Where to invest in AfricA - RMB · While Africa’s prevailing macroeconomic quandary can be ascribed to the past shortcomings of its resource-based economies, its future prospects

Where to invest in AfricA

2016 | 2017 edition

A guide to corporate investment

Authors: Celeste Fauconnier, Nema Ramkhelawan-Bhana, and Neville Mandimika

Data analyst: Claudell van Aswegen

BRMB Global Markets |RMB Global Markets |

foreWord

Best-selling author Ifeanyi Enoch Onuoha said that to fulfil your vision, you must have hindsight, insight and foresight. In that spirit, our theme for this edition is Back to the Future as we evaluate Africa’s past progress, present predisposition and future prospects.

A few years ago, Africa was hailed as a thriving investment frontier, boasting economic growth rates of above 7%. But global events paired with endogenous shocks have led to uneven rates of growth, altering perceptions and forcing us to take stock of where Africa is and what the future holds.

Faced with a mountain of challenges, both new entrants and seasoned investors alike are questioning whether Africa is indeed rising.

The short answer is yes, Africa is still primed for growth but its rate of expansion will remain slow as countries realign their long-term development strategies to take into account present realities.

To address investors’ concerns, we plot the investment potential of African economies using RMB’s Investment Attractiveness rankings — which balances economic activity against the relative ease of doing business. Our workings are complemented by a number of highly-regarded global surveys as well as an in-house study which captures the experiences of Rand Merchant Bank’s clients in Africa.

We find that, despite a challenging macroeconomic backdrop, investment opportunities are plentiful but require meticulous planning and fortitude.

Governments are gradually coming to the realisation that diversification is necessary to foster meaningful growth. But transformation cannot be achieved in isolation. Structural reformation and greater private sector participation are crucial to unlocking Africa’s potential. Our analysis of sectoral developments — specifically in the spheres of finance, infrastructure, resources and retail — strongly support this point of view.

The essence of RMB’s brand campaign “Thinking. Pulling. Together.” promotes a path to collective strength and success in Africa. At RMB, our unique and empowering culture creates an environment where smart people collaborate and architect solutions for our clients. We believe that great minds don’t think alike, but when different minds think together we can navigate through any conditions.

We trust that this year’s edition will reaffirm the belief that the continent still holds considerable value and look forward to working alongside you as you chart your course through Africa’s vast investment terrain.

Regards,

celeste fauconnier, nema ramkhelawan-Bhana and neville Mandimika

Africa Analysts Rand Merchant Bank

RMB is proud to present the sixth edition of

Where to Invest in Africa — A Guide to Corporate Investment.

1RMB Global Markets |

CONTENTS

chAPter 1 Overview 3

chAPter 2 Market activity 18

chAPter 3 Operating environment 33

chAPter 4 Finance 50

chAPter 5 Infrastructure 69

chAPter 6 Resources 79

chAPter 7 Retail 93

chAPter 8 Country snapshots 119

chAPter 9 Appendices 147

chAPter 10 Contact details and disclaimer 221


OvERvIEW

“The present defines the future. The future builds on the foundation of the past”

– Lailah Gifty Akita

chAPter 1


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TuRNING OF ThE TIDE

Africa is still rising, though not at the feverish pace that once captured international news headlines. Much of the optimism surrounding the hopeful continent was rooted in its ability to stave off global macroeconomic forces and grow from within. But, in many cases, home-grown development strategies have failed to generate self-sustaining growth, rendering selected economies vulnerable to exogenous shocks.

Arguably, the tapering of Africa’s economic growth rates between 2010 and 2015 were in line with global trends (Figure 1.1). But the deceleration in the continent’s GDP growth has been more pronounced in the last two years. Countries that were believed to be on solid footing buckled under the pressure of flailing resource prices, security disruptions, fiscal imprudence and adverse weather conditions.

figure 1.1: comparison of real GdP growth rates

Advanced economies Latam and the Caribbean

EM and developing economies SSA

Emerging and developing Asia North Africa

Emerging and developing Europe World

Source: IMF

While Africa’s prevailing macroeconomic quandary can be ascribed to the past shortcomings of its resource-based economies, its future prospects are bright if the better part of the continent commits to consistent structural reforms.

Although perceptions have been altered by recent events, investors still believe there are treasure troves of opportunities waiting to be unearthed across the continent. Seventy-five per cent of respondents to RMB’s survey on business experiences in Africai said that they were already invested in Africa and plan to invest even further (Figure 1.2).

When asked to name the most eye-catching investment destinations on the continent, answers varied, reflecting the vastness of the investment terrain.

Figure 1.1: Comparison of real GDP growth rates

%

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1980-1990 1990-2000 2000-2010 2010-2016 2016-2021

Advanced economiesEM and developing economiesEmerging and developing AsiaEmerging and developing Europe

Source: IMF

Latam and the CaribbeanSSANorth AfricaWorld

i RMB’s Global Markets Africa Survey was carried out in June 2016.


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figure 1.2: description of businesses’ investment plans with regards to Africa

We are already invested in Africa and plan to invest even more

We are already invested in Africa and do not plan to invest more

We are not invested in Africa but plan to invest

We are not invested in Africa but do not plan to invest

Source: RMB Global Markets

RMB’s Investment Attractiveness Index provides a means with which to discern the most appealing of these destinations by overlaying macroeconomic fundamentals with the practicalities of doing business on the continent. Our methodology, which is detailed in the Appendices, is simple but encapsulates what we perceive to be the most important elements underpinning investment: economic activity (expressed as a weighted average of market size and forecasted levels of GDP growth) and the operating environment.

Rather than evaluating the continent at a point in time, we sought to highlight its structural evolution by mapping its progress over the last decade. In each of the subsequent chapters we compare current realities to past occurrences to better understand the aspects that will shape future events.

Figure 1.2: Description of businesses’ investment plans with regards to Africa

75%

15%

6%

4%

We are already invested in Africa and plan to invest even moreWe are already invested in Africa but do not plan to invest more

We are not invested in Africa but plan to investWe are not invested in Africa and do not plan to invest



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Figure 1.3: RMB’s top ten most attractive investment destinations in Africa (where 1 = best)

20162015


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TOP TEN — ThE MORE ThINGS ChANGE ThE MORE ThEy STAy ThE SAME

The face of our top ten is remarkably similar to last year, reminding us that the more things change the more they stay the same (Figure 1.3). however, there is one noticeable difference — Côte d’Ivoire re-enters the fold after a 13-year hiatus, squeezing Tunisia out of the top ten.

figure 1.3: rMB’s ten most attractive investment destinations in Africa (rank, where 1 = best)

2016

2015


• SouthAfrica continues to stand firm at number one but risks losing its coveted spot in the next few years as a faltering growth outlook and uncertain business environment slowly eats away at its investment score. Despite a stream of negative news, the country remains a bastion of institutional integrity and continues to boast one of the best operating environments in Africa.

• Egyptcould unseat South Africa as the leading investment destination in Africa if it succeeds in consolidating the economic gains accumulated in the aftermath of the Arab Spring. however, the country’s operating environment could be an inhibiting factor considering that it lags South Africa in all aspects of governance (Figure 1.4).

The face of our top ten is remarkably similar to last year, with one noticeable difference – Côte d’Ivoire enters the fold.


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figure 1.4: Aspects of governance (where 2.5 = strong; -2.5 = weak)

South Africa

Egypt

Source: World Bank

• Moroccois hot on the heels of its North African peer, holding steady at number three for a second consecutive year, buoyed by solid economic growth, favourable geographic positioning, sturdy infrastructure, strong regulatory policies and a stable political setting.

• Ghanaremains within a whisker of the top three, brandishing the title as the most attractive investment destination in West Africa. Despite a myriad of economic challenges, the country labours on as it slowly rebuilds confidence in its processes and policies under the watchful eye of the IMF.

• Kenyahas seized fifth spot. It is an exceptionally worthy recipient which has steadily progressed up the ranks, surpassing both Ethiopia and Tanzania. Investors are attracted by Kenya’s relatively diverse economy, pro-market policies and brisk growth in consumer spending.

