The president and chief executive officer of the Boston Consulting Group shares his views on the outlook for investment in Africa.
African Business (AB): The current slump in growth across Africa has raised some concerns among investors. Do you share such concerns? If not, what should investors look to for reassurance?
Rich Lesser (RL): The IMF forecasts an average growth rate for Africa of lower than 5% through 2020, largely due to the dip in commodity prices and the economic slowdown in China. Yet, there are a number of countries that are growing above 6% per year in Africa and FDI continues to increase in those regions.
A window of opportunity currently exists in Africa for investors chasing yield due to higher interest rates than abroad. Boston Consulting Group (BCG) believes the prospects for African countries are very promising due to the continent’s young population, an overall trend towards democracy, a renewed focus on education and job creation, as well as more resilient industries that can withstand economic uncertainty.
What are the key elements of an effective approach to investing in Africa?
At BCG we believe an active investment strategy is key to success for anyone who hopes to gain exposure to Africa’s growth markets. At its core, Africa is an attractive continent for value investors, but we believe it requires a long-term horizon, and an understanding of the dynamics underpinning the continent’s growth.
In the short run, investors have a right to worry about the impact of lower commodity prices. In the long run, investors should ultimately benefit from the considerable demand of the 1.2bn consumers in the region.
Africa is often thought of as a commodities-based growth story. Do you share this perspective? If not, what will drive growth in the coming years?
First, increased investment in Africa’s infrastructure is critically needed. The substantial and rapidly increasing amount of capital being allocated to this sector provides a great growth opportunity.
Second, there are compelling opportunities across the continent for consumer goods and services, particularly given limited growth prospects in much of the developed world. The opportunity for investment in consumer growth across Africa is underpinned by three trends: a growing population, rapid urbanisation, and an emerging middle class.
However, it’s important not to discount commodities, which will remain the most obvious opportunity. Africa holds a large proportion of the world’s mineral reserves, and the continent’s significant reserves of oil and gas make it well poised to play a key role in the supply of the world’s energy needs, particularly as other emerging economies grow and the demand for precious metals follows suit.
Free movement of people and goods will also be a major driver of growth in Africa in the coming years.
What are the main challenges that must be addressed by governments and business to reverse the current downturn?
There is an urgent need for economic diversification, revitalisation of manufacturing, and harnessing of human innovation in order to weather the economic storm. The Fourth Industrial Revolution offers new opportunities to achieve inclusive and sustainable growth by fast-tracking market integration in Africa through industrial corridors.
Universal internet access and adoption remains fundamental to economic growth in Africa. BCG is currently engaged with the World Economic Forum on a report titled Internet for All which acknowledges and provides solutions for barriers to greater internet access and use. GSMA estimates that the internet sector could contribute up to $300bn to Africa’s annual GDP by 2025 due to growth in jobs, creation of new businesses and increased efficiencies across industries.
To what extent does the current, tougher economic climate require a change in approach or strategy from business to realise commercial opportunities in Africa?
Organisations need to work hard to win trust and build community support in order to create shared value and capture the opportunities offered by a rising consumer class. At the same time, companies must also manage constraints on the availability of resources and growing concerns about the environmental impact of their actions.
Faced with these challenges, there is a compelling need for innovation. We must accelerate progress to meet the changing needs and aspirations of African consumers, while operating in a way that wider society deems acceptable, now and in the future.
Given Africa’s development challenges, does sustainability play a bigger role for business on the continent? How viable is the idea of doing well while doing good?
Ethical governance and the transparency and accountability of anyone in a leadership role are imperative. The decisions African business leaders make in their organisations inevitably also affect the communities in which they operate.
Though there are many great examples of businesses operating with an integrated approach to governance and sustainability on the continent, we believe there is still significant opportunity for African companies to improve these aspects of their organisations in order to meet standards required by international investors.
Although it is the world’s second largest continent, Africa receives only 5% of all climate funds and CoP22 showcased the disparity in the deployment of global funds for climate change. In the past year, BCG has supported an initiative to tackle concerns over agriculture and food security known as the Adaptation of African Agriculture, or Triple A.
In November 2016, then UN Secretary General Ban Ki-moon and King Mohammed VI of Morocco reiterated their support at C0P22 for the Triple A initiative. They spoke of the risks Africa faces, including its 10m climate refugees, and urged other African nations to take on large-scale transnational adaptation projects.
One of the most urgent needs is to address the consequences of rising temperatures for Africa’s water, irrigation and soil systems. However, these projects are still not seen as good investments and have not attracted significant climate change funding.
We often speak of investing in “Africa”, glossing over the diversity of its 54 economies. Which countries and sectors would you point to as key areas for business to focus on? What makes them particularly attractive?
We believe East Africa is a particularly attractive region given the opportunities that exist in Kenya, Tanzania, Uganda, and Rwanda. They are making great strides in attracting foreign investment due to untapped resources, opportunities in agriculture, and relative economic and political stability.
Kenya for example has a robust private sector and has received signs of new oil, gas, and water reserves, which if managed appropriately, are encouraging for future growth. The country’s medium- to long-term economic outlook is strong due to a skilled workforce, agricultural resources, and growing tourism, telecommunications, and consumer sectors.
There are also many opportunities in West Africa, which has seen some of the highest GDP growth rates in the world with low inflation over the last five years. Côte d’Ivoire is one of the world’s largest producers of cocoa and rubber, and, following a decade of political turmoil, is showing political stability and some of the highest annual GDP growth rates in the world.
We also cannot ignore the importance that South Africa has on the continent, such as in the financial services, agriculture, and mining sectors; and we believe that it will continue to be an important player on the continent.
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