BMI Special Report Africa Dissecting The Growth Story 2013-02-01 - 15093406 PDF

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FEB 2013
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AFRICA
DISSECTING THE GROWTH STORY
Published by:Business Monitor International
Africa: Dissecting The Growth Story
Published by: Business Monitor International
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DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.
CONTENTS
Executive Summary ............................................................................................................. 7 Core View ............................................................................................................................. 9
Macroeconomic Outlook For Sub-Saharan Africa In 2013 ................................................................................. 9 Strong Growth Despite Global Headwinds .................................................................................................... 9
Table: BMI's Global Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Table: Economic Growth, % y-o-y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Upside Inflation Risks ............................................................................................................................. 11

Table: BMI Quarterly Forecasts For Consumer Price Inflation In 2013, % y-o-y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Table: BMI Quarterly Forecasts For Policy Interest Rates In 2013, % eop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Divergence In Fiscal Policy ..................................................................................................................... 14 Resource Stance Reconsidered .................................................................................................................. 16

Table: BMI Forecasts For Real GDP Growth, % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Topical Thematic Analysis ................................................................................................ 18

Diversification Ahead For Rising But Resource-Focused FDI? ........................................................................ India's Footprint To Expand, Led By Private Sector ....................................................................................... How Is Africa's Infrastructure Deficit Harming Development? ......................................................................... Manufacturing To Remain Weak Link For SSA Economies .............................................................................. SSA Unlikely To Benefit From Rising Chinese Wages ..................................................................................... Collateral Damage: The Eurozone Crisis In Africa ........................................................................................ 18 26 33 39 48 56
Table: Dangerous Dependence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Table: The Scoreboard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
China And Africa - Is The Party Over? ........................................................................................................ 65

Table: Ties That Bind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Appendix: BMI Forecasts And Ratings ............................................................................ 70

Macroeconomic Forecasts ......................................................................................................................... 70
Table: BMI Forecasts For Average Consumer Price Inflation, % y-o-y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Table: BMI Forecasts For Budget Balance, % Of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Table: BMI Forecasts For Balance Of Payments, % Of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Ratings .................................................................................................................................................. 73
Table: BMI Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Business Monitor International
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Executive Summary
Investor interest in Sub-Saharan Africa (SSA) is growing steadily with the region attracting greater attention thanks to its high economic growth rates, plentiful natural resources and youthful demographics. SSA is heavily under-invested, and the low returns currently on offer in many developed markets have only served to intensify the focus on the 'final frontier' for global investors.
Africa Rising Or Is It?

SSA - GDP Per Capita, US$
However, although in recent years there has been much hype about 'Africa Rising' (a commonly-used phrase following Vijay Mahajan's book of the same name), there is now a growing consensus that the growth story is complex and that risks abound. Increasingly, questions are being asked about the structural nature of economic growth. Is it becoming diversified and sustainable or is it still being driven by commodities that are inherently vulnerable to cyclical fluctuations? Which countries are emerging as key players in the growing South-South trade with Africa, beyond China? How dependent is SSA on the global economy and what risks stem from this? Which sub-regions and nations in SSA are expected to outperform economically over the long term?
Source: BMI, central banks & statistical offices. BMI forecasts.
In this special report, we outline BMI's core macroeconomic view on the region and then look 'beneath the headlines', analysing seven topical issues which shed light on the nature of Africa's growth story. We begin the report by putting forward our core view on SSA. We forecast that headline economic growth will remain generally strong in 2013, in spite of various global headwinds ranging from tepid growth in the US, to China's current economic bounce running out of steam by mid-year. We highlight Angola, Ghana, Mozambique and Zambia as outperformers on the back of their resource booms while Nigeria, Tanzania and Uganda should also outperform but with growth being more broad-based. Key macroeconomic themes for the coming year are: inflation trending mildly upward, fiscal policy diverging on a country-by-country basis, and governments reconsidering policy with respect to the extractive industries. Following the outline of our core view, we drill down to focus on one of the key drivers of growth: private investment. The trends and our understanding of the general state of investor perceptions of the African
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continent lead us to believe that West Africa is currently attracting the lion's share of foreign direct investment due to its hydrocarbon riches. Over the coming years, however, the proportion of FDI flowing into non-resource sectors will likely increase, although infrastructure improvements and greater regional cooperation are vital if this is to happen on a meaningful scale. Continuing on the theme of investment, we look beyond the much-publicised China-Africa relationship and consider SSA's burgeoning relationship with another Asian giant: India. In contrast with China's statebacked, resource-focused model, India's relationship with the region is more nuanced, with its prospects hinging more on private than state involvement. While likely to remain second best (or worse) in the hunt for Africa's resources, India's historical and cultural ties with the region and its consumer-focused commercial interests create the potential for a more evenly balanced relationship to develop. India's fast-growing investment in the region bears testament to SSA's potential, but it is undeniable that there are many obstacles which are holding African nations back from fulfilling that potential. Infrastructure is key in this regard. As we outline in the next article in the report, the physical infrastructure deficit is holding back growth and development through multiple channels: stunting economic diversification; stifling the development of the manufacturing sector; keeping markets fragmented; exacerbating inflation and raising political risk in various ways. Next, we focus on the manufacturing sector. Although we note a few exceptions, we expect that on the whole Sub-Saharan Africa's nascent manufacturing sector will remain underdeveloped over the medium to long term. A variety of structural factors, combined with strong competition from emerging markets in Asia have caused the share of Sub-Saharan Africa's GDP attributable to manufacturing to decline since 2000, a trend we predict will continue. We acknowledge that rising wages in China could present an opportunity for low-cost, labour-intensive manufacturing to develop in SSA - and we explore this issue in a separate article in this report - but we believe that African economies are generally not as well-placed to benefit as Asian economies such as Bangladesh and Indonesia due to infrastructural deficiencies and less attractive business environments. Finally, we assess the potential impact on SSA of two big risks hanging over the global economy: a plunge back into crisis for the eurozone and a 'hard landing' for the Chinese economy. For each, we consider the channels through which SSA would be affected, including exports, financial sector links, foreign direct investment, and foreign aid. In the event of a renewed crisis in the eurozone, we identify Francophone West Africa, the Maghreb states, South Africa, Mozambique, and South Sudan as especially vulnerable. Meanwhile, we believe that the impact of a significant slowdown in the Chinese economy would be focused on a relatively small number of countries, notably Zambia, Angola, the DRC, and West African iron exporters.
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Core View
Macroeconomic Outlook For Sub-Saharan Africa In 2013
BMI View: We hold an upbeat view for Sub-Saharan Africa in 2013, predicting that real GDP growth will be strong in general, in spite of the adverse external environment. Key macroeconomic themes for the coming year are: inflation trending mildly upward, fiscal policy diverging on a country-by-country basis, and governments reconsidering policy with respect to the extractive industries.
Strong Growth Despite Global Headwinds
BMI forecasts that headline economic growth in Sub-Saharan Africa (SSA) will remain generally strong in 2013, in spite of various external headwinds ranging from tepid growth in the US, to China's bounce running out of steam by mid-year.
Table: BMI's Global Assumptions
2011 China, real GDP growth, % Eurozone, real GDP growth, % United States, real GDP growth, % US$/EUR, ave Brent crude oil, US$/bbl, ave Copper, three-month, US$/tonne, ave Gold, US$/oz, ave 9.1 1.6 1.7 1.39 111.05 8,826 1,572
2012e 7.7 -0.7 2.2 1.27 111.70 7,955 1,669
2013f 7.5 0.1 2.3 1.25 107.00 7,700 1,775
2014f 6.7 1.2 2.5 1.20 102.00 7,300 1,825
2015f 6.0 1.6 2.5 1.20 98.00 7,100 1,780
2016f 5.8 1.8 2.4 1.20 96.00 7,000 1,700
2017f 5.8 1.8 2.4 1.20 96.00 7,000 1,600
Source: BMI
We continue to highlight Angola, Ghana, Mozambique and Zambia as outperformers on the back of their resource booms (oil, oil, coal and copper, respectively) while Nigeria, Tanzania and Uganda should also outperform but with growth being more broad-based. We expect the majority of other countries in the region to post real GDP growth of at least 4.0% in 2013, buoyed by favourable structural factors including natural resource wealth, youthful demographics, urbanisation and infrastructural improvements.
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Economic Heat-Map
SSA - Map Of Real GDP Growth In 2013, %
Source: BMI
A key sub-regional trend that we predict for 2013 is the resurgence of economic growth in East Africa. Kenya, Uganda and to a lesser extent, Tanzania, saw the pace of economic activity slow in 2012 as high interest rates (themselves a legacy of the 2011 food price crisis) stunted businesses and consumers in the first half of the year. Now that inflation and interest rates have come down sharply, we expect to see growth regain steam going into 2013. That said, the March 2013 election in Kenya could disrupt economic activity (although this is not our core scenario), and we have seen several negative signs with respect to economic
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policy in Uganda lately (see 'Business Environment Tinged By Corruption Allegations', December 12 on our online service) that pose downside risks to our forecasts.
Table: Economic Growth, % y-o-y
Q410 Botswana Ghana Kenya Mauritius Mozambique Nigeria South Africa Tanzania 4.9 6.9 7.5 5.1 6.2 8.6 4.5 6.7
Q111 9.7 3.3 4.8 5.0 7.8 7.0 4.6 6.8
Q211 8.0 20.6 4.2 4.9 5.5 7.5 1.0 6.7
Q311 6.6 17.1 3.8 4.0 8.6 7.4 1.7 4.6
Q411 9.1 16.0 4.6 2.2 7.5 7.8 3.2 8.1
Q112 7.6 15.7 3.2 3.0 6.3 6.3 2.7 7.1
Q212 8.5 2.5 3.5 2.7 8.1 6.4 3.4 6.9
Q312 5.7 4.6 3.7 6.8 6.5 1.2 6.5
Source: Central Banks and Statistical Offices/BMI. Seasonally adjusted. For South Africa, % q-o-q seasonally adjusted and annualised.
Outside of East Africa, we also highlight risks regarding South Africa and Cte d'Ivoire. We already hold a cautious stance on South Africa, forecasting real GDP growth of just 2.8% in 2013, but are cognizant of the fact that the recent mining sector unrest was sparked by deep-rooted, structural issues including racebased inequality and widespread poverty, that could re-surface in the coming months. Meanwhile, our core view on Cte d'Ivoire is that the government will hold together, but we acknowledge that if things fall apart, they could do so dramatically, derailing the nascent surge of investment.
Upside Inflation Risks