• Nigeria slips to number six, a position it last held in 2011, weighed down by a dismal economic growth outlook and weak operating environment. Despite its many challenges, the West African giant is still regarded as a viable long-term investment destination but will be forced to endure painful structural adjustments over the next few years to safeguard its prospects.

• Ethiopia might well surpass Nigeria in 2017 as scores of foreign investors seek to benefit from the country’s young and vibrant population, low unit labour costs and thriving manufacturing sector. Notwithstanding the regulatory challenges in establishing operations locally, the opportunity to participate in this budding economy cannot be overlooked.

• Côted’Ivoire — the unsung hero of West Africa — debuts at number eight. After years of political paralysis, the world’s top cocoa producer has earned its place in the sun, supported by a booming economy, an emerging middle class, robust infrastructure development and an improved business environment.

• having flirted with the top ten for many years, Tanzania holds steady at number nine, barely nudging out Algeria and Tunisia. The new political dispensation’s focus on industrialisation and enhanced productivity is encouraging, though protectionist tendencies could undermine the government’s pro-business rhetoric.

• Algeria slides two spots to number ten. high reserves and low debt levels have helped to cushion the blow of low oil prices, but there is a desperate need to implement reforms to diversify the economy away from the hydrocarbon sector.

Performances outside of the top ten do not go unnoticed. Notable advancements in the rankings include Senegal (up five spots to 17), Cameroon (three spots to 20), Togo (three spots to 35), Swaziland (four spots to 36) and Sierra Leone (four spots to 38).

Figure 1.4: Aspects of governance (where 2.5 = strong; -2.5 = weak)

South AfricaEgypt

Source: World Bank

-1.0

-1.5

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Voice and accountability

Political stability and absence of violence/

terrorism

Government effectiveness

Regulatory quality

Rule of law Control of corruption


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table 1.1: comparison of the most attractive destinations in Africa

InvestmentAttractivenessIndex

2016rank1 2015rank Country 2016score 2015score Whathasimproved?2 Whathasdeteriorated?2

1 1 South Africa 6.27 6.54

2 2 Egypt 6.21 6.23

3 3 Morocco 6.04 6.18

4 4 Ghana 5.71 5.92

5 10 Kenya 5.68 5.43 Operating environment

6 5 Nigeria 5.67 5.89 Economic activity

7 6 Ethiopia 5.63 5.67

8 15 Côte d'Ivoire 5.57 5.15 Operating environment

9 9 Tanzania 5.54 5.49

10 8 Algeria 5.50 5.59

11 7 Tunisia 5.50 5.65

12 11 Rwanda 5.43 5.36

13 13 Botswana 5.42 5.24 Economic activity

14 14 Mauritius 5.33 5.20 Economic activity Operating environment

15 16 uganda 5.22 4.89 Operating environment

16 12 Zambia 5.20 5.31 Economic activity

17 22 Senegal 5.01 4.54 Economic activity

18 18 Namibia 4.88 4.83 Operating environment

19 17 Mozambique 4.79 4.85 Operating environment

20 23 Cameroon 4.55 4.50

21 20 Libya 4.54 4.63

22 24 Burkina Faso 4.48 4.26

23 19 Angola 4.46 4.67 Economic activity

24 26 Mali 4.45 4.14

25 21 Gabon 4.28 4.61 Operating environment

26 25 Madagascar 4.23 4.19

27 28 Benin 4.17 3.92

28 27 DRC 4.03 4.12

29 31 Niger 3.92 3.76

30 29 Cabo verde 3.85 3.77

31 30 Seychelles 3.83 3.76 Operating environment

32 33 Sudan 3.81 3.73 33 35 Malawi 3.79 3.63 Economic activity and

operating environment 34 32 Lesotho 3.68 3.76 Economic activity and

operating environment 35 38 Togo 3.60 3.51 Operating environment

36 40 Swaziland 3.57 3.42 Operating environment

37 39 Guinea 3.56 3.50 Operating environment

38 42 Sierra Leone 3.54 3.33 Economic activity

39 46 Zimbabwe 3.51 3.24

40 41 Djibouti 3.39 3.41

41 45 Liberia 3.37 3.25

42 34 Chad 3.37 3.67 Economic activity

43 37 Mauritania 3.30 3.54 Operating environment Economic activity

44 44 Burundi 3.27 3.26

45 36 Gambia 3.09 3.57

46 47 São Tomé and Príncipe 3.09 2.99

47 43 Congo 3.02 3.29 48 49 Eritrea 2.94 2.54 Economic activity and

operating environment

49 52 Guinea-Bissau 2.61 2.34

50 48 CAR 2.61 2.57

51 51 Comoros 2.60 2.49 52 50 South Sudan 2.32 2.54 53 53 Equatorial Guinea 2.21 2.26

Note: 1. Green depicts improvement, red depicts deterioration. 2. An improvement or deterioration is noted when the change in a country’s economic activity and operating environment scores both exceed or fall short of the sample’s standard deviations. A blank cell implies that either one or both of the indicators did not meet the criteria. 3. Somalia lacked sufficient data to be rated.



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TOP TWENTy — NOW AND ThEN

By contrasting the scores of Africa’s most attractive investment destinations for 2016 with their relative positions in 2006 and 2011, we can single out Africa’s underachievers and outperformers (Figure 1.5).

Seven countries registered weaker investment scores. The differences are negligible for Nigeria, Tanzania and Algeria but obvious in the case of Cameroon, which deteriorated markedly between 2011 and 2016. Despite a persistent weakening in its score, South Africa continues to hold its own as the most attractive investment destination in Africa, buttressed by strong governance relative to its African peers.

Ten of this year’s top 20 have registered a more than 0.5 percentage point (ppt) improvement in their scores over the last decade. Côte d’Ivoire and Rwanda’s scores stand out, having improved by more than 2ppt while Zambia and Senegal’s metrics experienced a more than 1ppt rise.

figure 1.5: relative performance of the top 20 most attractive investment destinations at specific intervals1

2006

2011

2016

Note: 1. Dark green boxes highlight a tangible deterioration, while the light green boxes represent an appreciable improvement.


Figure 1.5: Relative performance of the top 20 most attractive investment destinations at specific intervals1

200620112016

Note:1. Dark green boxes highlight a tangible deterioration, while the light green boxes represent an appreciable improvement


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figure 1.6: Africa through the sands of time


Changes in global rankings

Our global investment attractiveness scores for 191 jurisdictions allow us to measure Africa’s relative performance. Africa is still at the lower end of the global spectrum. A large proportion of African countries are still ranked between 120 and 191 despite positive developments in a number of investment destinations in recent years (Figure 1.7). South Africa, the only African country to have featured in the top 40 in 2006, has dropped to 45, surpassed by a number of emerging economies in East Asia and Latin America.

figure 1.7: number of African countries ranked within each global bucket1

Note: 1. The sum of the buckets in 2006 and 2016 are less than 54 as Somalia is not ranked in either year and South Sudan only gained independence in 2011.


Figure 1.6: Africa through the sands of time

Ten countries have gained between five and ten places while seven countries have jumped more than ten spots between 2006 and 2016

Côte d’Ivoire and Zambia, which were ranked 35 and 38 respectively in 2006, now feature prominently within our top 16

Seven countries have slipped more than ten places. Cameroon descended from number two in 2006 to 20 in 2016

Libya remains the lowest ranked country in North Africa

Nigeria has swung between second and sixth position in the last ten years. Barring the period between 1997 and 2002, it has always placed in the top ten

Senegal features in the top 20 for the first time in more than two decades

North and East African economies have been well represented in the top 20 since 2006

Southern African economies have struggled to keep pace with their East African counterparts

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Figure 1.7: Number of African countries ranked within each global bucket1

2006

1 – 40

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40 – 80 80 – 120 120 – 160 160 – 200

9 18 16

2016

Note1. The sum of the buckets in 2006 and 2016 are less than 54 as Somalia is not ranked in either year and South Sudan only gained its independence in 2011.

