Understanding africa's growth & opportunities

Understanding Africa’s growth acceleration and business opportunities

March 2011

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McKinsey Global Institute

Discussion Document

McKinsey & Company 1

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Some facts that surprised us

Consumption grew more in Africa than in India or Brazil over the last decade

Africa has as many cities with 1 million people or more as Europe

Africa today is more urbanised than India, and just below China

African returns to FDI were the highest in the world by 2007

Productivity growth was widespread and jumped to 2.7% p.a. across the continent


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Africa’s growth prospects


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|SOURCE: International Monetary Fund; Global Insight, McKinsey Global Institute

Africa’s economic growth accelerated after 2000, making it the world’s third-fastest growing region

African annual GDP, 2010 $ billion

Compound annual growth rate, %

839694461

2.41.9

4.2

2000

1,067

199019801970

Compound annual real GDP growth, 2000–10%,

1.5

World 2.6

LatinAmerica

3.1

Centraland EasternEurope

4.3

Developedeconomies

Africa 4.7

Middle East 4.7

EmergingAsia

7.21 654

1 5801 549

1 483

1 400

1 323

1 258

1 191

1 1441 108

5.5

4.9

2010e090807

5.6

060504030201

3.6

3.3


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Despite a steep fall in real GDP growth, Africa was one of only three regions to grow in 2009

SOURCE: Global Insight; McKinsey Global Institute analysis

-3.3

-2.5-2.2

-0.2

1.5

5.55.6

Developed markets

Latin AmericaWorldMiddle EastAfricaEast Asia-Pacific1

South Asia1

2009 real GDP growth%, constant exchange rates

1 Only developing and emerging countries


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Compound annual growth rate, %

Sector share of change in real GDP, 2002–07Percent, 100% = $235 billion1

Africa’s growth was widespread across sectors …

SOURCE: Global Insight; Arab Monetary Fund; African Development Bank; McKinsey Global Institute

6

2

2

5

5

6

6

9

10

12

13

24

Other services2

Utilities

Tourism

Real estate, business service

Construction

Public administration

Financial intermediation

Manufacturing

Transport, telecommunications

Agriculture

Wholesale and retail

Resources

1 In 2005 dollars. Includes 15 countries that account for 80 percent of Africa’s GDP: Algeria, Angola, Cameroon, Egypt, Ethiopia, Kenya, Libya, Morocco, Nigeria, Senegal, South Africa, Sudan, Tanzania, Tunisia, Zimbabwe

2 Education, Health, Social Services, Household Services

7.1

6.8

5.5

7.8

4.6

9.0

3.9

7.5

5.9

8.7

7.3

6.9

Sectors with higher growth than resources


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… and countries

SOURCE: WDI

Kenya4.4

1.9

Tunisia4.94.7

Sudan7.5

5.8

Angola13.1

0.8

Morocco5.1

4.4-0.1

Egypt4.84.3

Algeria4.1

1.7

Nigeria6.1

2.8

South Africa4.1

1.8

2.4

Libya

2000-081990s

5.30.7

Gabon2.21.7

Uganda7.56.8

Ghana5.5

4.3

Eq Guinea20.9

Senegal

Tanzania6.8

2.9

Cameroon3.6

1.4

Cote d Ivoire0.6

2.3

Ethiopia8.2

2.8

4.13.1

Zambia

19.7

9.12.3

Namibia4.84.2

Mauritius4.35.3

Mali5.6

4.0

Madag-ascar 3.7

B Faso

Mozam-bique 8.1

5.5

Congo3.9

1.4

DRC4.9

-5.6

Botswana4.0

6.2

5.55.3

Chad

1.7

Africa top 10 – 79% of GDP Africa 11-20 – 12% of GDP Africa 21-30 – 6% of GDP

Accelerators

Average annual real GDP growth, %

1 These economies represent 97% of Africa’s GDP


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Africa’s growth acceleration has been driven by the commodity boom, greater stability, economic reforms, and healthy urbanisation

▪ Resources account for 32% of Africa’s growth since 2000, 24% through the direct effect on resources GDP, and 8% through multipliers on government spending

▪ Governments reduced inflation from 22% (1990s) to 8% (2000s) and foreign debt from 82% to 59%.

