growth,” says Mr Gates.

To achieve that, he says, the investment priority for the next three decades should be to invest primarily in improving Africa's human capital. Only by markedly raising the health, education and skills of region's people - 60 per cent of whom are under the age of 25 - will Africa's 'demographic dividend' be realised.

Nevertheless the dash for Africa is on. 

Spurred on perhaps by China and Russian investment, the UK, France and Germany are just three of a dozen or more developed nations to have recently pledged to dramatically increase their trade and investment in the region.

All three are also deploying military assets across the Sahel, the politically sensitive and strategic east-west band of Africa that separates the Sahara in the north from the Sudanian Savanna in the south.  

The British Prime Minister, Theresa May, last month led a high profile mission to Africa which included cutting dance shapes that took social media by storm as well as pledging that the UK would become the biggest single investor of the G7 group of the world's richest nations by 2022.

“As Britain prepares to leave the European Union we are committed to a smooth transition that ensures continuity in our trading relationships,” she told reporters.

French President Emmanuel Macron has made several African visits this year, wooing former French colonies and Anglophone countries with promises of closer cultural, sporting and economic ties. In Nigeria he announced $475 million in deals that included a water treatment facility in Kano, an urban transport project in Lagos and plans to promote green energy.

German Chancellor Angela Merkel, who arrived in Africa within days of Mrs May and is under pressure from waning electoral support at home, was keen to promote initiatives aimed at curbing migration, though she had a planeload of German business chiefs in tow for good measure.

All this comes as China continues to ramp up its Belt and Road Initiative, an ambitious $1 trillion infrastructure project intended to spread the country’s trading and investment links to about 65 countries through South East Asia, the Gulf and much of Africa.

At a summit with African leaders in Beijing earlier in September, China promised to pump a further $60 billion worth of project finance into Africa in the form of grants and loans while also encouraging Chinese companies to invest there over the next three years. It comes on top of $60 billion China pledged for Africa three years ago. Those figures dwarf the £4 billion offered to Africa by Mrs May during her visit.

The sheer scale of Chinese investment has raised fears that African countries risk being caught in a debt trap or having their markets flooded with Chinese products and workers, prompting Chinese President Xi Jinping to insist that the finance comes with no strings attached.

That approach has its risks. The Washington-based RWR Advisory Group, which monitors the Belt and Road Initiative, estimates that almost one-third of its projects, worth $419 billion, have run into trouble since 2013 through delays, local opposition and security issues.

Andrew Davenport, RWR’s chief operating officer, says: “Although some recent instances of debt rescheduling and forgiveness by China in Africa involve numbers that are not terribly significant to China’s bottom line, they may be indicators of growing trouble in the model for aid and development that China has been selling to the continent over the past decade.”

African nations have good reason to be wary of debt. After taking on vast western loans, many needed to be bailed out in the 1990s by the Heavily Indebted Poor Countries (HIPC) relief initiative. Launched by the IMF and World Bank it has worked with the finance sector and governments to reduce Africa's debt to sustainable levels.

Murray Grant, a managing director at the UK development finance institution, CDC Group, says the HIPC programme was a key element in helping to lift African economic growth in the first decade of this century.

“The consequence was that suddenly indebted African governments were given a degree of economic freedom that allowed them to re-borrow and invest in their economies,” he says.

CDC Group is owned by the UK government and for the last 70 years has invested in African and Asian companies with a view to creating jobs and boosting prosperity. Some of CDC’s representatives travelled with Mrs May to Africa last month.

Mr Grant says Africa’s abundant natural resources contributed to the continent’s strong economic growth from the turn of the century to 2014, fuelled mainly by demand for raw materials from China.

“Several favourable factors, including the rise of mobile telephony, came together at the end of the 1990s and sustained Africa for around 15 years,” he says. “Economies started to grow at six per cent to seven per cent. It prompted investors to ask if what was going on economically at the time in India and China was possible in Africa too.”

That optimism faded when African government debt levels rose, Chinese growth slowed and commodities prices crashed four years ago. As a result, some international investors turned to other markets in search of higher returns.

Figures from the United Nations Conference on Trade and Development (UNCTAD) show that African foreign direct investment peaked at above $55 billion in 2015 but fell sharply in the following two years. In 2017 it fell 21 per cent to $42 billion. The UN attributed the decline to weak oil prices and continuing economic fallout from the commodities bust but expects a rebound this year, with foreign direct investment rising 20 per cent to $50 billion.

“The projection is underpinned by the expectations of a continued modest recovery in commodity prices and strengthened interregional economic cooperation,” though  Africa’s commodity dependence will cause foreign direct investment to remain cyclical, UNCTAD says.

Mr Grant says that demographic pressures have intensified the need to build infrastructure in recent years even as economic growth slowed and declining investment made that task more difficult.

“While international money went elsewhere the need for investment in Africa has been undiminished. You are trying to build infrastructure, build financial services, you’re trying to build cities at a phenomenal rate to cope with the the demographics,” he says.

He believes the west has a huge vested interest in helping to fix Africa. If social problems are left unchecked and jobs are scarce, migration into Europe will remain high. “There are lots of good reasons why politicians in the west should be talking up the African story, and why we need to encourage businesses from around the world to take their skills and capabilities and competence and start to transfer some of that, as well as financial capital, into the continent,” he says.

Cornelis Vlooswijk, who manages Robeco Afrika Fonds, says that although Africa’s improving economic prospects have rekindled foreign investment interest following the recent slump, it remains a long way from taking the emerging markets mantle from China and India.

“I would love to say that Africa will be the new hotspot but I think that would be a huge exaggeration. I don’t think Africa is going to take that role because many of its countries don’t have control of their own destinies and there are just too many problems,” he says.

In other words, most African countries continue to rely on developed markets such as the US, Europe or China to fund big investment projects, Mr Vlooswijk says. They would need to be much more financially independent to become strong emerging markets.

He reckons the influx of Chinese money has had a positive impact on Africa in recent years and welcomes the country’s plans to do more. “China is now all over the continent and appears to want to accelerate its programme there. Increasingly it’s not just focused on getting resources out but is also investing to some extent in manufacturing. It’s very early days for them but that will be a big positive.”

He says there are good investment opportunities in many African countries, particularly in banking, where margins are relatively high, and in mobile telephony, but the main draw for investors is that stocks are much cheaper and competition between companies in both those sectors is lower than in Europe or the US.

Mr Vlooswijk says some investors are wary of investing in Africa because they worry regulations aren’t as strict as in more developed markets. “In fact, accounting rules aren’t really so far out of line,” he says. Companies that have increased earnings during the recent period when some African countries were in recession or generated no growth should make at least modest gains now that the continent’s economies are picking up, he says.

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