1 – 40

0

40 – 80 80 – 120 120 – 160 160 – 200

10 11 21 11

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Source: RMB Global Markets10RMB Global Markets |

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SIDEBAR 1.1: RISKy BuSINESS — ThE RELATIvE IMPORTANCE OF CREDIT RISK

We have long held that our investment attractiveness scorings are neither an indication of a country’s creditworthiness nor RMB’s willingness to extend credit for investment purposes into a particular jurisdiction.

While our primary scorings are similar to sovereign credit ratings, in that they provide investors with insight into the level of risk associated with investing in a particular country, our methodology is more attuned to the practicalities of doing business. It is apparent from our in-house survey that the nature of a country’s operating environment is a greater determinant in shaping a firm’s decision on whether to invest than a country’s credit rating (Figure 1.8). Only one respondent in the services sector singled it out as a primary driver, while less than 7% identified it as a more important factor than the ease of doing business.

figure 1.8: factors important in determining where to invest


We have compared our investment attractiveness scores with those implied by sovereign ratings to understand the nuances between the two.

Figure 1.8: Factors important in determining where to invest


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Macroeconomic andpolitical stability

Economic growth Ease of doing business Size of the economy(in US dollar terms)

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While our primary scorings are similar to sovereign credit ratings, our methodology is more attuned to the practicalities of doing business.


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Filling in the gaps

To date, only 27 African economies have obtained sovereign credit ratings, limiting the extent to which they can be used for comparative purposes. however, literature suggests that a handful of well-defined macroeconomic variables capture a large portion of the information that is used in assigning a country-specific rating. using a blend of indicators, we have formulated a model that extrapolates scores for African economies that have not been officially assessedi.

Our model implies speculative grade investment scores for 46 African economies. Thirty-six of these are rated in the ‘B’ category, which broadly tallies with the assessments of S&P, Moody’s and Fitch as at June 2016 (Figure 1.9).

figure 1.9: the number of African sovereigns per credit ratings buckets (actual versus implied)1

Actual

Implied

Note: 1. Actual sovereign credit ratings as at June 2016.

Source: IMF, EIu, S&P, Fitch, Moody’s, RMB Global Markets

Five economies (Guinea, Eritrea, Guinea-Bissau, South Sudan and Zimbabwe) have implied scores between 17 and 20, implying ratings of between CCC and D by S&P and Fitch or Caa2 and C by Moody’s. South Sudan and Zimbabwe fall within the C ratings bucket, reflecting the poorest credit quality.

Of our ten most attractive destinations in Africa, Tanzania is the only economy that has not attained a formal ratingii. It has traditionally relied on non-concessional loans, but plans are underway to issue a sovereign bond once a rating has been assigned. The country stands to benefit from robust GDP growth and single-digit inflation, yet is plagued by corruption, an escalating debt-to-GDP ratio and a widening current account deficit, which points to a ‘B+’ rating, on par with Côte d’Ivoire, Gabon, Kenya, Lesotho, Nigeria and Rwanda.

Figure 1.9: The number of African sovereigns per credit ratings buckets (actual versus implied)1

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Note:1. Actual sovereign credit ratings as at June 2016

Source: IMF, EIU, S&P, Fitch, Moody’s, RMB Global Markets

ActualImplied

Investment grade Sub-investment grade

i For further information on the working of the model, please refer to https://grid.rmb.co.za. ii Algeria is formally rated as BB by the EIu.


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Facing off

When juxtaposed against credit ratings, our investment attractiveness scores reveal an interesting truth. The capacity to repay sovereign or corporate debt subtracts very little from a country’s overall investment attractiveness (Figure 1.10) as structural measures can be adopted to minimise the risk.

figure 1.10: investment attractiveness scores versus implied credit ratings scores (where 1 = best)

Investment attractiveness score

Implied credit ratings score


Figure 1.10: Investment attractiveness scores versus implied credit ratings scores (where 1 = best)


Investment attractiveness scoreImplied credit ratings score

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The capacity to repay sovereign or corporate debt subtracts very little from a country’s overall investment attractiveness.


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FOREIGN DIRECT INvESTMENT TRENDS — A TRICKLE RAThER ThAN A TORRENT

Africa’s 2015 FDI profile somewhat mimicked its performance in 2010. In both years, the continent attracted roughly uS$55bn in inflows and accounted for 3.1% of global flows (Figure 1.11).

figure 1.11: fdi inflows

Above uS$3bn

uS$2bn to uS$2.9bn

uS$1bn to uS$1.9bn

uS$0.5bn to uS$0.9bn

Below uS$0.5bn

Source: uNCTAD, RMB Global Markets

inflows

Notwithstanding a similarly-sized pool of funds in 2010 and 2015, the regional distribution of inflows differed markedly (Figure 1.12). Prior to the Arab spring, North Africa accounted for almost one third of the continent’s inflows, while in 2015, the greatest proportion of monies was channelled into Southern Africa. Whereas East Africa captured a modest percentage of flows at the turn of the decade, it was virtually on par with West Africa in 2015.

Despite uninspiring levels of FDI growth in 2015, Africa continued to magnetise more investment than South and West Asia, Oceania and economies in transition. Liberalisation measures and planned privatisations of state-owned enterprises should induce modest gains in 2016, though global interests are likely to be depressed owing to muted levels of economic growth in many parts of the world.

Figure 1.11: FDI inflows

Above US$3bnUS$2bn to US$2.9bnUS$1bn to US$1.9bnUS$0.5bn to US$0.9bnBelow US$0.5bn

Africa attracted US$55bn in inflows in 2010, 9% lower than the previous year, amounting to 3.1% of global FDI

Africa attracted US$54bn in inflows in 2015, 7.2% lower than the previous year, amounting to 3.1% of global FDI

2010 2015

Source: UNCTAD, RMB Global Markets


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outflows

Africa’s investments abroad grew substantially between 2010 and 2014 but tapered in 2015 – South African, Nigerian and Angolan investors shrunk their investment portfolios abroad owing to weak commodity prices, anaemic demand from primary trading partners and currency weakness.

Over the years, Southern Africa, and more specifically South Africa, has assumed the role as the continent’s principal investor among its regional peers. A sizeable reduction in South Africa and Angola’s offshore investments resulted in a 70% decline in total outflows in 2015.

figure 1.12: fdi flows per region

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East Africa

West Africa

Southern Africa

Central Africa

Source: IMF

Figure 1.12: FDI flows per region

FDI outflowsFDI inflows

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Pinpointing primary destinations — country trends

Angola, Egypt, Mozambique, Ghana and Morocco accounted for the lion’s share of FDI inflows in 2015 (Figure 1.13).

figure 1.13: top five recipients of fdi in 2015


Figure 1.14: Top five recipients of FDI in 2015

After several years of negative flows, Angola returned to the top spot in 2015, attracting a record of US$8.7bn in inflows. This seems rather counterintuitive in the context of lower oil prices, a weaker currency and rampant inflation. However, the nature of the investment was largely skewed toward loans provided to local affiliates by their foreign parents. This should not detract from the greenfield investment in energy-related infrastructure, such as Puma Energy’s conventional buoy mooring system in Luanda Bay.

The expansion of foreign affiliates in the financial and pharmaceutical industries as well as substantial injections into telecommunica-tions and the gas industry underpinned Egypt’s 49% y/y increase in FDI.

Despite a dramatic slowdown in the rate of growth in FDI, owing to low gas prices, election-related uncertainties and a sizeable disinvestment by Anglo American, Mozambique was the third largest recipient of funds last year.

Intra-African FDI proved to be Mozambique’s saving grace, with multinational organisations such as Sasol expanding their activities.

As the second largest cocoa exporter in Africa, Ghana is a breeding ground for foreign investment in agriculture. Elevated cocoa prices incentiv-ised FDI which totalled US$3.2bn in 2015.