▪ Serious conflicts1 fell from 4.8 to 2.6 per annum

▪ Widespread business-friendly reforms, including in Nigeria (telecomm, banking); South Africa (tax); and Egypt (liberalisation)

▪ 11 ‘Reforming’ countries accelerated growth by 3% vs. 1% for ‘non-reformers’

▪ African cities’ population grew by 90m since 2000 ▪ ‘Healthy’ urbanisation is associated with productivity growth across Africa, and

accounts for 30-50% of the productivity growth in Tanzania, Kenya and Morocco

The commodity boom

1

Macro and political stability

2

Economic reforms

3

‘Healthy’Urbanisation

4

1 Conflicts with more than 1,000 deaths per annumSOURCE: Team analysis


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1 Each business policy metric is measured along a variety of dimensions that are aggregated into an index for each metric. Improvements in each metric are measured as an increase in the index level

2 Reformers are defined as countries that improved along credit, labor and business regulations, and trade policy. The non-reformers have improved along only a subset of dimensions (14 countries) or none at all

3 Percentage points

SOURCE: Fraser Institute; World Bank World Development Indicators; McKinsey Global Institute

1.1

3.2

Non-reformers

Reformers

2.1 pp3

Acceleration in real GDP2, 2000-08 vs. 1990-2000Unweighted country average, %

16

Many countries enacted microeconomic reforms, and this was correlated with more rapid growth

Sample size

50

64

8284

Trade policyBusiness regulation

Labor market regulation

Credit regulation

Sample size

37 11 11 30 14

Share of African countries improving business policy metrics1

%


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|SOURCE: United Nations; McKinsey Global Institute

7060 55

2721 18

100% =

Urban

Rural

North America

349

82

Latin America

594

79

Europe

830

73

China

1 351

45

Africa

1 032

40

India

1 219

30

Cities with >1 million people

52 5210948 63 48

Africa is almost as urbanized as China and has as many cities of1 million people as Europe

Share of rural vs. urban population by region, 2010%, million


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|SOURCE: McKinsey

The global race for commodities

� Projected increases in world commodity demand, e.g., 2.3% p.a., for oil

� Africa is a cost-competitive location globally for sourcingmany minerals

Access to international capital

� Capital inflows into Africa are US$65 bn p.a., and now exceed remittances and aid

� Africa has the highest return to FDI of any region in the world

Seismic demographic shifts

� By 2020, half of African households will have discretionary spending power – an additional 45 million such households

� At 1.2 bn, Africa will have the world’s largest workforce by 2040, an expansion of over 500 million compared to today

African green Revolution

� Africa has 60% of world’s available arable land

� Many African countries below global benchmarks for yields

4 main structural trends support Africa’s long-term growth potential

Established trends

Possible trends


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Private capital flows to Africa have risen sharply since 2003

SOURCE: World Bank World Development Indicators; McKinsey Global Institute Capital Flows Database

-10

0

10

20

30

40

50

60

70

80

90

20080520009590851980

Capital inflows1

Remittances

Gross aid inflows

1 Capital inflows are defined as net foreign direct investment (FDI), equity, debt, and other flows into Africa from foreign investors.

African financial inflows$ billion


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0

2

4

6

8

10

12

14

16

18

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

The rate of return on foreign direct investment in Africa is higher than in other developing countries

1 The rate of return is calculated as direct investment income for the current year divided by the average of FDI stock of the previous year and the current year. The figures for 2007 rates of return are based on 39 countries in Africa, 33 in Latin America and the Caribbean, 11 in West Asia and 18 in Asia

SOURCE: United Nations Conference on Trade and Development; McKinsey Global Institute

Developing economies

Asia

Africa

Latin America

Middle East

Rates of return1 on inward foreign direct investmentPercent


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Share of households in each income bracket%, millions of households

By 2020, more than half of African households will have discretionary spending power

Consuming middle class(10,000–20,000)

Emerging consumers(5,000–10,000)

Household income brackets$ PPP1 2005

Globals (>20,000)

Basic consumer needs(2,000–5,000)

Destitute (<2,000)

SOURCE: Canback Global Income Distribution Database (C-GIDD); McKinsey Global Institute

Households with income >$5,000Million

59 85 128

Basic needs

Discretionaryincome

1 Purchasing power parity adjusts for price differences in identical goods across countries to reflect differences in purchasing power in each country.