As ever, the outlook for inflation across SSA is mixed. The most notable trend is in East Africa, where we see inflation as being close to a cyclical bottom. As mentioned, inflation has come down sharply though the course of 2012, and with base effects from 2011 now petering out, we expect the headline prints to gradually edge downward over the first quarter of 2013 before bottoming out and gradually trending upward (with Tanzania continuing to lag Kenya and Uganda slightly). However, the East African currencies have been weakening in recent months and we highlight that if the Kenyan, Tanzanian and Ugandan shillings experience accelerated depreciation (not our core view), inflation will likely turn sooner and sharper than we currently anticipate.
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Close To Cyclical Low

SSA - Inflation, % y-o-y
Source: BMI, Central Banks & Statistical Offices
In Southern Africa, we expect inflation to stay relatively stable over the coming months, but South Africa is a notable exception. Due to a combination of the relatively weak rand, firm maize prices, high nominal wage increases and the re-weighting of the consumer price index basket (in January 2013), we expect that inflation will trend upward and breach the upper band of the South African Reserve Bank's (SARB) 3.0-6.0% targeted range over the coming months. Meanwhile, for West Africa we predict a slight decline in inflation in Nigeria mainly due to statistical base effects.
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Table: BMI Quarterly Forecasts For Consumer Price Inflation In 2013, % y-o-y
Sep-12 Angola Botswana Cte d'Ivoire Ghana* Kenya Mauritius Mozambique Namibia Nigeria South Africa* Tanzania Uganda Zambia Zimbabwe 9.7 7.1 2.3 9.4 5.3 3.9 1.5 6.7 11.3 5.5 13.5 5.4 6.6 3.2
Dec-12 9.0 7.4 3.4 8.8 3.2 3.9 1.1 6.3 10.3 5.7 12.1 5.4 7.3 2.9
Mar-13f 9.3 8.2 3.6 9.0 4.0 3.3 3.7 6.2 9.0 6.1 7.9 4.5 6.8 3.2
Jun-13f 9.4 7.4 2.8 11.0 5.5 4.5 6.4 7.1 9.3 6.4 8.1 5.1 7.2 3.3
Sep-13f 9.3 7.4 2.6 10.0 8.0 5.7 8.0 6.6 9.4 6.1 7.7 6.9 6.6 3.7
Dec-13f 8.4 6.8 1.1 10.0 8.0 5.8 8.0 6.0 9.0 5.7 7.0 7.9 7.2 4.1
Source: Central banks & statistical offices/BMI. BMI forecasts. *Includes effect of new CPI basket.
Our outlook for interest rates mirrors our inflation predictions: we see the rate-cutting cycle continuing in East Africa in the first quarter of the year as inflation declines, while the majority of other SSA central banks will likely keep rates on hold amid relatively stable inflation. Although we expect South African inflation to trend upward, the central bank will not want to hike rates given the weak growth outlook and our core scenario is for the SARB to maintain the status quo amid the stagflationary environment. The one central bank we see raising rates over the coming months is Zambia's, due to continued currency depreciation - but this would be a small, mostly symbolic move.
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Table: BMI Quarterly Forecasts For Policy Interest Rates In 2013, % eop
Sep-12 Angola Botswana CEMAC Ghana Kenya Mauritius Mozambique Namibia Nigeria South Africa UEMOA Uganda Zambia 10.25 9.50 4.00 15.00 13.00 4.90 10.50 5.50 12.00 5.00 3.00 15.00 9.25
Dec-12 10.25 9.50 4.00 15.00 11.00 4.90 9.50 5.50 12.00 5.00 3.00 12.00 9.25
Mar-13f 10.25 9.50 4.00 15.00 9.50 4.90 9.00 5.50 11.75 5.00 3.00 11.50 9.50
Jun-13f 10.00 9.50 4.00 15.00 9.00 4.90 9.00 5.50 11.25 5.00 3.00 11.00 9.50
Sep-13f 10.00 9.50 4.00 15.00 9.00 5.20 9.00 5.50 11.00 5.00 3.00 10.50 10.00
Dec-13f 10.00 9.50 4.00 15.00 9.00 5.20 9.00 5.50 10.50 5.00 3.00 10.00 10.00
Source: Central banks/BMI. BMI forecasts. CEMAC = Communaut conomique et Montaire de l'Afrique Centrale. UEMOA = Union Economique et Montaire Ouest-Africaine.
Divergence In Fiscal Policy

One trend that we have been tracking in 2012, and that we expect to accelerate in 2013, is a divergence in fiscal policy across the region. Following the accommodative policy enacted during and after the global downturn, there is a general need to unwind the stimulus, but some finance ministries are being more prudent than others. Mauritius and Botswana, for example, have relatively austere budgets that should help to rein in fiscal deficits and keep debt levels under control, boding well for future macroeconomic stability.
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Austerity Vs Profligacy
SSA - Budget Balance, % GDP
Source: BMI, Finance Ministries. BMI Forecasts.
Meanwhile, governments in Namibia, Cameroon, Zambia and Ghana are spending heavily, maintaining wide fiscal deficits and accumulating debt. Some of this spending is going into infrastructure and other measures to boost productive capacity and is therefore warranted, but it is important that revenue generation keeps pace in order to balance the books, especially at a time when austerity in Europe could entail cutbacks in overseas development assistance going to SSA.
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Debt Creeping Up
Ghana - Total Domestic And External Public Debt, % GDP
Source: BMI, Bank of Ghana
Resource Stance Reconsidered

Partly driven by the above-mentioned budget pressures, we expect to see a number of countries re-evaluate policy regarding foreign investment into resources and regulation/taxation of these industries in 2013. Such moves are also motivated by the widespread problem that the mining and hydrocarbon industries tend to generate a lot of wealth for a small minority, often leaving the majority of the population mired in poverty despite talk of 'booming growth' - which is a problem in itself and furthermore sows the seeds of discontent which can escalate into political instability or even violence. Several governments including those of Nigeria, Uganda, Zambia and Tanzania are currently designing or re-writing legislation which mandates increased local ownership in the extractive industries and raises taxes for foreign participants. While this creates uncertainty for investors, the changes are generally bringing SSA into line with global norms and reversing overly generous tax regimes that were instituted many years ago in a bid to persuade multinational companies to operate in high-risk environments. Indeed, although foreign companies will generally find it more expensive to have operations in SSA, the extractive industries will remain highly profitable and moreover, new legislation should bring clarity and predictability to the business environment, ultimately boosting investment.
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Table: BMI Forecasts For Real GDP Growth, %
2010 Angola Botswana Cte dÌvoire Cameroon DRC Gabon Ghana Kenya Madagascar Mauritius Malawi Mozambique Namibia Nigeria Rwanda Sudan Sierra Leone Senegal South Africa South Sudan Tanzania Uganda Zambia Zimbabwe 3.4 7.7 3.0 3.0 6.5 5.6 8.0 5.8 -0.4 3.1 6.7 7.1 6.6 7.8 7.0 6.6 4.7 4.1 2.9 4.2 6.8 6.2 7.1 9.6
2011e 3.5 10.4 -4.7 4.2 6.9 5.8 14.4 4.4 0.5 3.9 4.5 7.3 4.8 8.0 8.2 -19.0 5.5 2.8 3.1 1.9 6.4 5.9 6.6 10.6
2012e 8.4 5.0 8.4 4.7 7.3 5.4 7.6 4.5 1.1 3.2 4.5 7.2 4.1 6.6 7.8 -6.7 28.0 3.7 2.3 -49.7 7.0 4.8 6.9 4.6
2013f 8.7 5.4 7.5 5.2 7.7 3.1 8.7 5.8 3.8 4.0 5.1 7.4 4.6 6.8 7.0 2.1 13.0 4.0 2.8 47.8 7.1 6.1 7.1 6.4
2014f 6.7 5.8 7.5 5.0 6.1 2.9 9.2 6.3 4.2 4.9 5.6 8.1 4.7 7.2 7.4 3.6 13.0 4.4 3.4 21.5 7.3 7.1 7.3 6.8
2015f 6.8 5.5 7.7 5.0 7.3 2.2 8.3 6.3 3.2 4.5 6.0 9.4 4.7 7.3 7.1 4.9 5.0 4.8 3.5 9.3 7.3 7.3 7.1 6.8
2016f 7.6 5.4 7.7 3.5 6.7 2.0 7.3 6.4 3.0 4.4 6.4 10.4 4.6 7.1 6.9 4.8 5.0 5.2 3.5 9.3 7.3 8.3 6.9 6.7
2017f 6.5 5.0 7.8 3.7 6.3 1.8 7.3 6.3 3.0 4.4 6.5 10.3 4.6 7.0 6.8 4.8 5.0 5.3 3.7 9.4 7.3 8.1 6.9 6.3
Source: Central Banks and Statistical Offices/BMI. BMI Forecasts.
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Topical Thematic Analysis

Diversification Ahead For Rising But Resource-Focused FDI?
The latest data from the United Nations' World Investment Report reveal some interesting trends for foreign direct investment flowing into Sub-Saharan Africa (SSA):
FDI into Sub Saharan Africa (SSA) grew by 25.2% to US$36.9bn in 2011 and was at a level close to its pre-global financial crisis peak. However, flows into SSA still represent only a small fraction of global FDI. On a regional basis West Africa attracted more than East and Southern Africa combined.
These trends and our understanding of the general state of investor perceptions of the African continent lead us to believe that:
West Africa's dominance has much to do with its hydrocarbon riches and the fact that FDI into SSA continues to flow into resources despite excitement surrounding the region's consumer potential. SSA's risk/return profile will improve over the coming years as information on the region becomes more readily available. The proportion of FDI flowing into non-resource sectors is expected to increase in the years ahead although infrastructure improvements and greater regional cooperation are vital if this is to happen on a meaningful scale.
Recovering But Still Globally Insignificant
SSA saw a sharp recovery in foreign direct investment (FDI) in 2011 with US$36.9bn being injected into the region during the year, a figure within touching distance of the record high of US$37.3bn achieved in 2008. While the increase in the absolute value is a move in the right direction, the fact that FDI into the region only represented 2.4% of global FDI flows for the year shows that Africa is still far from a mainstream investment destination despite the fact that it is home to some of the world's fastest growing economies.
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FDI Flows Back At Close To Record Levels

