There are signs that Africa could be on the verge of a new era of
economic growth and development. Growth from 2000 to 2010 averaged over
5 per cent per annum. Even while the financial crisis hammered the
economies of the West, average growth across the continent managed to
stay firmly in positive territory.
While this is an encouraging foundation, more needs to be done to deliver sustainable growth. To effectively reduce poverty, Africa must grow at an average of 7 per cent or more – not far short of China’s current (and slowing) growth rate. To achieve this, investment needs to be at around 25 per cent of GDP; over the last two decades, it has been closer to 18 per cent. Closing this gap must therefore be an imperative for policymakers.
In our recent report, Curve Balls: Global Political Risks in 2015 and beyond, we identified Africa’s weak financial system and the regional impact of Ebola as two challenges to the continent attracting the level investment needed to really get Africa motoring.
Taking the first of these, Africa’s underdeveloped financial system is undoubtedly an impediment to faster growth. While the US and Europe have seen what can happen when a financial sector gets too big, one that is too small is also problematic. Africa’s is small in
both absolute and relative terms compared to other regions.
A further issue is a lack of competition. The World Bank estimates that the average market share of the three largest banks in African countries is 73 per cent – compared to 60 per cent in the world as a whole. This concentration probably results in higher interest rates, costlier loans and arguably higher levels of risk aversion.
There are some reasons to be optimistic. Disruptive developments such as mobile payment systems and microfinance will prove crucially important in ensuring small businesses can get access to finance without having to rely entirely on traditional banks. But for larger companies there is no replacement for well-regulated, functional capital markets coupled to a competitive banking system that will allow expansion to be financed though loans and issuance of debt and equity.
Reliable, trustworthy savings and investment products will be an important part of the jigsaw, helping the emerging middle-class – the engine of economic growth – to provide capital for business while also sharing in the proceeds of economic growth through interest, dividends and capital appreciation.
Yet, while a developed financial sector is a necessary condition it is not sufficient. As we are all too aware, shocks can have a chilling effect on investment. The human tragedy of Ebola shows that while economies have become increasingly attractive to intra-regional and global investment, they are also vulnerable to its rapid withdrawal.
The United Nations Economic Commission for Africa (UNECA) predicts that, in 2015, Ebola will reduce total African GDP by 0.15 per cent. While this is small at the level of the whole continent, the effect in West Africa is significant, particularly in the ‘High Ebola’ countries of Sierra Leone, Liberia and Guinea. For Sierra Leone, 2014 growth projections were revised from a staggering 11.3 per cent to 4.0 per cent as a result of Ebola; in Liberia growth was revised down from 5.9 per cent to 2.2 per cent; and in Guinea from 4.5 per cent to 0.5 per cent. With investment in local businesses and infrastructure falling, it will take time for these countries to recover. Recession is on its way and investor perceptions of the affected countries will limit investment when the situation improves.
Fortunately, Nigeria and Senegal are now Ebola-free and, due to a rapid response, Mali’s rate of infection remains low and in control. The fact that Nigeria, the largest economy in Africa, is Ebola-free is important. Nigeria’s GDP of $594.26bn dwarfs its regional neighbours – some may say it is ‘too big to fail’. Nonetheless, Ebola has not gone away and Governments and medical workers must remain vigilant.
Despite the challenges, we are optimistic for the future. While many have focussed on the clear shift of the economic centre of gravity to the East, there is colossal economic potential in Africa that can be unlocked too. An innovative, well-functioning financial system will help make this a reality. Economic growth and increased prosperity will help African countries tackle the challenges they face and make them more resilient to shocks. In Africa, there is a clear opportunity for the finance industry to prove its social value. It should be grabbed with both hands.
While this is an encouraging foundation, more needs to be done to deliver sustainable growth. To effectively reduce poverty, Africa must grow at an average of 7 per cent or more – not far short of China’s current (and slowing) growth rate. To achieve this, investment needs to be at around 25 per cent of GDP; over the last two decades, it has been closer to 18 per cent. Closing this gap must therefore be an imperative for policymakers.
In our recent report, Curve Balls: Global Political Risks in 2015 and beyond, we identified Africa’s weak financial system and the regional impact of Ebola as two challenges to the continent attracting the level investment needed to really get Africa motoring.
Taking the first of these, Africa’s underdeveloped financial system is undoubtedly an impediment to faster growth. While the US and Europe have seen what can happen when a financial sector gets too big, one that is too small is also problematic. Africa’s is small in
both absolute and relative terms compared to other regions.
A further issue is a lack of competition. The World Bank estimates that the average market share of the three largest banks in African countries is 73 per cent – compared to 60 per cent in the world as a whole. This concentration probably results in higher interest rates, costlier loans and arguably higher levels of risk aversion.
There are some reasons to be optimistic. Disruptive developments such as mobile payment systems and microfinance will prove crucially important in ensuring small businesses can get access to finance without having to rely entirely on traditional banks. But for larger companies there is no replacement for well-regulated, functional capital markets coupled to a competitive banking system that will allow expansion to be financed though loans and issuance of debt and equity.
Reliable, trustworthy savings and investment products will be an important part of the jigsaw, helping the emerging middle-class – the engine of economic growth – to provide capital for business while also sharing in the proceeds of economic growth through interest, dividends and capital appreciation.
Yet, while a developed financial sector is a necessary condition it is not sufficient. As we are all too aware, shocks can have a chilling effect on investment. The human tragedy of Ebola shows that while economies have become increasingly attractive to intra-regional and global investment, they are also vulnerable to its rapid withdrawal.
The United Nations Economic Commission for Africa (UNECA) predicts that, in 2015, Ebola will reduce total African GDP by 0.15 per cent. While this is small at the level of the whole continent, the effect in West Africa is significant, particularly in the ‘High Ebola’ countries of Sierra Leone, Liberia and Guinea. For Sierra Leone, 2014 growth projections were revised from a staggering 11.3 per cent to 4.0 per cent as a result of Ebola; in Liberia growth was revised down from 5.9 per cent to 2.2 per cent; and in Guinea from 4.5 per cent to 0.5 per cent. With investment in local businesses and infrastructure falling, it will take time for these countries to recover. Recession is on its way and investor perceptions of the affected countries will limit investment when the situation improves.
Fortunately, Nigeria and Senegal are now Ebola-free and, due to a rapid response, Mali’s rate of infection remains low and in control. The fact that Nigeria, the largest economy in Africa, is Ebola-free is important. Nigeria’s GDP of $594.26bn dwarfs its regional neighbours – some may say it is ‘too big to fail’. Nonetheless, Ebola has not gone away and Governments and medical workers must remain vigilant.
Despite the challenges, we are optimistic for the future. While many have focussed on the clear shift of the economic centre of gravity to the East, there is colossal economic potential in Africa that can be unlocked too. An innovative, well-functioning financial system will help make this a reality. Economic growth and increased prosperity will help African countries tackle the challenges they face and make them more resilient to shocks. In Africa, there is a clear opportunity for the finance industry to prove its social value. It should be grabbed with both hands.
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