Perceived as the Mediterranean’s gateway to Africa, Morocco continues to draw considerable FDI. It was one of six countries to attract more than US$3bn in inflows last year, with sizeable investments in its robust manufac-turing and real estate sectors.

MOROCCOANGOLA EGYPT MOZAMBIQUE GHANA



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Chief investors honing in on Africa

In keeping with historical trends, developed markets led investment flows in Africa in 2015. The uK outshone the uS and France, registering a total FDI stock of uS$66bn (Figure 1.14). Emerging markets are acquiring an eye for African investments. Five of the continent’s top ten investors in 2015 hailed from emerging economies, with China’s investments more than doubling since 2009.

figure 1.14: top ten investors by fdi stock in 2015


uNCTAD believes that North and East Africa will present the highest number of investment opportunities in 2016. Greenfield project announcements suggest that infrastructure (i.e. electricity, gas and water, construction, and transport) will attract a large proportion of FDI followed by manufacturing industries.

Figure 1.13: Top ten investors by FDI stock in 2015

1. UKUS$66bn

2. USUS$64bn

3. FranceUS$52bn

4. ChinaUS$32bn

5. SAUS$26bn

6. ItalyUS$19bn

7. SingaporeUS$17bn

8. IndiaUS$15bn

9. MalaysiaUS$14bn

10. GermanyUS$13bn



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MARKET ACTIvITy

The narrative on Africa is changing from one of unbridled optimism to sobering realism as the continent navigates its way through stormy global waters.

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Africa’s near-term economic growth outlook is littered with risks but the continent will bear fruit to those willing to take a long-term view.

FROM uNBRIDLED OPTIMISM TO SOBERING REALISM

An uneven recovery in commodity prices, stricter financing conditions and adverse weather patterns have forced many economies to reassess their structural underpinnings. Faced with rapidly depleting fiscal and foreign exchange reserves, constrained international financing and an understanding that resource prices could remain lower for longer, commodity exporters are at pains to initiate timely and coordinated policy responses to ensure quick, durable and more inclusive levels of growth. The International Monetary Fund (IMF) believes that fiscal consolidation, improved domestic revenue mobilisation, careful public investment and sharper governance are necessary preconditions to prevent disorderly adjustments.

however, the slow upturn in commodity prices is as much a boon as it is a burden to Africa. A host of non-resource reliant economies, particularly in East Africa, are primed for growth on account of a strengthening in their respective terms of trade. This has allowed policymakers to focus their efforts on enacting polices that will cushion their economies from a sudden worsening in the economic climate.

In this chapter, we get the true measure of the continent by plotting its economic evolution from two distinct points of view: market size and forecasted levels of GDP growth. Together, these indicators form the basis of our economic activity variable that accounts for 50% of our total attractiveness score. Given that Africa missed a number of the Millennium Development Goals (MDGs), we question whether the continent’s growth story still holds water by assessing the degree of its structural transformation.

We find that though Africa’s near-term growth outlook is littered with risks, the continent will bear fruit to those willing to take a long-term view on its ability to adapt to changing circumstances.


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MARKET SIZE — ThAT’S ABOuT ThE SIZE OF IT

figure 2.1: Africa’s many shapes and sizes

Source: IMF, RMB Global Markets

Figure 2.1: Africa’s many shapes and sizes

Africa’s giantsSum of Africa’s parts (number of countries per bucket)

2011US$3.1 trillion

2016US$6.0 trillion

US$1,000bn + 0 2US$500bn – US$1,000bn 2 2US$200bn – US$500bn 2 1US$100bn – US$200bn 3 7US$50bn – US$100bn 5 6US$30bn – US$50bn 4 9US$10bn – US$30bn 19 14US$0bn – US$10bn 19 13

2011 2016

% of Africa’s total market size

Morocco

Algeria

South Africa

Egypt

Nigeria

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Africa’s total market size has almost doubled in a space of five years

2016US$6.0 trillion

2014US$4.0 trillion

2011US$3.1 trillion


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At uS$6.1 trillion, Africa’s combined GDP (measured in uS$ PPP terms) is almost 20% greater than that of emerging and developing Europe and accounts for 5.1% of the world’s GDP. The continent’s share of the global pie has increased by 1.8ppt since 2011, accentuating its commercial vibrancy despite a slowdown in growth in recent years.

Almost 60% of Africa’s GDP is generated by Nigeria, Egypt, South Africa and Algeria. In 2011, South Africa was considered as the largest economy on the continent. It relinquished that title to Nigeria in 2012, following the rebasing of the oil producer’s GDP which occasioned an almost doubling of its market size. Rather than taking up second spot, South Africa slipped to third owing to expeditious growth in Egypt’s nominal GDP. At uS$735bn, it remains a formidable player on the continent, boasting a more developed and diverse economy than its North and West African peers. however, it risks being usurped by Algeria which doubled the size of its economy in a matter of five years. The periodic rebasing of countries’ national accounts could result in a reordering of Africa’s economic hierarchy over the next few years. World Economics asserts a number of changes in the pecking order if several countries update their base years to 2013: Egypt could drive Nigeria into second place, Sudan would likely streak past Angola, while Tanzania could just pip Kenya as East Africa’s biggest economy.

By 2011 only three African countries, other than the continental giants, boasted economies greater than uS$100bn. This number has more than doubled, with 12 economies now valued at more than uS$100bn.

ECONOMIC GROWTh — quICK, quICK, SLOW

In 2011, the IMF anticipated that sub-Saharan Africa (SSA) would grow at an average of 5.4% for the next five years (Figure 2.2).

figure 2.2: iMf’s 2011 baseline projections for ssA growth vs. actual GdP growth

Actual

Expected

Source: IMF

Figure 2.2: IMF's 2011 baseline projections for SSA growth vs. actual GDP growth

Source: IMF

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Actual growth rates differed by an average of 0.9ppt from the IMF’s baseline projections, with the most pronounced deviations in 2012 and 2015 (Figure 2.3).

figure 2.3: Actual vs. forecasted levels of ssA growth since 20111

Actual c. 2014

c. 2011 c. 2015

c. 2012 c. 2016

c. 2013

Note: 1. ‘c’ denotes estimates of baseline projections for the current year and five periods thereafter.


Between 2012 and 2014, the IMF revised its growth forecasts for each year in question (i.e. its estimate for time t in period t) lower by an average of 0.85ppt. In 2015, it pared back its annual forecast by 1.9ppt and followed suit in April 2016 by lowering its baseline projection for the year by 1.3ppt.

While the near-term outlook for SSA is shrouded in uncertainty, medium-term prospects remain favourable, with an estimated return to 5% growth by 2021. however, the IMF has consistently overestimated GDP growth, suggesting that the region might grow at a slower pace than anticipated.

Actualc.2011c.2012c.2013

Figure 2.3: Actual vs. forecasted levels of growth since 20111

Note:1. ´c`. denotes estimates of baseline projections for the current year and five periods thereafter


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table 2.1: regional tops and tails

Region

Averageforecastedgrowthrate

(%, 2016-2021) Affiliate

Actualgrowthrate

(%, 2010-2015)

Averageforecastedgrowthrate

(%, 2016-2021) Top/tail

North Africa 4.9 Libya 10.6 9.0 TopAlgeria 3.7 2.9 Tail

West Africa 5.3 Côte d'Ivoire 6.2 7.4 TopEquatorial Guinea -2.0 -1.8 Tail

East Africa 5.6 Ethiopia 7.1 7.3 TopEritrea 2.8 3.6 Tail

Central Africa 4.0 DRC 6.8 5.7 TopCongo 5.8 2.5 Tail

Southern Africa 4.8 Mozambique 7.5 13.5 TopSwaziland 1.3 1.2 Tail


Although East Africa’s market size pales in comparison to its western counterparts, it is pegged to grow at a faster pace (5.6%) between 2016 and 2021, maintaining the speed with which it grew in the preceding five years. Despite West Africa’s concentration of oil-laden economies, the region is likely to grow at a respectable rate of 5.3%, supported by countries with favourable business environments and diversified growth propositions.