SSA - FDI Inflows, US$mn
Source: United Nations 2012 World Investment Report, BMI
West Africa Leading The Way
It is hydrocarbon-rich West Africa which led the way in attracting investment in 2011 with US$21.0bn flowing into the region during the year, more than East and Southern Africa combined. Perhaps unsurprisingly Nigeria, the continent's biggest oil producer and most populous nation was the destination of the largest FDI flow in SSA attracting US$8.9bn. Ghana saw inflows worth US$3.2bn, the lion's share of which went into development of its Jubilee oil field. US$2.9bn was invested into fellow oil producer Republic of Congo while Guinea attracted US$1.2bn, the majority of which went into iron ore.
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All About The Oil

Breakdown Of FDI Inflows To West Africa, US$mn
Putting The South In Southern
South Africa led a revival in total flows to Southern Africa with US$5.8bn being invested into the continent's largest economy out of a total value of US$7.7bn of net inflows into the sub-region. Walmart's US$2.4bn acquisition of Massmart Holdings accounted for almost half of the total and was one of the few major examples of an international M&A deal in the 2012 figures with the majority of SSA FDI consisting of investment into greenfield opportunities. Angola saw net outflows of FDI worth US$5.6bn as Angolanbased oil subsidiaries repaid loans and repatriated profits to their foreign parent companies. Investment into Mozambique more than doubled to US$2.1bn in 2011 as international miners ploughed funds into the country's vast coal reserves. With significant amounts of natural gas discovered in the north of the country, the investment frenzy is likely to accelerate over the coming years. FDI into Zambia approached the US $2.0bn mark during the year with the country's high grade copper deposits luring in international players.
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Net Outflows In Angola Weighing On The South

Breakdown Of FDI Inflows To Southern Africa, US$mn
Falling In The East
East Africa was the only sub-region which saw foreign investment fall in 2011 although this came after a year of particularly strong FDI growth in 2010. Tanzania was the only non-resource rich economy to attract more than US$1.0bn with oil producers Sudan and Chad topping the sub-regional list with US$1.9bn and US$1.8bn respectively while the DRC's array of minerals saw foreigners investing US$1.7bn. Regional economic powerhouse Kenya saw only US$335.2mn of inflows for the year.
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Sudan, Chad And DRC Outpacing Regional Power Kenya

Breakdown Of FDI Inflows To East And Central Africa, US$mn
Resources Still Dominating The Day
Much has been made of the growing diversity of opportunities in the SSA region with the emergence of the African consumer in particular often trumpeted as a new vector of growth and opportunity. However, the above shows that the majority of foreign investment continues to flow into Africa's resource-based economies. The example of Zambia is instructive. The country possesses many of the qualities such as a growing middle class and a young, relatively large population that lead many observers, including us, to believe that the African consumer market holds a lot of potential. However, a look at the breakdown of 2010 FDI data from the Zambian Investment Authority show that foreign investors are more interested in the country's resource wealth than its consumer market.
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Focus On Mining FDI In Zambia Is Representative Of Region

Zambia - Breakdown Of 2010 FDI By Sector
Source: Zambia Development Agency
There has been foreign investment into service sectors in many African economies, especially telecoms and financial services. It is manufacturing which has really been neglected however. The percentage contribution of manufacturing to regional GDP has fallen from 11.8% in 2000 to 9.8% in 2012. Would-be foreign investors in the manufacturing industry are facing many of the same impediments as their local counterparts, namely poor infrastructure, inadequate regional cooperation and high export costs. Furthermore, to make investments viable given the logistical and infrastructure challenges it is often necessary to build up scale and distribution networks before operations become profitable. The need to make such a large commitment to ensure profitability may be deterring firms from investing until they are more comfortable with perceived risks.
Improving Risk/Return Profile?
Despite the relatively small share of global FDI being allocated to Africa and the fact that the majority of it continues to flow to the resources sector, we believe that there are grounds for optimism. According to data from the US Department of Commerce, returns of US FDI into Africa (measured as FDI income as a share of FDI stock) are around 20% compared with 14% in Latin America and the Caribbean and 15% in Asia. Of
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course many African countries are still viewed as riskier propositions than other emerging markets and investors require higher rates of return to compensate them for taking on this perceived risk. However, there is little doubt that the continent is becoming more prominent on the global investor radar. A natural consequence of this is that more information about actual conditions on the ground is becoming more readily available meaning that investors are increasingly able to make decisions based on actual risks rather than perceptions of risk. Greater information availability also means that investors are able to quantify and manage these risks more effectively. All of this, we believe, is leading to an improving risk return profile for SSA investment and this will help attract greater FDI flows in the future.
Infrastructure: If You Build It They Will Come
Attracting a greater share of this investment into the non-resource sector will be challenging. However, once again there are reasons for guarded optimism. China's special envoy for Africa recently said in an interview that he believes that as the Chinese economy develops, there is likely to a be a move to shift labour intensive industries abroad and that African countries, with large populations and low labour costs, should look to seize that opportunity. The data that we have discussed in the above cover actual FDI flows that took place during the year. The UN report also includes figures showing the value of FDI projects announced in 2011 but which have not yet been fully implemented. These figures show that future FDI flows will, if plans are implemented, be more evenly distributed among the primary, secondary and tertiary industries.
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A Move Away From Resources Ahead

Breakdown Of Planned FDI Project Values By Sector, US$mn
However, there are significant obstacles to the realisation of these plans. A lack of reliable infrastructure, power and transport in particular, offset low labour costs and end up driving production costs higher than in more industrialised economies in Asia where wages are higher. This lowers the incentive for investment in manufacturing industries. Additionally, SSA is made up of a patchwork of over 50 countries meaning inputs and finished goods often have to travel across several borders which raises the bureaucratic and logistical costs of production. The large number of mainly small states also divides the large and otherwise attractive African consumer market which further lowers incentives for investment into secondary industries. For African countries to attract FDI into non-resource sectors, significant investment into infrastructure and greater regional cooperation are absolutely crucial.
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India's Footprint To Expand, Led By Private Sector

BMI View: India's rapidly growing economy will see its trade and investment in Sub-Saharan Africa intensify over the coming years. In contrast to China's state-backed, resource-focused model, India's relationship with the region is more nuanced, with its prospects hinging more on private than state involvement. While likely to remain second best (or worse) in the hunt for Africa's resources, India's geographical and cultural ties with the region and its consumer-focused commercial interests create the potential for a more evenly balanced relationship.
A Nuanced Relationship
We expect that ties between India and Sub-Saharan Africa (SSA) will intensify over the coming years as the demands of India's burgeoning economy and vast population drive it to expand and deepen its involvement on the continent. While the Indo-African relationship is nothing new - long-standing historical and geographical factors have both shaped its evolution - over the last decade it has entered a new phase.
Fuel-Powered
SSA Trade With India, US$mn (LHS) And As % Of Total Trade (RHS)
Source: IMF
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Energy Concerns Power One-Sided Trade Relations
The explosion in trade between India and Africa over the last few years is one of the starkest (if not the most instructive) indicators of the intensifying economic links between the two markets. Since 2002 Africa's trade surplus with India has ballooned from around US$1.1bn to a massive US$17.3bn in 2011. This has been driven primarily by India's soaring demand for energy, as the country's rapidly expanding power consumption and poorly functioning domestic power sector have seen fuel imports from Africa skyrocket over the last five years. While imports from India have also grown strongly, expanding by an annual average of 24% between 2007 and 2011 to reach US$19.4bn, the value of SSA exports to India in 2011 was almost double, standing at US$36.7bn.
The lion's share of this trade is heavily focused in a small number of fuel-rich countries, with producers Nigeria, South Africa and Angola accounting for around 90% of total SSA exports to India in 2011. With BMI's Power team forecasting Indian electricity consumption to grow at a rate of over 6% per annum over the next decade and persistent domestic power shortages, we expect energy security to remain a key priority for New Delhi in its Africa strategy and remain the biggest single dynamic driving Indo-African trade.
The import picture is more varied and reflects, among other things, the strong geographical and historical linkages between the two markets as well as the sub-region's bright economic outlook. This is illustrated by the notable showing of East African countries among the region's top importers of Indian goods, with Kenya, Tanzania and Mauritius placed 3rd, 4th and 5th respectively.
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Energy Shapes Trade Picture

