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Africa: What’s next?

IN the last couple of years Africa has been touted as the new growth frontier, amid huge expectations that the continent would emulate China and record exponential growth rates.

Speaking at the 11th Credit Suisse Salon in 2013 Giles Keating, head of research for private banking and wealth management at Credit Suisse, said: “What happened in Asia will happen in Africa.”

Indeed, several countries on the continent appeared to be headed in that direction, recording strong growth rates that made the continent an investment target. According to the World Bank, African countries that recorded huge growth rates included Ethiopia (10,5% in 2013), Mozambique (7,4% in 2013), Nigeria (5,4% in 2013) and Tanzania (7,3% in 2013), just to mention a few.

The buzz led one of the much talked-about countries, Nigeria, into rebasing its economic gross domestic product, a move that catapulted it into the continent’s top economic slot as it overtook the highly developed South Africa. Commenting on the continent’s potential, analysts described the continent as one with “breathtaking demographics”. Its ever-growing middle class was noted as one of the most attractive fundamentals for investing into Africa. As incomes rose and living standards improved, Africans were expected to alter their spending habits. These changes in consumer demand, paired with increasing disposable income, were expected to create vast investment opportunities.

Nigeria loses its lustre

Fast forward to now, and some of the countries don’t look that attractive any more. A good example is Nigeria, a country where much of the funds driving growth was coming from oil revenues. The country generated about 70% of its revenues from oil sales. But events that took place since the beginning of 2014, if not as far back as 2013, have made Nigeria less attractive again.
The oil price has tumbled by more than 50%, in the process significantly reducing Nigeria’s income-generating capacity.
Nigeria’s Finance minister Ngozi Okonjo-Iweala recently said Africa’s biggest economy is borrowing money to pay salaries as it struggles through a “difficult cash crunch” brought on by halved oil prices.

Nigeria is not the only country in that position. Angola is in a similar predicament, amid news that the Angolan government is working with Standard Bank to ensure the availability of enough capital to keep specific industries afloat, as its economic mainstay — oil — takes a beating.

Many other African countries relied on their natural resources to generate income. In 2013 and thereabouts this seemed to be working, with commodity prices reaching all-time highs. Gold reached a peak of US$1 921,50 (September 2011) while platinum also traded at record prices. With funds coming out of mineral exports trickling into countries’ coffers, all was set for a roller coaster ride for most African nations.

Stock market euphoria

Hopes were raised and investors followed suit, with portfolio investments into the continent’s stock markets reaching record levels. The euphoria was so high that even the stock markets of struggling countries such as Zimbabwe rallied to record highs. In 2013 the Zimbabwe Stock Exchange was one of the top performers in Africa, having gained a solid 33% with a record US$486 million invested.

The market capitalisation also reached a record high of $5,2 billion. It was the same story in Kenya, Nigeria and many other bourses. Foreign direct investment into the continent also increased, with Africa getting US$57 billion worth of inflows in 2013.

However, all that seems to have changed. The main source of revenue for most of these countries is no longer yielding as much as in 2013. After recovering in 2008, the resource market peaked in May 2011. Since then, in the last 12 months, there have been some real bloodletting days with, yes, a great deal of negativity.

As I said earlier, the oil price per barrel is now down by about 50%. Gold is down from the highs of US$1 951 per ounce to US$1 200/oz currently. The trend is the same for other resources. The main reason for the fall in commodity prices is that China, which accounts for about 50% of traded commodities, is now edging away from its investment infrastructure philosophy towards consumption.

This takes us to the question: what next for Africa? — Fin24.com

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