Individual prospects — no two countries are alike

Economic growth prospects differ markedly across the continent (Figure 2.4). Although fewer countries are anticipated to grow at more than 7% between 2016 and 2021 (compared to the last six years), almost half of the continent will surpass the regional average of 5%. When asked what represents an attractive rate of economic growth for your business in the current macroeconomic environment, 40% of respondents to RMB’s survey answered between 5% and 7%.

Mozambique and Libya remain at the forefront of economic expansion (Table 2.1), registering real GDP growth of 7.5% and 10.6% respectively between 2010 and 2015. however, Mozambique’s debt troubles are likely to impact the IMF’s long-term forecasts. Drought, coupled with a staggering decline in investment, is likely to steer real GDP growth for 2016 to roughly 4% — its lowest level in 23 years. Long-term prospects, particularly with regard to liquefied natural gas (LNG), are unlikely to be as robust unless the government commits to transparency and becomes more amenable to IMF policies. Other agencies like the Economist Intelligence unit (EIu) and Business Monitor International (BMI) do not subscribe to the IMF’s sanguine view of double-digit growth in Libya (refer to Table A4 in the Appendices). Consensus forecasts are more aligned to lower levels of crude oil production, security disruptions and delays to reconstruction works.


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figure 2.4: Actual vs. forecasted levels of growth (six-year average)

No data

< 2% growth

2% - 3% growth

3% - 4% growth

4% - 5% growth

5% - 6% growth

6% - 7% growth

> 7% growth


Figure 2.4: Actual vs. forecasted levels of growth (six-year average)

2010 – 2015 2016 – 2021

No data< 2% growth2% - 3% growth3% - 4% growth4% - 5% growth5% - 6% growth6% - 7% growth< 7% growth


Fewer countries are anticipated to grow at more than 7% between 2016 and 2021 compared to the last six years.


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Does Africa’s growth story still hold water?

On the face of it, it would appear that Africa failed to meet all the MDGs set out by the united Nations (uN) in 2000, calling into question its ability to engender all-inclusive growth. however, there are a number of extenuating circumstances.

table 2.2: Africa’s Millennium development Goals performance at a glance

Goals Status Remarks

Goal1: Eradicate extreme poverty and hunger

Off track • Poverty in SSA declined from 56.5% in 1990 to 48.4% in 2010 and in North Africa from 5% to1%.

• Poverty is perpetuated by rising inequalities, unemployment, the youth bulge, unplanned urbanisation, lack of diversification, etc.

• hunger declined by 8% in SSA between 1990 and 2013.

• SSA is the most food-deficient of all regions of the world, with 25% of its population facing hunger and malnutrition in 2011 – 2013.

Goal2: Achieve universal primary education

On track • In 2012, over 68% of African countries had a net enrolment rate of at least 75% in primary education.

• Average primary completion rate stands at 67%.

• The youth literacy rate reached 70% in 2012, in part owing to increased access to universal primary education.

Goal3: Promote gender equality and empower women

On track • Gender Parity Index in primary education increased from 0.82 to 0.96 in North Africa and from 0.83 to 0.92 in SSA between 1990 and 2012.

• Gender barriers manifest themselves in low transition rates between education levels.

• Africa has made the most progress in increasing the number of seats held by women in national parliaments, with an average increase of 15% between 2000 and 2014.

Goal4: Reduce child mortality

Off track • The under-five mortality rate fell by 55% between 1990 and 2012, while the infant mortality rate fell by 40%.

• But only Egypt, Liberia, Malawi and Tunisia have achieved both targets on reducing child mortality.

Goal5: Improve maternal health

Off track • By 2013, Africa had 289 maternal deaths per 100,000 live births, compared to the world average of 210.

Goal6: Combat hIv/AIDS, malaria and other diseases

On track • A downward trend is observed in the incidence, prevalence and death rates associated with hIv/AIDS, malaria and tuberculosis, especially since 2000.

Goal7: Ensure environmental sustainability

Off track • Declining forest cover in Africa.

• Consumption of ozone-depleting substances declined by 94% between 1986 and 2012.

• Increasing proportion of terrestrial and marine areas protected.

• In 2012, only 64% of the population in SSA used an improved drinking water source.

• The proportion of people with access to improved sanitation between 1990 and 2012 increased only moderately in SSA (from 24% to 30%) compared to North Africa (from 72% to 91%).

Source: uNDP


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In 2007, the Brookings Institution argued that the MDGs were poorly and arbitrarily designed to measure progress against poverty and depravation which cast Africa in a poor light relative to other developing countries. In a paper on how the MDGs are unfair to Africa, the institution contended that the primary goals, which were applied uniformly at a global level without consideration for regional or country-specific nuances, were largely unattainable because of the manner in which they were formulated.

In January 2016, the uN launched its development strategy for the next 15 years. The 17 Sustainable Development Goals (Agenda 2030) provide a framework for green industrialisation. unlike the MDGs, Agenda 2030 is underpinned by three dimensions of sustainable development: economic, environmental and social. Africa’s proactive engagement with the uN ensured that the continent’s priorities are more evenly reflected in the document, which should encourage member states to adopt and integrate the Agenda within national development frameworks. however, implementation will be staggered as economies are at different stages of structural transformation — which refers to the redeployment of resources across broad sectors of African economies.

It is contended that the primary MDGs, which were applied uniformly, were largely unattainable because of the manner in which they were formulated.


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SIDEBAR 2.1: EARNING DEMOGRAPhIC DIvIDENDS

Africa’s demographic transition has been slow but progress is tangible. After a period of measured decline, fertility rates (specifically in SSA) have ostensibly stalled, resulting in upward revisions to population estimates. This indicates that greater resources will be required to improve the economic well-being, human capital and social resilience among a youthful and rapidly-growing population.

The IMF estimates that Africa’s share of the global working age population will rise from 12.6% in 2010 to over 41% by 2100. Overwhelming changes in Africa’s population structure could have a profound influence on its economic performance and redefine its role in the global economy.

Lest we forget that a demographic transition in several Asian countries helped shape the “Asian Miracle” in the 1990s. Asia honed in on human (education and health) and physical capital. By focussing on labour-intensive export-led growth, it created employment opportunities to support the transition to sectors with higher total factor productivity which allowed it to take advantage of its budding labour force.

A rapid transformation in Africa’s age structure paired with a decline in dependency ratios can yield demographic dividends for the continent. With prudent policies, economies could reap the benefits of the dividend by fostering healthy, educated and empowered labour forces that contribute meaningfully to sustained economic growth.

Africa is arguably starting off from a lower base relative to its global counterparts and the pace of transition is somewhat slower — roughly three generations compared to one elsewhere across the world. North America and Europe underwent their first demographic transitions following the world wars, while Asia, Oceania and Latin America experienced considerable changes in their working age populations from the 1970s. Africa’s earliest recorded gains are in the 1980s, though individual experiences vary in terms of when countries began their transitions and where they stand relative to their peak. The IMF has done considerable work in measuring the pace of demographic change in SSA and categorises economies into five groups based on the decade in which their transition began (Figure 2.5).

A rapid transformation in Africa’s age structure paired with a decline in dependency ratios can yield demographic dividends for the continent.


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figure 2.5: evolution of shares of working age population (sWAP) in ssA1,2

Note: 1. The decade refers to the period when the country started the transition. Numbers in brackets represent the group’s population and its share of the sample’s total of 819.6 million in 2010. 2. a) The base of the rectangle shows the SWAP at the beginning of the transition. The transition is still in its infancy in cases where the rectangle is small. b) The top of the rectangle shows the country’s SWAP in 2012. c) The end of the line shows the SWAP for a country at its peak.

Source: IMF

• Egypt, South Africa, Botswana, Cabo verde and Seychelles constitute the first grouping. Each is near completion owing to rapid declines in their respective mortality and fertility rates which have increased the share of their working age populations by nearly 20ppt.

• The majority of the countries (29 out of 46), representing nearly 70% of the continent’s population in 2010, set about on the transition between 1981 and 2000 but are only a quarter way through the process. The IMF does not expect these economies to reach their peak before 2050.