SSA Trade With India, As % Of Total Trade
Source: IMF Direction of Trade Statistics, November 2012
Putting direct trade with a small number of oil producers to one side (given the relative ease with which these exports can be diverted to new markets if needed), BMI believes that Indian investment into Africa's resource sector will continue to belie its size and requirements. At the heart of the matter will be India's lack of hard cash - an essential ingredient given the highly capital-intensive nature of resource extraction in Africa. Compared to China's whopping US$3.2trn in foreign reserves (according to BMI estimates), India's cash supplies are far more modest (at around US$274.3bn in 2011) and the latter's persistent current account deficit is likely to see these run down further over the coming years. Meanwhile, the heavily leveraged state of many Indian power companies further precludes capex, while the cost advantages afforded to Chinese companies by importing their own cheap labour compounds these challenges.
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That said, the relatively elevated price of coal by historical standards and the deterrent bureaucratic and regulatory hurdles facing producers in India, should see firms such as state-owned Coal India (the company is a growing presence in Mozambique's coal market) continue to seek to secure new supplies in Africa. Nevertheless, we believe easier access to coal supplies in Australia (owing to better infrastructure and access to credit) or even Indonesia may prove a more attractive option for many of India's cash-strapped firms. Over the longer term, if Coal India is able to overcome its internal problems, we note the possibility of the coal giant becoming a more significant presence on the continent.
A Growing Appetite
India - Electricity Consumption Per Capita, KWh And % Y-o-Y
Source: EIA, BMI forecasts
India Inc Brings Value-Added Benefits
Moving away from resources, we believe growing African demand for low-cost Indian goods across a broad range of sectors will be a key driver of India's engagement with Africa over the coming years. Attracted by SSA's rapidly-expanding consumer base and aided by well-established trade and historical linkages, the commercial opportunities for many of India's consumer-focused companies are sizeable. Moreover, BMI
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notes that this expansion of corporate India's African footprint is helping to bring important value-added benefits to a number of African economies.
An example of this is Africa's booming telecoms sector which has been, and will in our view continue to be one of the outperforming sectors over the coming years. In 2010, India took a massive step into the market, with Bharti Airtel's US$10.7bn acquisition of Zain's Sub-Saharan African operations giving it access to 15 African markets (in Q312 Airtel had over 50mn subscribers in Africa). Significantly, this move has also opened the door for a number of Indian IT companies, drawn by Airtel's outsourcing needs, while the general rise in demand for business software has also seen Indian firms rapidly expand their presence, especially in the financial services sector.
This expanding services sector not only creates an opportunity for India's vibrant services industry but also represents an opportunity for African economies to move further up the value chain, through the addition of expertise and technical assistance to local labour markets. Moreover, given the enduring structural bottlenecks that continue to inhibit investment into the manufacturing sector, the services sector offers a potential alternative.
Elsewhere, India's reputation for making low-cost consumer goods is also providing it with an advantage in Africa over Western counterparts, with the autos and pharmaceutical markets being cases in point. Cheap imported commercial vehicle from India is one example, driven by booming demand for infrastructure and construction-related goods. BMI notes that rapid credit growth and a fast-growing middle class have seen Kenya's construction and housing market boom in recent years, which in turn has driven demand for commercial vehicle imports, as well as other consumer goods. This has led to firms such as Tata Motors investing in manufacturing plants in the country. While the above-mentioned infrastructure constraints may mean that building production plants will not always be viable, the lower cost of many Indian goods compared to those produced by Western firms for instance is nonetheless helping to lower production costs and boost competition.
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Africa Focus
Export-Import Bank Of India - Operative Lines Of Credit As Of March 31 2012, By Region
Source: Export-Import Bank of India, Annual Report 2012.
Investment: Commercially-Driven, But State-Influenced
Indian investment into Africa is relatively difficult to measure and reflects the more nuanced nature of its relationship with the region next to that of China's for instance. Part of this difficulty stems from the broad sources of financing, which range from state-provided credit lines for particular projects, to investment from private Indian firms.
The latter is a key distinguishing factor between the India-Africa model and the China-Africa model. The generally deeper integration of Indian firms within a number of African economies reflects in part the continued importance of historical as well as geographical linkages in shaping economic relations. East Africa is a case in point given its history of trade with India and the considerable Indian Diaspora in the region. East Africa continues to be the heart of Indian investment into Africa and we expect this to intensify over the coming years.
Indeed, the Export-Import Bank of India's launch of its 'Focus Africa' initiative in 2002, which focused on Ethiopia, Kenya and Mauritius, arguably marks the start of the acceleration in economic ties between
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India and Africa. While India's commercial activities in the region now extend far beyond East Africa, these strategic factors - along with the fact that the outlook for East Africa's consumer sector is the brightest within SSA - will see the sub-region continue to be the first port of call for many Indian companies.
For all the power of India Inc, BMI believes the government will continue to play a vital role in oiling the wheels of India's commercial success in Africa. The Export-Import Bank of India will continue to be a key player in this regard, with its provision of credit lines to Indian companies across a range of sectors a crucial cog in the wheel given the limited access to credit in much of the region and the prohibitive costs of doing business. As of March 31 2012, Africa as a whole accounted for over 50% of the Ex-Im Bank's outstanding credit lines and much will depend on New Delhi's (often unreliable) leadership if a mutually beneficial Indian-African relationship is to be further developed.
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How Is Africa's Infrastructure Deficit Harming Development?

In the context of weak growth in major economies, Sub Saharan Africa (SSA)'s attractive macroeconomic profile - underpinned by a low base, natural resource wealth, a burgeoning consumer market and a broadly improving business environment - has seen the region become increasingly prominent on investors' and multinationals companies' radar screens over recent years. From private equity firm Helios Investment Partners' raising of US$900mn in 2011 for investment into the region, to Walmart's acquisition of South African retailer Massmart (also in 2011), the growing interest in SSA is palpable. But even the most euphoric Africa optimist will admit that economies in the region still face significant challenges. Although undoubtedly diminished over recent years, political risk - mainly in the form of lack of policy continuity and social instability - cannot be discounted completely. Additionally, the underdevelopment of the region's capital markets means that it is difficult and expensive for firms to access finance.
However, we believe that one of the biggest constraints to economic development, which is cited by almost all who have an interest in the continent, is the inadequacy of physical infrastructure, in the power and transport sectors in particular. According to BMI's proprietary ratings system, which quantifies political and business environment risk and components thereof by assigning each with a numerical value (a higher value implying lower risk), the SSA average for the infrastructure component of the business environment rating lags the global average by more than any other component or aggregate rating.
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Infrastructure Is Where SSA Most Lags The Rest Of The World

BMI Ratings - Short & Long Term Political Risk And Business Environment Total & Infrastructure Subcomponent
Source: BMI. Scores are from 0-100 where lower score indicates higher risk/greater impediment
In light of this, BMI has put together a series of articles which seek to: (1) identify the macroeconomic implications of the physical infrastructure deficit; (2) provide a progress report by looking at case studies of ongoing infrastructure projects; and (3) assess how likely it is that meaningful progress at addressing the deficit will be made in the future given the different financing options available. In this first article in the series, we will start by looking at the macroeconomic and political implications of the physical infrastructure deficit.
Headline Growth Constrained: Perhaps most obviously, poor physical infrastructure decreases headline real GDP growth by negatively impacting productivity and raising costs of production. The African Development Bank (AfDB) estimates that if African countries were to catch up to South Korea in terms of infrastructure, productivity gains would increase annual growth rates by 2.6 percentage points on average.
Diversification Impeded: Many African countries rely disproportionately on a particular natural resource for export and fiscal revenues and as a source of economic growth (eg Botswana: diamonds; Gabon, Angola, Equatorial Guinea: oil; DRC, Zambia: copper). Inadequate infrastructure is one of the major
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stumbling blocks to the broadening of the economic base in these countries which means that their economies remain susceptible to unpredictable commodity demand and prices.
Keeping The Reins On Manufacturing Sector Growth: Nowhere is the effect that poor infrastructure is having on diversification more pronounced than in the manufacturing sector. Based on figures from the AfDB, BMI's analysis suggests that SSA is less industrialised than it was at the turn of the 21st century as growth in the manufacturing sector has failed to keep pace with resource and consumer-fuelled headline economic expansion. Although the region benefits from a large pool of cheap labour, the competitive advantage this offers is more than offset by higher production costs associated with inadequate electricity and water supplies and transport links.
Stuck In Second Gear?

SSA - Manufacturing Value Added (% of GDP)
Source: BMI, AfDB
Consumer Market Fragmentation: Much of the recent excitement about Africa has centred on the continent's burgeoning consumer market with sound bites, such as one about SSA having a larger middle class than India, bandied about as a rallying cry for the potential of the African consumer. The fact though is that SSA is comprised of a patchwork of about 50 economies which are, for the most part, relatively small.
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Poor transport links connecting them mean that gaining access to the SSA consumer pool in its entirety is difficult and expensive. Improved transport links would bolster the attractiveness of the consumer market as a whole and would lure in more competition to drive down prices and improve services.
Inter-Regional Trade (Dis)Integration: The negative impact of poor regional transport infrastructure and the pressing need to improve inter-regional connectivity is starkly borne out by the fact that SSA is the least trade integrated region in the world. Only 12.5% of total SSA imports come from other countries in the region, compared to almost 20.0% in Developing Asia and Latin America and the Caribbean. This has a great deal to do with the fact that inland shipping costs are prohibitively high. According to data from the World Bank, of the $4,990 it costs to import a container to Rwanda, $4,000 goes towards inland transportation costs.
Trade With Thy Neighbour

Regional Trade - % Of Total Regional Imports Coming From Home Region
Source: BMI, IMF
The expense and consequent low amount of inter-regional trade is another reason that the African manufacturing sector has not flourished. Indeed, high regional transportation costs mean that it is cheaper
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for African countries to import finished products from abroad rather than importing inputs and raw materials from neighbouring countries and manufacturing products themselves.
Inflation Magnification: Most economies in SSA have had to deal with periods of high inflation over recent years. Deficient infrastructure has played a part in many instances as it tends to exacerbate supply side shocks. The most recent example is East Africa where a regional drought severely impacted a power sector that is overburdened and heavily reliant on hydroelectric power. The consequent surge in demand for oil for use in diesel-powered generators caused a massive widening of the current account deficit and a collapse in regional currencies which in turn stoked imported inflationary pressures.
Inadequate Power Infrastructure Exacerbated Drought-Induced Price Growth In 2011

East Africa - Inflation, % y-o-y
Source: BMI, National Statistics Agencies
Food has the largest weighting in consumer price baskets in every country in the region (except South Africa), often making up more than 50% of the total. Poor transport infrastructure means that it is often not efficient to move food from well-supplied regions to those facing shortages, leading to market distortions and driving food prices higher than they might otherwise have been.
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Raising Political Risk: Links can also be made between poor physical infrastructure and political risk. Episodes of high inflation, and high food price inflation in particular, have been at the heart of popular discontent and demonstrations over recent years in countries across the region including Uganda, Mozambique, Tanzania and Cameroon. Inadequate infrastructure will continue to exacerbate supply-side shocks, leading to elevated inflation and increasing the possibility of social instability until meaningful progress is made at addressing the shortfall.
Unemployment is a major issue for many countries across the region. The relative stasis of the labourintensive manufacturing industry has meant that little progress has been made at addressing the problem. In fact, strong headline economic growth driven largely by the capital-intensive resource sector has arguably seen the disparity between the haves and the have-nots grow further in recent years. As the events of the last 18 months in the Middle East and North Africa have shown, this is a recipe for social upheaval.
Finally, deficient infrastructure also makes it difficult for central governments to exert control over remoter parts of the territories they govern. For example, the government's ability to respond to turmoil in eastern Democratic Republic of Congo has been severely restricted by the lack of connectivity between Kinshasa and the rest of the country. Poor quality roads, which become impassable after heavy rain, have slowed the progress of Kenyan forces which are helping the Somali government to re-exert control over the country in a fight against Islamist insurgents.
These are but a few examples of the ways in which poor physical infrastructure is constraining economic, social and political development in many SSA countries. The good news is that, although challenges are huge, there is some progress being made. We look at this progress in the next article in this series where we provide case studies of several of the planned or ongoing physical infrastructure projects and analyse the extent to which we believe that these will mitigate the problems outlined above.
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Manufacturing To Remain Weak Link For SSA Economies

