Economist - Is the financial turmoil an opportunity for africa?

Economist offers a unique view of the global financial crisis and the impact or opportunity that may effect Africa.

Oct 9th 2008
From The Economist print edition

With world markets in turmoil, an unexpected and overlooked continent may benefit from its very isolation

TAKE a snapshot of the main news stories around Africa. In Nigeria, its most populous country, the insurgency in the oil-producing Delta region grows fiercer by the day. Zimbabwe’s agony continues as President Robert Mugabe and the new prime minister, his opponent in the last election, Morgan Tsvangirai, fail to agree on the composition of a face-saving coalition government; meanwhile, the country’s official rate of inflation has topped 11m%, with the unofficial rate put at more than 531 billion%. The president of Sudan, Africa’s largest country, has officially been accused of genocide and war crimes by the International Criminal Court. In Somalia, the tragedy of a lawless and ungoverned country only gets worse. Even in South Africa, the continent’s biggest economy, political uncertainty has set in after the ousting of the former president, Thabo Mbeki, in a bitter political feud.

Yet all this has been accompanied by a steady drumbeat of optimism about the continent, and confidence in its prospects. Despite the litany of problems, the 48 countries of sub-Saharan Africa (hereafter referred to as plain Africa) are, by several measures, enjoying a period of unparalleled economic success. And despite the turmoil in the world’s financial markets, international investors still think they can make money there.

In 1990-94 annual GDP growth was a weak 0.9%; since then, growth has averaged closer to 5% (see chart 1). Before this autumn’s financial meltdown, the IMF was predicting GDP growth of 6.6% this year; now it is predicting only a slightly lower rate. Annual GDP growth per person was 1.1% in the late 1990s; from 2004 to 2006 it was around 4%. In 1990 47% of Africans lived in poverty; in 2004 41% did and, if present trends continue, only 37% will by 2015. Zimbabwe apart, most African countries have been bringing inflation down, even if the trend is now creeping up again, in line with the rest of the world.

Investors are currently showing new found interest in Africa's resources. Many are considering Africa the next Asia. The Associated Press has an interesting take on the rush to the continent.

Africa, the next Asia for investors?

By The Associated Press

Economies in Africa are among the world's fast growers, and more analysts suggest investors pay attention to the continent.

Historically, heavy debt loads and political strife weighed on Africa. But since 2001, the resource-rich continent has been lifted by stronger prices for oil, gold and other commodities.

Read more

Africa momentum for 2008 and beyond

2007 was a banner year for Africa, Africa enjoyed unprecedented growth in telecommunications, financials, and consumer products. No longer does Africa have to depend on the west for trade or aid. Africa now, more than ever has many opportunities for trade with other emerging markets.

For the first time ever, emerging markets are collaborating, partnering and sharing intellectual ideas. The Brazilians are collaborating with Africans in ethanol and other Biofuels, Indians and Chinese are buying world renown brands (ex. Lenovo, Jaguar/Land Rover). India outsourcing providers are building BPO capacity in Africa. The Chinese are building massive infrastructure projects all over the continent.

10 years ago the West mainly dictated how the world ran. The world's major currency was the dollar, and the major financial and commodity markets were only in New York, Chicago, London, and Tokyo. 10 years later we have Asian/Middle eastern markets providing capital infusion to the west. Also, Kuala lumpur, New Delhi, Beijing, Abu Dhabi, Lagos, Accra, Nairobi, and others are becoming the new financial cities.

Despite Africa's great success in 2007, how can it grow in 2008 and beyond? That answer lies in trade and partnerships. Emerging markets have mainly grown because they are providing services and resources to wealthier markets; mostly US and Europe. There will be a time when some services and products from Brazil, Russia, India, and China (BRIC countries) become too expensive to produce or service. Africa has to position itself to cater to these BRIC's, and other world markets.

India is facing a turnover and quality problems with it's BPO sector. Many Indian outsourcers are starting to build capacity in Africa. Everyone knows China is taking resources from Africa back to China for finished products then selling it back to Africans. The Chinese are starting to realize it's cheaper to make finished products in Africa then shipping them from China. Also, the Russians, Middle Easterners and many private equity players are looking at investments in Africa.

Despite the mortgage crisis that is effecting the west; this could be an opportune time for investment in many emerging markets. Pension funds, mutual funds and insurance funds that invested in mortgage back securities got burnt and will keep getting burnt until they liquidate their holdings in these securities. Some are investing their monies in emerging markets, and I'm sure some are looking at Africa for investment.

Copper is boosting Africa's growth rate

Africa has plenty of natural resources that are untapped, copper is boosting African countries growth rates. Many African nations are using this commodity to position themselves for the future. Copper is essentially used for almost all industries because it is a good conductor of electricity.

Africa Business Magazine has a good report about copper growth

The exceptionally high prices of commodities, particularly those of industrial metals, which leapt by over 50% last year, will help Africa nudge past 6% growth this year. The trend is likely to continue for the next couple of years, driven mainly by strong demand from China. Moin Siddiqi reports.

Mineral-rich Africa is reaping the benefits of strong commodity prices driven by robust global demand. Africa’s economic growth is projected at 6% this year, the highest in two decades, according to the African Development Bank. It will be primarily fuelled by demand from China and other rapidly-growing economies for the continent’s crude oil and metals.