3424

18

29

3229

1821

23

100% =

2020F

244

17

12

2008

196

14

8

2000

163

11

6


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Opportunities and challenges across countries


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Zambia

Uganda

Tunisia

Tanzania

Sudan

South Africa

Sierra Leone

Senegal

Rwanda

Nigeria

Namibia

Mozambique

Morocco

Mauritius

Mali

90

Libya

KenyaGhana

Gabon

Ethiopia

EquatorialGuinea

Egypt

Côte d’Ivoire

Congo, Rep.

DRC

Chad

Exports per capita, 2008, $

10000

1000

100

10

Economic diversificationManufacturing and service sector share of GDP, 2008, %

8070605040

Madagascar

3020 100

Cameroon

Botswana

Angola Algeria

Africa’s future growth prospects differacross four groups of countries

SOURCE: Organisation for Economic Co-operation and Development; World Bank World Development Indicators; McKinsey Global Institute

Diversified

Oil exporters

Transition

Pre-transition

Size of bubble proportional to GDP

NOTE: We include countries whose 2008 GDP is approximately $10 billion or greater, or whose real GDP growth rate exceeds 7% over 2000–08. We exclude 22 countries that account for 3% of African GDP in 2008

$500–1,000

$1,000–2,000

$2,000–5,000

>$5,000

<$500

GDP per capita


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Africa’s $2.6 trillion business opportunity


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Four groups of industries could have combined revenue of $2.6 trillion by 2020

SOURCE: McKinsey Global Institute

Estimated annual revenue, 2020$ billion

Compound annual growth rate, 2008–20%

Growth, 2008–20$ billion

1 Took 2030 value of $880 billion and calculated straight line equivalent for 2020.2 Represents investment. Assumes need remains as same share of GDP through 2020.

4%

2%

5%

9%

4%~980

520

110

220

130200

500

540

Total 2 620

Infrastructure

Agriculture

Resources

Consumer-facing

1 380


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While food will account for the largest share of consumer spending,non-food sectors will grow faster as incomes increase

SOURCE: World Bank World Development Indicators; Euromonitor; McKinsey Global Institute

Household spending 2008

Household spending growth, 2008–20

2008 $ billion

101

26

28

46

51

97

144

369

Telecom

Banking

Education

Other

Food and beverages

Housing

Health care

Non-foodconsumer goods

60

21

30

35

32

62

101

175

Total 861 515

Compound annual growth rate, 2008–20%

3.3

4.5

4.2

4.2

4.9

6.2

4.9

4.0

4.0


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Demand for agricultural production will surge through 2030…

SOURCE: Firm biomass model; FAOSTAT; UN population prospect; Unica, team analysis

Billion tons

▪ 2030 Low case –increase of total demand driven only by population growth

▪ 2030 High case–per capita food consumption and caloric intake aligned to European level; high biofuelexpansion

Scenario assumptions

3.3

0.6

Waste

Seed

Processing

Food

Biofuel

High case

Feed

6.0

3.1

Low case

9.4

14.8

0.3

2.5

4.6

1.4

1.00.2

1.20.20.4

0.6

3.5

2.0

0.1

2003

7.0

0.3

2.8% p.a.

1.1% p.a.

2030 demand scenarios


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Wheat

No. 2 hard red winter wheat, USA FOB Gulf, June/May

Rice

Milled, 100%, grade B, FOB Bangkok, August/July

Maize

No. 2 yellow corn, US FOB Gulf, September/August

… and long-term prices should increase over recent historical averages

SOURCE: OECD; FAO

168

2008 267

Avg’03–’07

2017 231

3,1% p.a.

2017 335

2008 391

Avg’03–’07

263 2,4% p.a.

165

Avg’03–’07

113

1852008

2017

3,9% p.a.

457

2008

2017

482

Avg’03–’07

293 4,5% p.a.Avg’03–’07

302

2008 216

2017

237 2,5% p.a.

2,073

2008 2,060

Avg’03–’07

1,833

2017

1,2% p.a.