BMI View: Though we note a few exceptions, we expect that on the whole Sub-Saharan Africa's nascent manufacturing sector will remain underdeveloped over the medium to long term. A variety of structural factors, combined with strong competition from emerging markets in Asia have caused the share of SubSaharan Africa's GDP attributable to manufacturing to decline since 2000, a trend we predict will continue. Though Africa's resource and service sectors will support strong headline GDP growth, BMI predicts that the decline of manufacturing will make it difficult to solve the region's endemic unemployment problems.
While surging commodity exports and growing domestic consumption have caused rapid growth across Sub-Saharan Africa (SSA), the region's manufacturing sector has failed to keep pace. Based on figures from the African Development Bank (AfDB), BMI's analysis suggests that SSA has actually become a less industrialised economy than it was at the turn of the 21st century. A variety of structural challenges, including weak infrastructure, poor transport links with export markets, and a difficult business environment have prevented the continent from developing the light industries common to most other emerging markets. The rise of cheap imports from Asia and high commodity prices that have directed investment towards extractive industries have also played a role. Without the rise of labour-intensive manufacturing industries, BMI believes that African countries will struggle to find jobs for their surging populations. We note that youth unemployment is already a political problem in many African states, and that a lack of opportunities for young workers was a major cause of the 2010-2011 Arab Spring.
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Powering Ahead?
SSA-Manufacturing Value Added (US$bn) (LHS), Annual Growth % (RHS)
Source: BMI/AfDB
Despite the relatively weak performance of African manufacturing, total production increased by 46% between 2000 and 2011 in constant US dollar terms as regional economies grew. South Africa, which has by far the region's most developed economy, made up the majority of manufacturing in SSA: its manufacturing value added was worth six times that of second placed Nigeria in 2011. Cameroon and the countries of the East African Community (EAC) were also among the region's largest manufacturers. The country to most increase its share of the region's manufacturing was the Democratic Republic of the Congo (DRC), which saw the value of its production increase 10 fold following the end of its civil war in 2002.
With the notable exception of South Africa, however, those African economies that have developed manufacturing bases are mostly concentrated on low end consumer products and the processing of natural resources. In the case of the DRC, for example, almost all manufacturing consists of processing raw copper into formed sheets and rods. While this does add value, it is unlikely to form the basis of a more developed sector.
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Stuck In Second Gear?

SSA - Manufacturing Value Added (% of GDP)
Source: BMI/AfDB
At the regional level the fraction of GDP created by manufacturing has declined from 11.8% in 2000 to 9.8% in 2011, representing a moderate de-industrialisation across SSA. The relative decline of manufacturing as a fraction of the African economy is particularly worrying given the comparatively small role that the sector plays in the region's economy already.
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Falling Behind
Manufacturing In Select Emerging Markets (%GDP)
Source: BMI/AfDB for African economies, BMI/World Bank for others; Russia and Brazil 2010 figures, all others 2011
This trend is especially pronounced in some countries, which have seen their already weak manufacturing sectors collapse. Cte d'Ivoire has seen the most rapid deindustrialisation, with the share of its economy made up by manufacturing collapsing from almost a fifth to only 6% over the past 11 years. Of the 47 countries in SSA for which data were available, 25 of them had manufacturing sectors that were smaller as a percentage of their economy in 2011 compared with in 2000.
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The De-Industrial Revolution?

SSA - Manufacturing Share Of GDP, 2000 & 2011
Source: BMI/AfDB
While the causes of some countries' underperformance are unique (e.g. Cte d'Ivoire's civil war, Zimbabwe's economic crisis) there are some factors that are common across the region. BMI identifies poor access to capital, weak infrastructure, and the difficulty of reaching key export markets as the key factors holding back African manufacturing. As we do not see any of these forces being seriously reduced, we hold a bearish outlook for the sector as a whole.
Barriers To Growth
Compared with emerging markets in Asia and elsewhere, the banking system in most of SSA is notably underdeveloped. It is difficult or impossible for many small firms to access the capital that they need to expand. With a few exceptions government programmes to provide aid to strategic industries remain corrupt, underfunded, and inefficient.
An inability to access capital is made more challenging by the extra costs imposed by weak infrastructure that makes shipping goods within countries difficult and expensive. Poor electricity and water provision
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also presents a problem, and deters investment in higher-technology production. Despite increased attempts to improve SSA infrastructure, BMI does not expect that this will be dramatically improved except over the long term. We note that investment remains at around 15% of GDP, compared with 25% in many Asian economies. A low savings rate and weak government revenues would preclude a massive increase in this figure.
Even were physical infrastructure to improve, African geography necessitates that many goods (or their inputs) must cross national borders. We note that infrastructure cooperation between countries remains low, and customs barriers to trade present a serious challenge. Since most African countries have relatively small populations compared with Asian competitors, a large-scale manufacturing sector would require more cross-border cooperation than we believe is likely in the near future.
Finally, high export costs mean that African manufactured goods are not competitive on international markets. Despite lower labour costs - which is the key comparative advantage across most of the region transport costs mean that it is actually significantly more expensive for most developed markets to import African goods rather than Asian ones. The World Bank estimates that logistics costs can add 25% to the cost of goods shipped from developed markets, significantly reducing the continent's cost advantage.
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Top Producers
SSA - Top Manufacturing Economies
Source: BMI/AfDB, United States Government
Turning The Tide?
We do, however, see some signs of potential. BMI believes that the countries of the EAC, especially Kenya, have the potential to expand their manufacturing sectors. The five countries share a much more integrated market than most African regions. Kenya is already a more advanced manufacturer than most on the continent, with a growing vehicle assembly industry. As BMI is predicting strong economic growth in East Africa - partially as a result of the development of the region's hydrocarbon potential - we see Kenya as benefiting from its role as the hub of an expanding regional economy.
Nigeria, though it faces serious logistical challenges, has the advantage of a huge domestic market and plentiful cheap energy. While a relatively small player compared to the region's larger economies, Cte
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d'Ivoire should see a rapidly expanding manufacturing sector, provided that political stability can be maintained. The country was the third most industrialised in the region before civil war destroyed much of its economy, and should experience rapid growth as it rebuilds its cocoa-processing and consumer goods sectors.
Overall, however, we expect manufacturing to continue its slow decline. As has been widely noted, the key economic transition underway in SSA has been an increase in the importance of the region's service sector. BMI expects this trend to continue, with growth especially high in the telecoms and transport sectors. We note, however, that unlike other emerging markets that have focussed on service sector growth - like India few African services are currently exported. While outsourcing is being developed in Kenya, most services remain small-scale and domestic. Africa is creating a nation of shopkeepers, but not of call centres.
The Post-Industrial Future?

Service Value Added US$bn (LHS) & GDP Share (RHS)
A Billion Shopkeepers?
We note, however, that this model of development may present challenges in the future. Manufacturing industries have been critical in providing jobs for rapidly urbanising countries in Asia. Unemployment in African economies remains very high compared with other emerging markets, and we doubt that the small-
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scale service businesses and capital-intensive resource industries currently powering African growth will be able to soak up the millions of young Africans who are joining the workforce.
No Jobs For The Boys

SSA - Unemployment Rate
Source: BMI/National Statistics Agencies, figures for Q2 2012 unless otherwise noted.
That said, these figures may over-state the problem, as much of the African economy remains in the informal sector and unemployment figure are notoriously unreliable. Still, unemployment of young graduates remains high across the region, and high-skilled and labour-intensive industries must be created to avoid growing popular discontent. We point to the 2010-2011 Arab spring, as well as the on-going protests in Sudan as evidence of the risks of high unemployment, especially among the young.
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SSA Unlikely To Benefit From Rising Chinese Wages

BMI View: As rapid industrialisation causes wages to rise in China, we expect to see the country specialise in higher value goods as it becomes less competitive in labour-intensive production. Some of these low-cost industries will likely move abroad, seeking lower wages in less developed countries. While this shift will have a transformational effect on those markets able to 'capture' this opportunity, BMI believes that SubSaharan African (SSA) economies are not as well-placed as Asian ones due to infrastructural deficiencies and less attractive business environments in SSA.
China is rapidly moving into higher end manufacturing with leading Chinese firms building, and increasingly - designing, mobile phones, cars, satellites, and jet planes. This transition is coming as wages rise, reducing China's comparative advantage in the low-cost and labour-intensive sectors that powered China's breakout into world markets. BMI predicts that, over the coming years, millions of jobs will be 'exported' from China as industries such as textiles and light manufacturing relocate to lower-wage countries.
We believe, however, that Asian countries (notably Bangladesh, Vietnam, and Indonesia) are better placed to reap the benefit of this than African ones. This is largely due to poor business environments and massive infrastructure deficits in Sub-Saharan Africa (SSA), which we predict will deter manufacturing investment even in cases where the continent has a clear labour cost advantage.
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Moving Up-Market
China - Export Categories By Share Of Exports (%)
Source: Justin Yifu Lin/World Bank
Warning: Turn Ahead
Rising wages in China are not due solely to robust (though slowing) economic growth, but also to a structural change in the country's supply of labour. China's manufacturing growth has been supported by the one-time migration of almost 200 million workers to coastal provinces from the less developed interior. While China's population is large, it is still finite; and as the supply of willing migrants is depleted the country will soon face a 'Lewis Turning point' at which supply constraints will kick in and wages will rise.
BMI believes this process is beginning, a view which is supported by rising wage figures in both coastal and interior provinces. Given the size and momentum of the Chinese economy, we stress that this change will be more of a process than a hair-pin turn, but only a severe economic slump will prevent Chinese wages from rising significantly over the coming years, matching the pattern seen in other Asian emerging economies.
Japanese economist Kaname Akamatsu used the term 'Flying Geese' to described the process by which rising wages caused Asian economies to follow each other in close formation; low-wage industries
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relocated from Japan to Korea and Taiwan, then from there to China and South East Asia. With China's GDP per capita (in constant US dollars) now approaching the level of Japan in 1960 or South Korea in 1980, BMI believes that there is an opportunity for a fourth line of economies to join the formation.
African Geese Not Yet Taking Flight
Given the huge size of China's economy, the potential is enormous; Justin Lin, a former World Bank chief economist calculates that, if just 5% of China's apparel sector were to move to SSA it would boost the region's total manufacturing production by 92%, creating millions of jobs. BMI doubts, however, that this potential will be realised.
Still Tied To The Land

