Could Sub-Saharan Africa Be the Next China?

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  • 1. Weekly Commentary QNB Economics economics@qnb.com.qa January 19, 2014 Could Sub-Saharan Africa Be the Next China? Sub-Saharan Africa (SSA) continues its rapid growth momentum. According to the latest QNB Group estimates, the subcontinent grew by 5.0% in 2013 and is expected to reach 6.0%6.5% this year on the back of high investment spending and a growing middle class. This makes it the second fastest economic growth performance in the world and begs the question: could SSA be the next China? According to QNB Group, strong infrastructure investment and continued prudent macroeconomic policies will be essential if the African subcontinent is to achieve double-digit growth and reach emerging market status. down into single digits. More importantly, this has enabled millions of Africans to escape poverty and reach middle class status. Real GDP Growth (% change) 1980-1994 1995-2013 Ethiopia Mozambique Rwanda Tanzania The economic renaissance of the African subcontinent started in the mid-1990s. Following years of corruption and economic mismanagement, a new generation of African leaders started on the difficult path of structural reforms with support from the International Monetary Fund (IMF) and the World Bank. This required bringing inflation under control, increasing tax collections, reducing wasteful subsidies, and redirecting government spending toward long-term investments in human capital, like education and health. At the same time, the international community granted most SSA countries generous debt relief that enabled them to exit from an unsustainable debt burden accumulated during the 1970s and 1980s. The results of this economic renaissance have been remarkable. From stagnation and high inflation in the 1980s, several African countries have managed to grow rapidly for the last two decades under moderate inflation. Countries like Ethiopia, Mozambique, Rwanda, Tanzania and Uganda on average quadrupled their real GDP growth rates, while bringing inflation generally Uganda Average -2 0 2 4 6 8 10 Sources: IMF World Economic Outlook and QNB Group analysis Behind the macroeconomic statistics though, an even more interesting story about the SSA economic renaissance emerges. While SSA economic growth was primarily linked to international commodity prices in the past— cocoa, copper, crude oil, etc.—the new growth drivers are increasingly linked to a rising African middle class. For example, SSA is the fastestgrowing mobile phone market in the world: mobile licenses grew at an average compound annual growth rate of 44% during 2000-12, according to the GSM Association. This has unleashed a digital dividend that extends from mobile banking in Kenya to the launch of smart taxi cabs in South Africa. Another important driver is the rise of the African consumer. Disclaimer and Copyright Notice: QNB Group accepts no liability whatsoever for any direct or indirect losses arising from use of this report. Where an opinion is expressed, unless otherwise provided, it is that of the analyst or author only. Any investment decision should depend on the individual circumstances of the investor and be based on specifically engaged investment advice. The report is distributed on a complimentary basis. It may not be reproduced in whole or in part without permission from QNB Group.
  • 2. Weekly Commentary According to a 2012 study by McKinsey & Company, the SSA consumer industries will grow by USD400bn during 2012-20, representing the single-largest business opportunity in the subcontinent. This growth is driven by Africa’s population—the fastest growing and youngest in the world—being increasingly urbanized, educated and digitally-savvy. What is stopping SSA from growing faster and becoming the next China? According to QNB Group, the next phase of the African renaissance will need to be driven by large infrastructure investment and continued prudent macroeconomic policies to support the rapid QNB Economics economics@qnb.com.qa January 19, 2014 growth in other sectors of the economy. As many have experienced while traveling in Africa, airports are overcrowded, electricity supply is unreliable, ports are inadequate and roads are mostly unpaved. What is needed is to fill this infrastructure gap to enable the subcontinent to reach double-digit growth. This will need skillful policies for governments to finance such large investments while avoiding another unsustainable debt burden that could cripple the fiscal discipline achieved during the last two decades. With strong infrastructure investment and continued prudent policies, the African subcontinent will undoubtedly turn into an economic might.