• Five countries, which constituted 11% of Africa’s population in 2010, embarked on the transition only after 2000.

According to the Africa Finance Corporation (AFC), Africa requires policies that accelerate a reduction in child mortality and help couples to achieve a smaller family size to reap a large demographic dividend in the near term.

Broadening access to education is also critical to improving productivity of workers and supporting a transition to higher valued-added sectors. The IMF finds that a structural transformation involving a movement away from agriculture is conducive to harnessing the demographic dividend. Policies that remove impediments to private sector development and enable labour-intensive manufacturing will ensure that Africa’s resources are used more effectively.

Figure 2.5: Evolution of shares of working age population (SWAP) in SSA 1,2

0.75

0.7

0.65

(a) SWAP at the beginning of transition (b) SWAP in 2012

0.6

0.55

0.5

0.45

The role of industrialisation in Africa’s structural transformation

Formal productive employment is crucial to structural transformation. however, a large percentage of the continent’s workforce is unemployed or contracted to the informal sector to perform less productive activities.

twin problems of unemployment and underemployment

The united Eco-Action Fund (uNECO) contends that “Africa is plagued by the twin problems of unemployment and underemploymenti, mutually reinforcing and exacerbating widespread informality in countries”. The International Labour Organisation (ILO) purported that Mauritania (31%), Reunion (28.5 %), Lesotho (26.5%) and Gabon (20.3%) suffered the highest levels of unemployment in 2012. Women were subject to substantially higher unemployment rates than men in Algeria, Egypt, Ethiopia, Gambia, Libya, Namibia and Tunisia partly due to differences in accessing labour markets (Figure 2.6). underemployment is taking root in African labour markets because of structural barriers that hinder labour to flow to the areas where it is most needed. According to the African Development Bank (AfDB), only one in four youths will find a wage job over the next decade, and only a small fraction of those jobs will be formal in modern enterprises.

figure 2.6: Unemployment rate by gender (2012)1

Female

Male

Note: 1. Data for 2014 does not provide a large sample of African countries.

Source: uNECO, ILO

i A situation in which a worker is employed but not in a desired capacity in terms of compensation, hours, or level of skill and experience.

Figure 2.6: Unemployment rate by gender (2012)1

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Structural transformation, and by implication industrialisation, should provide the means with which to absorb Africa’s youth bulge through the creation of productive employment opportunities in selected parts of the value chain. In the past, industrialisation meant that a country had to develop the domestic capacity to perform all the major steps in manufacturing a product. Globalisation has altered international production networks, affording African economies the opportunity to embed themselves at precisely the right point in global trade chains.

dearth of manufacturing activities is an impediment to structural change

Africa’s speed of industrialisation has been hobbled by a host of factors: widespread Dutch Disease, weak infrastructure and vast geographical distances from high-value markets. This limits the continent’s participation in phenomenon such as the flying-geese development paradigm in south-east Asia (i.e. the movement of manufactured goods from more advanced to the less advanced countries).

Africa has suffered a sustained decline in manufacturing activities as a percentage of GDP. Its emphasis on resources has limited the extent of growth in manufacturing production and exports across the continent. This is apparent when observing the share of manufacturing to GDP (Figure 2.7). For more than half the continent, manufacturing contributes less than 10% to GDP.

figure 2.7: Manufacturing as a percentage of GdP (2014)

Source: World Bank

There are exceptions of course: Ethiopia’s manufacturing sector has grown, on average, by more than 10% per year since 2014 (albeit from a very low base), partly because it has courted foreign investors. Tanzania has also recorded meaningful gains, resulting in the development of a megaport and industrial park to accommodate 7.5% y/y growth in local production.

According to McKinsey & Company, low wage countries like Ethiopia, Kenya, Senegal and uganda have the potential to grow their manufacturing sectors by 6.6% annually over the next four years, while diversified economies with more developed manufacturing sectors, like Egypt, Morocco and South Africa, should achieve annual manufacturing growth rates of 4.3% over the next decade.

Outside of these beacons of hope, progress is limited, constraining the movement of labour to productive sectors of the economy. Governments are charged with providing the necessary infrastructure and incentives to promote industrialisation and empower regulatory bodies to enforce development strategies.

Figure 2.7: Manufacturing as a percentage of GDP (2014)

Source: World Bank

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SEEING ThINGS A LITTLE DIFFERENTLy — ALTERNATIvE RANKING PRIORITISING MARKET ACTIvITy

To assess the importance of economic activity to a country’s overall investment attractiveness, we amended our principal formula by assigning a larger weighting to the output variable. The most pronounced changes within the top ten are Ghana and Côte d’Ivoire’s descent to numbers seven and ten. South Africa and Kenya drop one spot each while Morocco and Tanzania remain unchanged (Table 2.3).

Nigeria’s overall attractiveness score improves on account of its mammoth economic size, but it continues to trail South Africa and Egypt due to its poor operating environment. Egypt snatches the number one spot from South Africa, emphasising the importance of sustained levels of economic growth to a country’s investment attractiveness.

Smaller economies like Cabo verde, Seychelles and Swaziland are relegated due to their marginal economic sizes.


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table 2.3: Alternative investment ranking prioritising economic activity

Ranking Scoring

Country Alternative Core Change Alternative Core

Egypt 1 2 1 6.6 6.2South Africa 2 1 -1 6.4 6.5Morocco 3 3 0 6.2 6.2Nigeria 4 6 2 6.1 5.9Ethiopia 5 7 2 6.0 5.7Kenya 6 5 -1 5.9 5.4Ghana 7 4 -3 5.8 5.9Algeria 8 10 2 5.8 5.6Tanzania 9 9 0 5.8 5.5Côte d'Ivoire 10 8 -2 5.8 5.1Tunisia 11 11 0 5.5 5.7uganda 12 15 3 5.4 4.9Rwanda 13 12 -1 5.3 5.4Zambia 14 16 2 5.2 5.3Botswana 15 13 -2 5.2 5.2Senegal 16 17 1 5.1 4.5Mauritius 17 14 -3 5.0 5.2Libya 18 21 3 5.0 4.6Mozambique 19 19 0 5.0 4.8Angola 20 23 3 4.8 4.7Namibia 21 18 -3 4.8 4.8Cameroon 22 20 -2 4.8 4.5Burkina Faso 23 22 -1 4.5 4.3Mali 24 24 0 4.5 4.1DRC 25 28 3 4.4 4.1Madagascar 26 26 0 4.3 4.2Gabon 27 25 -2 4.3 4.6Sudan 28 32 4 4.3 3.7Benin 29 27 -2 4.2 3.9Niger 30 29 -1 4.0 3.8Malawi 31 33 2 3.8 3.6Togo 32 35 3 3.6 3.5Guinea 33 37 4 3.6 3.5Cabo verde 34 30 -4 3.6 3.8Zimbabwe 35 39 4 3.6 3.2Sierra Leone 36 38 2 3.5 3.3Seychelles 37 31 -6 3.5 3.8Lesotho 38 34 -4 3.5 3.8Chad 39 42 3 3.5 3.7Djibouti 40 40 0 3.4 3.4Liberia 41 41 0 3.3 3.3Swaziland 42 36 -6 3.3 3.4Mauritania 43 43 0 3.3 3.5Burundi 44 44 0 3.2 3.3Congo 45 47 2 3.1 3.3Gambia 46 45 -1 3.0 3.6São Tomé and Príncipe 47 46 -1 3.0 3.0Eritrea 48 48 0 2.9 2.5CAR 49 50 1 2.7 2.6Guinea-Bissau 50 49 -1 2.6 2.3South Sudan 51 52 1 2.6 2.5Comoros 52 51 -1 2.5 2.5Equatorial Guinea 53 53 0 2.2 2.3



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OPERATING ENvIRONMENT

The fall in resource prices and the normalisation of uS monetary policy have led to increased investor scrutiny of emerging and frontier market risks, exposing the urgent need to prioritise competitiveness-enhancing business environment reforms in Africa.