Continental Africa - Employment By Sector, 2010 (%)
While particular countries may attract some investment we believe that the structural impediments which have hindered the development of Africa's manufacturing sector will remain formidable barriers to the large-scale outsourcing of Chinese production to the continent. Indeed we note that Africa's workforce remains more agricultural than many Asian and Latin American economies were in the 1960s.
Source: International Labour Organisation
The most important of these barriers will be the region's generally inadequate infrastructure and weak business environments. Collectively, we believe that these factors will almost entirely negate the cost advantage that low wage rates in SSA would otherwise confer and we predict that Asian economies such as Cambodia and Vietnam will profit most from China's industrial modernisation.
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Logistical Issues
Emerging Markets - World Bank Logistics Performance Index Scores (0-5)
Source; World Bank (Note, Non-African economies shaded black)
Poor physical infrastructure in SSA is a serious impediment to the region's economic development, especially weak transport connections between states. While South Africa performs quite well on the World Bank's logistical performance index, major African economies such as Nigeria and Kenya are ranked as having worse infrastructure connections than land-locked Laos.
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This is especially burdensome given that the small size of many African markets would prevent most individual countries from competing against larger Asian economies such as Vietnam or Indonesia. Though regional integration could build economies of scale, cross-border trade in SSA remains difficult, slow, and expensive, even within the continent's many economic communities.
African SEZs: Problems With Power

Emerging Markets: Electricity Outages Inside And Outside Special Economic Zones
Beyond transport, we highlight power as being a major hindrance to the development of the manufacturing sector. A recent academic study found that firms experienced more power outages in SSA regions designated as 'Special Economic Zones' (which have specially updated infrastructure) than they did when using the national grid in most other emerging markets.
Source John Page/Brookings
Poor access to physical capital is twinned with a skills-shortage in many key sectors and broadly low productivity in many economies. Given that most SSA countries are starting with a weaker manufacturing base than their Asian rivals, we would expect the start-up costs to be significantly higher.
Still An Uninviting Environment
Though BMI has noted that the business environment is improving in certain countries across Sub-Saharan Africa, the region as a whole remains a substantially more difficult place in which to do business than the Asian countries with which it would have to compete for manufacturing jobs (see 28 May 2012 'Climate Change: The Business Environment In Africa' on our online service).
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Strangled By Red Tape

Emerging Markets: Time Senior Managers Spend Dealing With Government Regulations (%)
Source: BMI/World Bank Enterprise Surveys (Figures are most recent available) (Note: Non-African counties shaded black)
While some countries have enacted laws encouraging foreign investment, most SSA countries have weak legal and regulatory frameworks which are often biased against foreign firms. Figures from the World Bank suggest that senior business managers in the Democratic Republic of the Congo (DRC) spend almost a third of their time complying with government regulations, compared with just 0.4% in Thailand. While the DRC is obviously an exceptional case, regulations in South Africa, Kenya, and Nigeria all take more time to complete than those of Bangladesh.
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Somewhat Competitive On Wages

Emerging Markets - Monthly Wage For Unskilled Manufacturing Work, 2012 (US$)
Source: World Bank
Low wages are often seen as the advantage of many SSA economies, lowering the cost of production; even if risks are higher. Wages across much of the region (with exceptions in a few countries, such as South Africa and Gabon) are lower than in China, and have been for several years. We note, however, that they are not substantially lower than wages in other Asian economies, such as Vietnam. This is partially because, despite high unemployment levels many African economies also suffer from severe skills shortages, which push up wages in the manufacturing sector.
False Economies
An economic survey of SSA manufacturing recently estimated that higher transport costs and the burden of complying with government regulations (which often demand the use of expensive local input goods) mean that indirect costs make up between 18-35% of the cost of production in the region, compared to 8% in China. The high cost of doing business often completely erodes the cost advantage implied by Africa's low wages.
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Cheaper Workers, Expensive Production

Ethiopia & China: Cost Difference: Ethiopia compared to China (%)
Source: World Bank
A report by the World Bank estimates that higher costs for inputs and trade logistics mean that manufacturing wood products was 125% costlier in Ethiopia despite wages being 17% lower there than they were in China. This was due to the cost of shipping primary products across international borders and the lower productivity of workers who were unused to a production-line environment.
While this is only a single example, and costs will vary across the continent, it is worth noting that Ethiopia is one of Africa's poorest countries (we estimate GDP per capita currently stands at just US$483) and one where the production of labour-intensive and low-cost goods should be most competitive.
We also stress that this compares wages in one of Africa's poorest states with one of emerging Asia's richest ones; the wage gap between, for example, Vietnam and Zambia will be much smaller. Without substantial improvements in infrastructure and reforms to the business environment, BMI does not believe that rising wages in China are likely to confer a cost advantage on African production in anything but the long term.
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Collateral Damage: The Eurozone Crisis In Africa

BMI View: While we believe that the eurozone will continue its 'muddle-through' trajectory, BMI acknowledges that a more dramatic deterioration remains possible. In providing an overview of how such a crash would affect different African economies, we select those we believe would be most or least vulnerable to European contagion. We identify Francophone West Africa, the Maghreb states, South Africa, Mozambique, and South Sudan as especially vulnerable to the fallout of any deterioration in the European crisis. While no African market would be unaffected, we identify Angola, Nigeria, Zambia, and the East African Community states as weathering the storm comparatively well.
BMI identifies exports, financial sector links, foreign direct investment, and foreign aid as the channels by which a crisis in the eurozone would spread to African economies. We highlight the Maghreb states, Francophone West Africa, Mauritius, the Seychelles, Mozambique, South Africa, and South Sudan as being particularly exposed to Europe. We predict that countries with strong export links to China, stable balance of payments positions, and large domestic markets will weather any eurozone crisis relatively well. With this in mind, we focus on major oil producers, Ethiopia, Kenya, and Zambia as being relatively safe from eurozone contagion.
For all of the talk of an emerging China-Africa axis, Europe remains crucial for Africa's economic growth. It is the largest destination for African exports, a major foreign investor, the continent's largest aid donor, and a major political and security partner. From banking and telecoms to mining and oil exploration, European firms are deeply woven into Africa's economy at every level.
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Eurozone Still Africa's Top Customer

Sub-Saharan Africa - Exports By Destination
Source: BMI/IMF
BMI's Europe analysts believe that recent decisions by the European Central Bank have increased the chances of a eurozone survival, but the growth outlook for region is weak, with significant risks of another major downturn. In this article, we consider the impact on Africa of a serious slowdown in eurozone growth, potentially caused by another spike in sovereign debt or banking sector stress. BMI identifies export demand, deep financial links including trade finance, foreign direct investment and aid flows as the channels by which a worst-case scenario for the eurozone would affect countries across Africa.
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Seller Beware
Africa - Share Of Exports Sent To Eurozone
Source: BMI/IMF
Export-Led Underdevelopment
The countries most immediately hit by an economic slowdown in Europe would be those most dependent on exporting goods to the eurozone. Ten African countries sell more than a third of their goods exports to the eurozone and several North African countries are as dependent on the bloc as Mexico is on the United States. BMI predicts that the eurozone's demand for African exports would fall in the event of a further crisis, but that certain sectors would be hit harder than others. Industrial metals such as iron, bauxite, and copper, food products, and diamonds would be particularly affected.
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Table: Dangerous Dependence
Country Tunisia Congo (Republic) Equatorial Guinea Algeria Ghana Cte d'Ivoire Morocco Mozambique Cameroon Mauritius Madagascar Uganda Egypt Ethiopia Central African Republic
Exports (% GDP) 37.90 109.40 47.00 38.30 32.70 42.40 21.50 23.90 19.70 23.50 14.50 13.90 11.30 7.40 5.10
Eurozone (% Exports) 70.28 22.41 39.55 41.63 44.71 34.42 49.42 43.08 49.53 40.95 39.10 25.40 29.48 32.85 43.47
Eurozone Exports (%GDP) 26.64 24.52 18.59 15.94 14.62 14.59 10.62 10.30 9.76 9.62 5.67 3.53 3.33 2.43 2.22
Source: BMI
The impact of an export shock would be felt hardest in the countries that are heavily dependent on foreign trade generally, such as Tunisia and the Republic of the Congo. Countries with larger domestic markets, such as Ethiopia, or those which have isolated economies such as the Central African Republic would be hit less hard as their economies are more inward-focussed.
Even countries without direct trade links to Europe would see exports hit by weak import demand from the eurozone. One cause of this is indirect trade. For example, China's largest export partner is the eurozone, so weak final demand in Europe would depress Chinese demand for African minerals.
BMI highlights the impact that a eurozone slowdown would have on commodity prices. Our Commodity analysts highlight oil and industrial metals as being vulnerable to dramatic market corrections, with agricultural goods likely more resilient. Established oil-exporters are unlikely to see volumes fall, but could face serious balance of payments issues if prices were to drop.
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Countries with stronger balance of payments positions would weather an export-shock better than those which are currently running deficits. Africa's major oil producers are mostly on relatively stable footing and have the capacity to deal with a drop in export prices. Angola, for example, was forced to seek IMF emergency aid in 2009, but has since built up substantial foreign currency reserves. Economies that are currently running large current account deficits are likely to be hit hard by any drop in exports. BMI points to Mozambique, which is also highly dependent on trade with Europe, as being especially vulnerable.
Different Starting Positions

Africa - Strongest & Weakest Current Account Positions, % Of GDP
Source: BMI
Financial Ties That Bind... And Gag?
Beyond exports, a dense web of financial and banking ties link Africa to Europe. According to data from the Overseas Development Institute (ODI) European banks make up just under 25% of cross-border lending in Africa, but they dominate the market in some states; making up over half of bank assets in Mozambique, Ghana, Cameroon, Tanzania, and others. Deleveraging at home could cause European banks to abandon operations abroad to focus on meeting capital reserve requirements. We believe this risk is highest for Mozambique, Mauritius, and the Seychelles, where European banks play a key role in the financial sector.
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Global trade finance, in which European (especially French) banks play a key role, is often discussed as a major channel through which European crises could be transmitted to African economies. BMI notes, however, that several key pieces of research suggest that the sector's importance has been overblown. The IMF, for instance, has found that shocks to trade finance were not a major factor in the decline of trade seen in late 2008 and early 2009.
As during the 2008-2009 crisis, BMI predicts that the relative underdevelopment of the African banking system and its lack of connection to the international financial markets will shield African banks from a crisis abroad. While most African markets are small and highly illiquid, we do point to South Africa as an exception. We believe that South Africa's more integrated financial markets and widely-traded currency will expose the continent's largest economy to further turmoil. Countries with less developed financial systems would, however, still feel the strain through a fall in remittances from Europe.
The Other Periphery?