Soy Sugar Beef

Weighted average oilseed price, European port

Raw world price, FOB Carribean port, bulk spot price

Nebraska choice steers, 1,100-1,300 lb live weight

USD per ton


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Note: IIASA (International Institute for Applied Systems Analysis); joint project on Land Resources together with the FAO1 Based on current yields and production for all countries, global average yields for maize and rice and best-in-class yields for cassava, sorghum and millet2 For all crop types; the optimal crop mix will differ by location3 Maximum climatically attainable yield

SOURCE: FAOSTAT 2007

Africa could become a worldwide player in agriculture as the sector is far from reaching its potential

Boosting yields, more land

1.3

Rice, paddy3.9

1.6

Maize4.5

1.2

10.9Cassava

7.0

0.8

14.4

6.1

Wheat2.7

Sweet potatoes

3.0

Yams

6.1

0.8

10.2

5.7

Millet

Sorghum1.3

0.9

Plantains

World average

SSA

Yield potential across major crops in SSAYield, Mt/ha

320

Housing andinfra-structure

1,320Not suitablefor cultivation

Total land

20

2,445

785

Closed forest or protected area

195

All types of potentially suitable land notunder cultivation

590

Land currently under cultivation

Land potentiallysuitable for cultivation2

135Very suitable (80-100%)

Suitable (60-80%)

Moderately suitable (40-60%)

Marginally suitable (20-40%)

590

225

140

90

Land availability and suitability in Sub-Saharan Africa

Land by degree of suitabilityMillion ha, % of maximum yield3

Land availability in Sub-Saharan AfricaMillion ha, 2008

ESTIMATES


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Africa represents about 60 percent of the potentially available cropland in the world

80

970

2009

590

300

Sub-SaharanAfrica

LatinAmerica

Others

216

38

45

49

53

53

66

72

Others

Tanzania

Central AfricanRepublic

Mozambique

DRC

Angola

Sudan

Zambia

75

31

39

155

Others

Venezuela

Argentina

Brazil

1 Cropland defined as land producing output greater than 40% of maximum yield under rain-fed conditions, excluding forest areas.

SOURCE: World Bank/Food and Agriculture Organization, Awakening Africa’s sleeping giant; McKinsey Global Institute

Additional available cropland, 20091

Million hectares


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Mechanization, tractors per 100 sq km1, 2007

Fertilizer use, kg/ha1, 2007

Poor government policies▪ Low government spending on agriculture (5% vs. 14%

Asia)▪ Limited spending on research and extension▪ Lack of strategy and coordination at a national level

Land fragmentation and ownership issues▪ Widespread of small farms of <5 ha on average (e.g.,

Uganda, Morocco) with subsistence farming▪ Difficult access to larger land pieces for investors (e.g.,

administrative hurdles, availability)

Low quality infrastructure▪ Very low road density, 40 times lower than India in 1970▪ Lack of adequate overall finance systems▪ Expensive access to agro inputs and to markets

Inappropriate seeds and inputs▪ 'Asian imported' varieties with low yields▪ Slow development of adapted varieties due to slow

dissemination▪ Risk of vulnerable monocultures (e.g., diseases)

258

131

16

9

1.712

USABrazil

1.901

SSA

1 Arable land

SOURCE: “Role of intermediate factor markets in Asia’s green revolution:Lessons for Africa?” Amer. J. Agr. Econ, 2003,85:3.

http://www.globalchange.umich.edu/webprojects/w01_africagr.htm, FAOStat, UN Millennium Project; Evenson and Gollin 2003

4 Root causes explain low input use and resulting low yields

…which result in large input gaps

African agriculture is facing 4 main obstacles


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The recent FDI wave in agriculture could be a potential catalyst for the African green revolution

SOURCE: The Economist; The Guardian; IFPRI

100,000–1m ha committed

>1m ha requested

>1m ha committed

Mali

Libya secured 100,000 ha for rice

RDC

▪ ZTE international (China) secured 2.8m ha for biofuel oil palm plantation

▪ 10m ha offered to South African farmers’ union

Zambia

China requested 2m ha for jatropha

Mozambique

Skebab (Sweden) and Sun Biofuel (U.K.) secured >100,000 ha for biofuels

Madagascar

Daewoo (South Korea) buying 1.3m ha for maize; deal now aborted

Sudan

▪ 690,000 ha to South Korea for wheat

▪ 378,000 ha to UAE▪ 25,000 ha to Jordan for

livestock and crops▪ 10,000 ha to Saudi

Arabia

Tanzania

▪ Saudi Arabia requested 500,000 ha

▪ CAMS Group and Sun biofuels (U.K.) secured 50,000 ha for sorghum, jatropha

EXAMPLES

Kenya

Qatar to lease 99,000 ha for fruit & vegetable production – port construction in exchange