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SLuGGISh IMPROvEMENT IN DOING BuSINESS

Africa’s operating environment continues to lag behind other regions despite improving on average since 2006 (Figure 3.1). This trend is not expected to change anytime soon — the level of improvement in productivity, institutions, infrastructure and human capital has been very slow in most countries, and any advancement in these fields will take time to produce results. The fall in resource prices and the normalisation of uS monetary policy have led to increased investor scrutiny of emerging market risk, exposing the urgent need to prioritise competitiveness-enhancing business environment reforms.

figure 3.1: Africa’s operating environment progress compared to other regions (score, where 10 = best)

Developing economies Emerging Latam

Emerging Asia Africa

Emerging Europe and Middle East World


Changes in our Operating Environment scores

Since the inception of RMB’s Where to Invest in Africa rankings in 2011, we have used a composite Operating Environment Index to assess the continent’s business environment. It combines four main independent global assessments on operational issues: The World Bank’s Doing Business Report; Transparency International’s Corruption Perceptions Index; the heritage Foundation’s Index of Economic Freedom; and the World Economic Forum’s (WEF) Global Competitiveness Report. Our selection of surveys is based on their prominence, wide coverage, and lengthy time series. These four reports combine both objective and subjective assessments of the operating environment across a wide variety of areas.

By looking back at Africa’s performance, we will be able to see if countries have actually made some improvement or are still lagging behind. The top five most attractive business environments in 2006 were (in order): Botswana, South Africa, Mauritius, Namibia and Tunisia. This has changed to Mauritius, Botswana, Rwanda, South Africa and Seychelles in 2016.

Figure 3.1: Africa’s operating environment progress compared to other regions (score, where 10 = best)


Developed economiesEmerging AsiaEmerging Europe and Middle East

Emerging LatamAfricaWorld

2

4

6

8

10

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016


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table 3.1: operating environment rankings and the change over the past decade (where a score of

10 is the best)1

2016 2006

Score Rank Score Rank

Mauritius 6.86 1 6.28 3Botswana 6.40 2 6.56 1Rwanda 6.15 3 3.12 33South Africa 5.76 4 6.45 2Seychelles 5.56 5 4.64 9Namibia 5.46 6 5.97 4Morocco 5.44 7 4.38 13Tunisia 5.32 8 5.70 5Cabo verde 5.17 9 2.30 47Swaziland 5.10 10 5.02 7Ghana 5.03 11 4.42 11Zambia 5.02 12 4.39 12Lesotho 4.68 13 4.32 14Kenya 4.52 14 4.71 8Egypt 4.38 15 3.76 24Senegal 4.36 16 3.38 29Côte d'Ivoire 4.33 17 2.87 40uganda 4.30 18 4.47 10Burkina Faso 4.18 19 3.47 27Tanzania 4.15 20 3.82 21Mali 4.13 21 3.38 30Benin 4.09 22 3.82 22Gabon 4.05 23 3.72 25Ethiopia 4.02 24 4.12 16Mozambique 3.99 25 3.67 26Algeria 3.91 26 4.24 15Malawi 3.84 27 4.10 17Madagascar 3.75 28 3.81 23São Tomé and Príncipe 3.70 29 - 52Sierra Leone 3.68 30 2.54 44Nigeria 3.59 31 3.92 19Cameroon 3.57 32 5.08 6Liberia 3.56 33 2.20 48Togo 3.55 34 2.97 37Gambia 3.51 35 3.90 20Mauritania 3.51 36 3.94 18Burundi 3.48 37 2.97 38Niger 3.46 38 2.65 43Djibouti 3.32 39 3.29 32Guinea 3.29 40 3.39 28Comoros 3.23 41 1.95 49Zimbabwe 3.17 42 3.10 34Eritrea 3.04 43 1.50 50Chad 2.85 44 2.72 41Angola 2.79 45 2.50 45Guinea-Bissau 2.49 46 2.38 46Congo 2.42 47 3.34 31Equatorial Guinea 2.42 48 2.69 42CAR 2.38 49 3.08 35DRC 2.37 50 3.06 36Libya 2.21 51 2.91 39Sudan 1.40 52 1.45 51South Sudan 0.80 53 - 53

Note: 1. Somalia is not rated due to a lack of data.

Source: RMB Global Markets35RMB Global Markets |

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Twenty-one out of the 53 countries’ operating environments have deteriorated over the past decade. The countries that improved and deteriorated the most over the past ten years are illustrated in Figure 3.2, and the reasons for these moves are highlighted in Table 3.2.

figure 3.2: evolution from 2006, highlighting the best and worst performers (score between 0 and 10)

Good (6.5 to 7.5) Most deteriorated Most improved

Moderately good (5.5 to 6.5)

Average (4.5 to 5.5) Cameroon Rwanda

Poor (3.5 to 4.5) Congo Cabo verde

very poor (0 to 3.5) CAR Eritrea

Libya Côte d’Ivoire

Source: World Bank, WEF, heritage Foundation, Transparency International, RMB Global Markets

2006 2011 2016

Figure 3.2: Evolution from 2006, highlighting the best and worst performers (Score between 0 and 10)

Source: World Bank, WEF, Heritage Foundation, Transparency International, RMB Global Markets

Good (6.5 to 7.5)Moderately good (5.5 to 6.5)Average (4.5 to 5.5)Poor (3.5 to 4.5)Very poor (0 to 3.5)

Most deteriorated

CameroonCongoCARLibya

Most improved

RwandaCabo VerdeEritreaCôte d’Ivoire

Twenty-one out of the 53 countries’ operating environments have deteriorated over the past decade.


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table 3.2: improvement and deterioration in business environments

Mostimproved Reasons Mostdeteriorated Reasons

Rwanda • Remarkable development successes, which have helped reduce poverty and inequality.

• Strong institutions.

• Significant improvement in labour market efficiency and getting credit (financial market efficiency).

Cameroon • Although still a relatively competitive economy in West Africa, there are certain areas of its business environment that have deteriorated.

• There has been a slowdown in infrastructure development.

• hardly any improvement in education.

• Progress is hampered by persistent problems with corruption.

CaboVerde • Major strides in improving institutions, technological readiness and higher education.

• health and primary education relatively strong compared to other SSA nations.

Congo • Press freedom is becoming more constrained.

• Potential deterioration in political stability.

• Deterioration in government effectiveness and electricity supply.

Eritrea • Comes from a very low base and still a very difficult business environment.

• however, progress seen in terms of control of public spending, labour freedom and monetary freedom, offsetting a small decline in freedom from corruption.

• Several state-owned companies have been privatised in recent years.

CAR • Severe political instability, especially in 2013.

• Alarming deterioration in humanitarian situation.

• Increased trade costs due to being landlocked. Low investment to GDP.

Côted’Ivoire • Significant increase in political stability.

• Improvements seen in many areas like government efficiency and rule of law.

• Fully open to foreign investment.

Libya • Centralised control of government spending and a significant rise in corruption.

• Rudimentary financial markets.

• Government instability is the most problematic factor for doing business.

• Decline in basic requirements like institutions.

• Rise of Islamist militancy.

Source: RMB Global Markets, WEF, World Bank, EIu


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TOP PERFORMERS IN 2016

Mauritius remains Africa’s most attractive business environment. It boasts well-developed infrastructure, the most healthy and educated workforce, the most efficient goods market and strong institutions. The island economy is followed by Botswana and Rwanda, also known as ‘moderately good’ business environments. South Africa just fell short of being classified in the same category — Africa’s most competitive economy (according to WEF) has experienced a slow but steady deterioration in its operating environment. Business leaders want the government to address its inefficient electricity supply and, most importantly, the inflexible labour market. health and the quality of education also remain worrisome. But South Africa still leads the continent in vital areas like financial markets, transport infrastructure and strong institutions. Seychelles has overtaken Ghana since 2015, taking up fifth position as Ghana’s progress has slowed due to significant fiscal indiscipline.