Africa - Currencies Pegged To The Euro
Another, more fundamental, financial link between Europe and Africa concerns the CFA Franc and Moroccan dirham, both of which are pegged to the euro. While the progressive depreciation of the euro against the US dollar has provided relief to the export sector in the CFA-zone, BMI stresses that instability
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in the euro could be severely damaging to a group of highly fragile economies which are very dependent on trade in US dollar-denominated commodities.
Stillborn Sectors
The economic sectors that BMI believes would be most severely affected by eurozone fallout are those which are still in the exploration and development stage. We point especially to oil and iron ore developments in West Africa, oil and gas exploration off the coast of East Africa, and South Sudan's oil sector as being vulnerable.
The first reason for this is a lack of foreign direct investment (FDI). We note that FDI from the EU into Africa fell from US$70bn to US$50bn during the 2008-2009 crisis and has yet to reach pre-crisis levels. Project funding for the infrastructure and development costs necessary for new industries is likely to become scarce. While exploration agreements already signed in Cte d'Ivoire and Uganda would be honoured, production would be set back. Hope of a new South Sudan pipeline could die, and investmentfocused development plans would be unlikely to be realised.
Secondly, BMI predicts that risk-conscious firms are likely to focus on core assets. We have already seen several large miners responding to low metal prices by consolidating operations in their major projects and deferring new operations. We predict this would increase, with available FDI focussing on established industries, such as Zambian copper, to the exclusion of recent start-ups.
We note that Zambia also stands to benefit from continued Chinese investment. BMI's Asia team believes that, even in the event of a Chinese economic slowdown, investment from China - much of it led by stateowned firms - would continue.
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Political Ties
Aid Dependency
Africa - Selected Markets Aid Receipts, % Of GDP
The EU contributes over half of all foreign aid, and historical ties to Africa mean that the majority of its aid is directed to that continent. According to the ODI total aid given worldwide fell by 3% in 2011 as developed countries struggled with high budget deficits. Crisis-hit eurozone states cut their funding drastically; Spain has reduced overseas assistance by 33%. Should additional European countries be sucked into the debt crisis, similar cuts could be made, crippling the EU's aid budget. BMI notes that the worst-affected countries would likely be the continent's smaller economies, such as Burundi. Among larger markets, Mozambique, the DRC, and the Republic of Congo would lose out.
Source: World Bank, All figures 2010
Weathering The Storm?
While all African countries would suffer from a further slowdown in Europe, BMI has identified the factors that will make certain countries more vulnerable than others. We believe that extensive trade ties to Europe, linked financial systems, a reliance on foreign direct investment, and dependence on foreign aid are the most important factors in raising a country's exposure to a further crisis in the eurozone. We predict that the countries worst effected by a eurozone slowdown would be the Maghreb states, the 14 countries that use the CFA franc, Mauritius, Mozambique, and South Africa.
On the other hand, BMI believes that strong trade links with China and other emerging markets, a stable balance of payments position, a minimal dependence on foreign trade, and large government reserves would protect some countries in the event of a graver eurozone crisis. We highlight established oil producers with large surpluses (eg, Angola), countries with large domestic markets (eg, Kenya) and states with strong ties to China (eg, Zambia) as best prepared to deal with an aggravated eurozone crisis.
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Table: The Scoreboard
Country Angola Cameroon DRC Ethiopia Ghana Kenya Maghreb Mauritius Mozambique Nigeria South Africa South Sudan UEMOA Uganda Zambia
High Eurozone Exports
Dependent on Deep Current Exports Account Deficit
Eurolinked Currency
Deep Financial Links
FDIAidDependent Dependent
Source: BMI (Most Exposed Bold; UEMOA = West African Economic & Monetary Union; Maghreb = Algeria, Morocco, Tunisia, only Moroccan currency pegged)
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China And Africa - Is The Party Over?

BMI View: We believe that China's economic slowdown, and its transition to a more domestic consumption-based economy, will depress demand for African exports. This will be felt especially strongly in exporters of industrial metals (copper, iron ore, etc) which are heavily exposed to China's construction sector. Due to the heavily concentrated distribution of Chinese trade with Africa, falling export demand will be focused on a relatively small number of countries, notably Zambia, Angola, the DRC, and West African iron exporters. We expect Chinese investment in Africa to remain high, and highlight the opportunities that more Chinese domestic consumption will present for some economies. Africa's dependence on commodity exports, however, makes it less well-suited to adapt to a consumer-focused China than many other emerging markets.
When Chinese and African leaders gathered for the first Forum on China-Africa Cooperation in Beijing in October 2000, they pledged to develop a 'new, stable and long-term partnership' that would boost growth in both economies. In the decade that followed trade between the two sides grew almost 7-fold, and increased from 4.7% to 13.5% of Africa's total trade. After years of progress, however, BMI is expecting a slowdown in the coming years.
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Peaked?
Africa - Chinese Trade With SSA (US$mn & Share Of SSA Trade)
Source: BMI/IMF DOTS
The key reason for this is our long-held view that China's long-running economic boom is coming to an end. As the Chinese economy rebalances towards domestic consumption and the country deals with the slow unwinding of its massive real estate bubble, we expect Chinese demand for African resources to falter. BMI predicts that this will hit exporters hard, and depress commodity prices across the board; a trend that we believe is already beginning to play out.
Overall, however, we believe that the impacts of China's deceleration will have a highly uneven impact across Africa. We highlight metal exporters such as Zambia and South Africa as highly exposed to a drop in Chinese demand, while oil and food exporters should be more insulated. We believe that Chinese investment into Africa will be relatively stable, and note that the rebalancing of the Chinese economy will present opportunities for some African economies.
Exports: Fewer And Cheaper
BMI believes that one of the most reliable indicators of China's slowing economy has been increasingly sluggish trade figures (see Sept 3 'Recession Is Here, And Stimulus Won't Help' on our online service). As
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China's economy slows, we expect real growth in import demand to fall from an average of 14.6% in the 10 years to 2011 to just 2.5% in 2012 and 6.6% in 2013. China's share of African exports peaked at 15.3% in 2010 and has not risen since. If China's share increases above this level in the coming years, we suspect it will more likely be due to falling European demand rather than rising Chinese consumption.
A Smaller Footprint
Africa: Share Of Exports Sent To Eurozone (Left) & China (Right)
The countries most exposed to trade with China will feel this pinch first. We highlight Zambia, Angola, Sudan, and the Democratic Republic of the Congo (DRC) as having the most to lose. BMI calculations indicate that exports to China represent 17% of GDP in Zambia, and a startling 31% in the DRC. While all countries will be affected, we note that China's trade with Africa is much more concentrated in a few countries than is that of Europe or America, the continent's other main trading partners. While a few countries are highly dependent, half of all African countries send less than 7% of their exports to China. By comparison, half of African countries send more than a fifth of exports the euro zone. This indicates that the trade shock of a Chinese slowdown would be much more geographically contained than a crisis in the euro zone.
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Table: Ties That Bind
Share of Economic African partner Exports
Top Export Sources (% of Exports)
Top Export Sources (US $bn)
Top 3 Export Parters' Share of All Imports From Africa
Median Share of Exports
Eurozone
Tunisia (70.3%), Libya Nigeria (US$27.1bn), Algeria (62.7%), Cameroon (US$24.1bn), South Africa (US$15.9bn) 21.4% (50%) Sudan (69%), DRC (48.1%), Mauritania 12.5% (46.6%) Chad (83.2%), Niger (49.2%), Gabon 15.6% (33.9%) Angola (US$22.6bn), South Africa (US$12.4bn), Sudan ($8.6bn) Nigeria ($31.2bn), Algeria ($13.6), Angola ($12.6bn)
45.3%
21.1%
China United States
64.8%
7.0%
67.7%
4.9%
Beyond direct trade links, BMI believes that falling commodity prices will be a key channel by which China's slowdown will be spread to Africa. Our mining team estimates that China represents 42.3% of global demand for base metals, so slower demand growth will have a dramatic impact on commodity prices. We believe that this is already occurring, and predict that metal prices will continue to moderate in the coming years. We expect this to have a serious impact on Zambia, the DRC, and the iron ore sector in West Africa.
Commodities: Trending Down

