Africa: potential, challenges & risks

Africa: potential, challenges & risks

Africa is drawing increasing attention, not only from the perspective of businesses based in China and Europe, but also from operators in Africa itself. In particular, closer economic ties between Africa and China have been covered extensively by the media recently—with fairly mixed reviews. This paper highlights the potential, challenges and risks for doing business in Africa over the next few years.

Africa rebounds quickly

In 2001 The Economist described the continent, perhaps with undue harshness, as the “hopeless continent”. But Africa, one way or another, has managed to survive the steepest contraction in global economic activity since the 1930s, and has been rebounding quickly since the last decade

African GDP has outpaced world growth since the start of the last commodity boom in 2001, reaching 6% in mid-decade. Despite slowing sharply in 2009, as global growth and trade retreated, African growth stayed positive at about 2%, and the downturn has clearly been “V-shaped”. In 2011-12 Africa is expected to grow faster than any other region or country in the world, apart from China and India—and this is more than a just a commodity story. Although Africa is not immune to global conditions—as seen in 2009—the continent is fairly resilient. For instance, a downturn a decade ago would have resulted in negative growth of 6-10%, and it would have taken another decade for growth to return to positive territory .The favourable outlook for the region is based on modest inflation, steadier exchange rates, and a smaller debt burden owing primarily to the debt write-offs in 2006 and 2007 (although some countries have been building up their debt again since then). Thus, with growth prospects buoyant, and the number of African consumers rising, businesses can no longer afford to ignore this vast continent, with its 53 countries—54 now with Sudan—and immense natural resources, including people.However, although returns can be high, so are the risks. Africa’s growth trajectory in 2012 can be mapped by a breakdown into regions: the North, South, East and West. Growth is forecast to hit over 8-9% in some countries in the regions. In West Africa, for example, Nigeria, Angola and the oil-based economies will dominate the region. Ghana also joined the oil club in 2011, with its first commercial output. East Africa is forecast to be the fastest-growing region. Although Kenya has no natural resources, it is the key financial and business hub, and the Kenyan economy is expected to grow by 5-6% on the back of ongoing development and reforms. Across the border, Uganda’s discovery of oil will boost development and growth, and the country will join the oil club in a few years’ time. Key mineral producers will also perform well (Tanzania), as will strong agricultural economies (Ethiopia). Africa will

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