Sudan

Jarch capital (U.S.) signed deal for 800,000 ha


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700

275

+14%

20072000

Vibrant private sector-led kick-started by FDI

Hands off support by the Government of Kenya

▪ Development of the sector kick-started by flagship FDI projects (e.g., Fresh del Monte for pineapple, Saupiquet for green peas) and Kenyan expatriates

▪ Know-how and business mindset now clearly anchored in the sector

– Strong investment in high-tech for production

– Close market monitoring and adaptation/anticipation of new market requirements and shift in consumer preference

▪ Integration along the value chain and strong linkages toimporting countries (e.g., direct relationship with retailing import-export offices abroad)

▪ Tight cooperation amongst players via the Fresh Producers Association (e.g., branding/ marketing)

▪ Government role limited to facilitation and providing public goods

– Facilitation of FDI installation and contract farming practices

– Setup of quality infrastructure (port/airport) and education (e.g., Kenyatta University of Agriculture and Technology)

– Enforcement of plant variety protection

▪ Private sector request for more of these interventions, esp. increase market access and funding some R&D effort

Development of sophisticated horticulture export

▪ Now 2nd export to tourismexport, USD m

▪ Highly sophisticated product: from bulk to high value Add

▪ Constant adaptation to market

– Private R&D effort for new variety

– Know-how developed

KENYA CASE STUDYIn Kenya the development of the horticulture sector has been private-led


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* 18 countries did not report

SOURCE: “The 10 Percent that could change Africa”, CAADP

Seven countries have reached the 10 percent target in five years*

A parading shift in Africa's approach to agriculture

▪ Launch of the Comprehensive Africa Agriculture Development Program (CAADP) in 2002

– An African-led initiative established by the New Partnership for Africa's Development (NEPAD) and the African Union

– Main goal is to focus on agriculture-based development

▪ Maputo declaration in 2003: African governments commitment to increase the share of public spending going to agriculture to at least 10%

– Public investment falling from 6,4% in 1980 to 4,5% in 2002

– Annual development assistance devoted to agricultural investments falling from 26% in the late 1980s to 4% currently

At least 10%From 5 to less than 10% Less than 5%

▪ Burkina Faso

▪ Cape Verde

▪ Chad

▪ Ethiopia

▪ Mali

▪ Malawi

▪ Niger

▪ Benin

▪ Equatorial Guinea

▪ Ghana

▪ Kenya

▪ Lesotho

▪ Madagascar

▪ Mozambique

▪ Senegal

▪ Sudan

▪ Gambia

▪ Tunisia

▪ Zimbabwe

▪ Algeria

▪ Botswana

▪ Burundi

▪ Cameroon

▪ Democratic Republic of Congo

▪ Egypt

▪ Gabon

▪ Liberia

▪ Mauritius

▪ Nigeria

▪ Rwanda

▪ Sierra Leone

▪ Tanzania

▪ Uganda

▪ Zambia

Governments have put increased emphasis on agriculture

Though many countries

did not reach the goal,

the numbers appear to be

getting better slowly


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Pesticide 7

Fertilizer 14

Horticulture 490

DownstreamMidstream

Equipment 7

Seed 7

Upstream

239

Grainprocessing

58

Biofuels 23

Cereals 138

Vegetable/fruitprocessing

66

868

Otherprocessing 60

35

Livestockprocessing 33

Livestock 112

Cash crops 129

Downstream agricultural processing offers a large business opportunityAfrica agriculture revenue potential, 2030USD billion

SOURCE: McKinsey Global Institute

0–5 percent

5–15 percent

15–20 percent

20+ percent

ESTIMATED OPERATING MARGIN


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The full report can be downloaded at:

McKinsey Global Institutewww.mckinsey.com/mgi

Thank you