Mauritius remains Africa’s most attractive business environment. It boasts well-developed infrastructure, the most healthy and educated workforce, the most efficient goods market and strong institutions.


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SIDEBAR 3.1: A STRONG uPSWING IN ThE BuSINESS ENvIRONMENT — CôTE d’IvOIRE

Côte d’Ivoire has been identified as one of the most improved business environments on the continent in the past decade. Strong private investment growth in areas such as agriculture, agribusiness, mining, light manufacturing, housing and services has been spurred by the government’s pro- business reforms.

• It is one of the most open countries to foreign equity ownership in Africa, while all of its business sectors are fully open to foreign investment.

• The West African CFA franc (XOF) is linked to the euro at a fixed exchange rate and unlimited convertibility to the euro is guaranteed. CFA members have agreed to apply exchange control regulations modelled on those of France, and transfers within the CFA zone are not restricted.

• Dividends out of revenue and capital on disinvestment may be remitted.

• With the exception of electricity transmission, there are no other sectors with monopolistic or oligopolistic market structures nor are there any perceived difficulties in obtaining any required operating licences.

Recent reforms have improved the business environment in areas such as:

• Business creation

• Property registration

• Access to credit

• Protection of minority investors

Source: skyscrapercity.com, getty.com


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Côte d’Ivoire is certainly on many firms’ radars, especially after the country made a remarkable economic recovery since the end of the post-electoral crisis in 2011. Furthermore, the holding of a peaceful presidential election in October 2015 has strengthened political stability. This has helped the number of business start-ups and private investments to increase significantly, and has drawn the African Development Bank (AfDB) headquarters back to its shores. Now, major businesses are interested in establishing regional offices in Abidjan.

Of course the country does not come without its challenges, these include:

• Low infrastructure development

• Shortage of skilled workers

• Insufficient and unreliable market data

• Limited use of English

• uncertainty of legal protection

• high corruption

• high poverty levels

Côte d’Ivoire has been identified as one of the most improved business environments on the continent in the past decade.


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MOST PROBLEMATIC FACTORS FOR DOING BuSINESS — STATuS quO NO DIFFERENT TO A FEW yEARS AGO

figure 3.3: the most problematic factors for doing business in Africa

2015

2010

Source: WEF

It comes as no surprise that the WEF highlighted access to financing, inadequate infrastructure and corruption as the top three major business impediments for five years running. Similarly, in our in-house survey, almost half of the respondents emphasised access to financing as the most problematic factor for doing business on the continent. Thirty percent of participants chose government bureaucracy, followed by corruption and then the infrastructure deficit.

3. Infrastructure

Efficient infrastructure is critical for ensuring the effective functioning of an economy. high-quality roads, railroads, ports, and air transport enable the smooth flow of goods and services; sufficient electricity supply allows business to produce goods without interruption; and telecommunication makes the sharing of important information possible. We have seen a large amount of FDI flows focussing on these specific projects is Africa, which has complimented the growth story for the continent. But, it is well known that infrastructure development remains painstakingly slow and keeps the continent from achieving potential growth. This is discussed more fully in Chapter 5.

Figure 3.3: The most problematic factors for doing business in Africa

Source: WEF

20152010

0 5 10 15 20

Poor public health

Government instability/coups

Restrictive labour regulations

Crime and theft

Foreign currency regulations

Policy instability

Inflation

Poor work ethic in national labour force

Inadequatly educated workforce

Tax rates

Tax regulations

Inefficient government bureaucracy

Inadequate supply of infrastructure

Corruption

Access to financing

% of respondents

1

2

3


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2. Corruption

According to Transparency International, poor countries across the world lose around uS$1 trillion a year to corruption, with Africa losing the bulk of this number. Somalia remains the most corrupt country in Africa, and in the world. Sudan, South Sudan, Angola and Libya follow at its heels. Botswana is perceived as the least corrupt in Africa, sitting at 28th in the world, followed by Cabo verde, Seychelles, Rwanda, Mauritius and Namibia.

Albeit at a slow pace, 35 out of the 54 African countries have made an improvement in their Corruption Perception Index scoring over the past decade (Figure 3.4). Six countries’ scorings remained the same, while a staggering 13 have deteriorated. The biggest progress over the past decade was seen in Cabo verde, while the country which weakened the most was Cameroon. The high level of power concentrated in the executive branch, lack of judicial capacity, and widespread poverty are some of the factors that have made corruption — in the form of bribery, extortion, tax evasion and electoral manipulation — so rampant.

figure 3.4: corruption Perception index (cPi) – winners and losers between 2005 and 2015

Improved

unchanged

Deteriorated

Source: Transparency International, RMB Global Markets

1. Access to financing

The repatriation of hard currency has been Africa’s Achilles heel for many years. In our previous editions, we have delved into the main reasons for this problem, including exchange controls, pricing and liquidity. Liquidity, in particular, was the main culprit of many firms’ repatriation woes in 2015/2016. And the problem will certainly remain over the medium term. The reasons can be tracked back to Chapter 2, where we highlight that commodity prices are not expected to increase significantly over the medium term, while most countries still battle with dual deficits.

The lack of consistent uS dollar inflows has led to new foreign exchange restrictions designed to shield the currency, making it increasingly difficult for investors and business owners to repatriate capital or pay for imports. In some instances, hard currencies are being used exclusively to facilitate priority transactions. The severity of these actions has differed across jurisdictions.

Figure 3.4: Corruption Perception Index (CPI) – winners and losers between 2005 and 2015

Source: Transparency International, RMB Global Markets

ImprovedUnchangedDeteriorated


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TRANSFERABILITy AND CONvERTIBILITy RISKS IN AFRICA

Where are we seeing the issues?

The regions where FirstRand Bank has operations and could encounter liquidity and currency challenges are West Africa (Nigeria and Ghana), East Africa (Tanzania and Kenya) and Southern Africa (Zambia, Mozambique and Angola). All these countries in one way or another run managed floating exchange rate regimes, meaning that their central banks could intervene in their foreign exchange markets to support the currencies.

Africa’s continued resource dependence is what leads us to believe that liquidity will remain a significant issue over the next two years as export revenues remain low. See Table 3.3 for more details on the liquidity situation in selected African countries as at June 2016.

table 3.3: drivers of and risks to liquidity in Africa

Defactocurrencyclassification

Existenceofinformalmarket

Differentialbetweenformalandinformalexchangerate(June2016)

Depreciationoflocalcurrencybetween1Q14and2Q16

DifficultiesinconvertinglocalcurrencytoUSdollars

PrimaryoriginofUSdollarinflows

Changeinprimaryrevenueearnersbetween1Q14and2Q16

PrimarysourceofUSdollardemand

Actualreservecoverage(monthsofimportcover) Exchangecontrols

Angola heavily managed float. yes 324% 70% Contingent on adequate liquidity accruing from the sale of oil exports. More onerous during periods of severe market stress, reflected in the active depletion of international reserves and sharp depreciation. This was apparent in 2009 and 2014 following a substantial drop in the oil price.

Merchandise exports (crude oil).

Oil: 55% drop. Merchandise imports (machinery, marine vessels, electrical equipment and articles of iron and steel), payment of services (freight transport, construction) and income on equity and investment fund shares.

8.30 Operators that require local currency in order to make payments for goods and services to Angolan residents must sell their foreign currency to the central bank (BNA). This obligation also applies to investors that conduct petroleum exploration activities in Angola. Other investors can sell the foreign currency required to make local currency payments to residents to Angolan commercial banks. The exchange rate applied for the sale of foreign currency to the BNA shall be the BNA’s primary market purchase rate. Operators must inform the BNA before the 28th day of each month of the expected amount of funds which they require during the subsequent month to cover the costs of their oil and gas related activities. In terms of Angola’s Law on Private Investment, foreign investors can be theoretically guaranteed the repatriation of profits and dividends arising in Angola after certain conditio

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Where to invest in AfricA - RMB · While Africa’s prevailing macroeconomic quandary can be ascribed to the past shortcomings of its resource-based economies, its future prospects