China: Key Industrial Commodities (Rebased To 2008 Average Price)
BMI stresses that industrial metals, which are highly exposed to China's construction sector, will be harder-hit than oil. Our China analysts expect demand for energy will be bolstered by rising car ownership among the rising middle class despite the slowdown. This means that oil-exporting Angola and Sudan, will be less affected than their expose to Chinese imports would suggest, though they will suffer from lower crude prices in the short run.
Source: BMI (f= BMI forecast)
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Investment: Exit The Dragon?
Though difficult to measure precisely, China's foreign direct investment (FDI) into Africa has risen dramatically in recent years. At each subsequent China-Africa forum, Beijing has doubled its pledged grants to Africa, and Chinese firms are now active in a variety of industries across the continent.
While individual investments may be curtailed, BMI believes that China's high level of investment in Africa will continue in the face of the economic slowdown that we are predicting. China' resource-focussed investment in Africa is being led by large state-owned enterprises. We believe that these firms' preferential access to capital and long time horizons mean that they are likely to continue investing in strategic resources such as oil.
For diplomatic reasons, we suspect that Beijing will continue to give grants and concessional loans to African governments. Even if the next China-Africa forum bucks the trend by not doubling pledges, a meaningful cut is doubtful. Beijing continued to send aid abroad during the Cultural Revolution, and is unlikely to cut back now.
Rebalancing: Challenges And Opportunities
BMI stresses that we are not predicting a brief fall in Chinese growth, but the beginning of a fundamental reordering of the Chinese growth model. Weak external demand, the falling efficacy of new investment, and rising wages are beginning to replace China's export and investment-based economy with a more sustainable one based on domestic consumption. As was the case during the transitions of the Korean and Japanese economies in the 1970s and 1990s, we expect a period of subdued economic expansion and a decline in investment as a share of GDP.
African economies that are heavily dependent on industrial metals used in construction are likely to be hardhit by this transition. BMI especially points to the developing iron ore sector in West Africa, which may find itself coming online in the middle of a building bust.
On the other hand, a more consumption-focused China could boost demand for food imports, potentially helping cocoa and palm-oil producers in West Africa. Rising wages may also cause some low-value manufacturing to leave China, though the many challenges faced by manufacturing in Africa lead BMI believe that low-cost Asian destinations like Vietnam are more likely to profit from this.
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Appendix: BMI Forecasts And Ratings

Macroeconomic Forecasts
Table: BMI Forecasts For Average Consumer Price Inflation, % y-o-y
2010 Angola Botswana Cameroon Cte dÌvoire DRC Gabon Ghana Kenya Madagascar Malawi Mauritius Mozambique Namibia Nigeria Rwanda Senegal Sierra Leone South Africa South Sudan Sudan Tanzania Uganda Zambia Zimbabwe 14.4 6.9 1.3 1.8 24.6 1.5 10.8 3.9 9.2 7.4 2.7 12.4 4.5 13.8 2.3 1.2 9.7 4.3 1.2 16.5 7.2 4.1 8.2 3.1
2011e 13.5 8.7 2.9 4.9 15.6 2.3 8.7 14.0 9.5 7.6 5.5 11.2 5.0 10.9 5.6 2.7 9.5 5.0 47.3 18.0 12.7 18.6 6.4 3.5
2012e 10.2 7.4 2.7 1.3 10.0 3.4 9.2 9.6 6.8 20.8 3.9 2.6 6.6 12.2 7.1 1.4 10.0 5.7 45.1 35.1 16.1 14.6 6.6 4.0
2013f 9.1 7.0 2.2 2.6 8.0 2.5 9.9 5.0 7.3 21.3 4.8 5.0 6.5 10.5 5.9 1.8 10.0 6.0 20.1 32.2 7.7 6.7 7.2 4.2
2014f 9.4 6.2 2.5 2.6 9.0 2.5 11.0 6.7 8.0 11.5 5.6 7.5 5.8 8.2 5.0 1.8 9.0 5.6 13.5 14.0 6.5 7.7 7.0 4.1
2015f 9.2 6.0 2.5 2.6 9.0 2.5 10.5 7.0 8.0 7.5 5.3 7.0 5.5 7.5 5.0 1.8 8.0 5.2 12.0 7.5 6.0 7.5 7.0 4.0
2016f 8.8 6.0 2.5 2.6 9.0 2.5 9.5 7.0 8.0 7.0 5.1 7.0 5.5 7.5 5.0 1.8 8.0 5.0 11.0 7.0 6.0 7.8 7.0 4.0
2017f 8.2 6.0 2.5 2.6 9.0 2.5 8.5 7.0 8.0 6.5 5.0 6.5 5.5 7.2 5.0 1.8 8.0 5.0 10.0 7.0 6.0 8.2 7.0 4.0
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Table: BMI Forecasts For Budget Balance, % Of GDP
2010 Angola Botswana Cameroon Cte dÌvoire DRC Gabon Ghana Kenya Madagascar Malawi Mauritius Mozambique Namibia Nigeria Rwanda Senegal South Africa South Sudan Sudan Tanzania Uganda Zambia Zimbabwe 6.0 -6.9 -1.1 -2.0 2.2 4.8 -5.9 -4.2 -2.4 -3.3 -3.2 -3.2 -5.9 -3.2 -2.0 -4.9 -4.4 0.5 -2.0 -6.5 -4.3 -3.9 -1.3
2011e 9.2 -2.0 -2.7 -6.1 -3.3 7.9 -0.9 -4.4 -2.2 -0.1 -3.2 -6.2 -11.4 -3.0 -0.7 -6.6 -4.3 0.9 -8.4 -5.7 -3.5 -3.3 -1.5
2012e 6.3 1.4 -3.9 -3.4 -3.7 6.1 -7.2 -5.6 -2.2 0.7 -2.5 -6.2 -11.2 -2.9 -1.6 -6.6 -4.9 0.1 -11.4 -3.6 -3.6 -4.5 -1.0
2013f 0.1 2.4 -3.6 -2.8 -4.0 1.2 -6.3 -5.2 -2.1 -1.3 -2.0 -6.2 -11.4 -2.5 -2.0 -6.2 -4.7 0.2 -7.5 -3.0 -3.3 -4.8 -1.5
2014f -1.6 3.3 -2.9 -2.5 -4.7 1.8 -5.4 -4.8 -1.9 -1.8 -1.9 -5.9 -11.2 -3.2 -1.4 -5.7 -4.1 0.1 -7.4 -2.4 -3.1 -4.8 -1.3
2015f -1.4 4.2 -2.7 -2.3 -5.2 1.4 -5.4 -4.6 -1.7 -2.3 -1.5 -5.6 -9.3 -4.0 -0.8 -5.2 -3.6 0.2 -7.6 -2.8 -2.0 -4.6 -1.1
2016f -1.0 4.6 -2.9 -2.0 -5.2 0.9 -5.0 -4.5 -1.6 -1.9 -1.3 -5.2 -7.3 -4.9 -0.6 -4.6 -3.3 0.2 -7.9 -3.1 -1.3 -4.7 -0.9
2017f -0.3 4.6 -2.8 -1.7 -5.6 0.6 -4.5 -3.9 -1.5 -1.8 -1.1 -5.3 -6.1 -5.8 -0.5 -4.1 -3.0 0.1 -7.9 -2.9 -0.4 -4.3 -0.8
Source: BMI, central banks & finance ministries. BMI forecasts.
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Table: BMI Forecasts For Balance Of Payments, % Of GDP
2010 Angola Botswana Cameroon Cte dÌvoire DRC Gabon Ghana Kenya Madagascar Malawi Mauritius Mozambique Namibia Nigeria Rwanda Senegal South Africa Sudan Tanzania Uganda Zambia Zimbabwe 8.1 1.1 -3.6 4.6 -11.7 5.8 -8.2 -7.8 -17.8 -14.1 -8.3 -13.5 0.2 5.9 -6.0 -6.1 -2.8 0.2 -8.3 -8.8 7.0 -33.5
2011e 11.2 2.4 -2.7 2.8 -9.9 6.2 -9.4 -13.9 -16.4 -12.9 -12.7 -13.2 -1.9 3.6 -9.6 -7.7 -3.3 1.4 -17.1 -10.4 5.2 -41.8
2012e 16.4 1.3 -3.4 -3.0 -10.3 5.2 -11.3 -11.2 -19.3 -11.2 -16.4 -13.0 -2.7 7.2 -9.2 -12.6 -6.2 -16.0 -13.8 -10.7 1.4 -43.3
2013f 16.2 1.2 -3.6 -2.7 -11.8 2.0 -12.6 -9.9 -19.0 -10.2 -14.4 -14.4 -4.3 7.2 -8.9 -12.9 -6.2 -14.8 -12.5 -10.6 0.9 -44.4
2014f 10.8 1.9 -3.2 -2.9 -12.1 -0.7 -10.3 -9.1 -18.9 -10.0 -12.9 -15.2 -4.6 6.0 -9.0 -13.6 -5.9 -15.3 -12.3 -9.2 4.3 -41.6
2015f 8.0 2.3 -3.3 -2.5 -10.0 -3.4 -5.5 -8.5 -19.2 -10.8 -10.1 -14.1 -5.4 5.2 -9.0 -13.3 -6.3 -16.1 -12.1 -8.0 4.5 -40.5
2016f 6.4 3.0 -3.7 -2.1 -10.7 -5.2 -5.0 -7.7 -20.1 -12.2 -9.5 -12.4 -6.0 3.4 -8.5 -12.9 -6.4 -16.1 -12.0 -6.5 4.4 -39.6
2017f 3.5 3.5 -3.5 -1.8 -10.3 -6.3 -5.3 -7.2 -21.4 -14.0 -9.0 -11.9 -6.1 3.3 -8.1 -12.2 -6.2 -15.9 -12.0 -4.5 4.9 -39.0
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Ratings
Table: BMI Ratings
Short-Term Political Risk Rating* Angola Botswana Cameroon Cte dÌvoire DRC Gabon Ghana Kenya Madagascar Malawi Mauritius Mozambique Namibia Nigeria Rwanda Senegal Sierra Leone South Africa South Sudan Sudan Tanzania Uganda Zambia Zimbabwe 69.0 72.9 67.5 59.6 25.8 69.6 72.1 51.2 34.0 66.9 82.7 66.9 70.8 47.9 64.0 75.6 53.3 67.3 33.1 24.6 65.4 56.7 63.8 31.9
Long-Term Political Risk Rating* 44.6 70.4 26.0 50.9 45.7 60.4 68.6 52.7 40.4 81.5 56.8 61.3 62.7 48.8 54.3 28.2 48.0 60.5 28.3 62.3 53.7 68.8 54.2 34.6
Short-Term Long-Term Business Economic Risk Economic Risk Environment Rating* Rating* Rating* 64.6 73.1 47.3 51.7 29.6 52.5 39.2 47.1 32.3 35.0 60.0 41.2 34.4 59.4 48.3 43.3 46.0 60.2 42.7 23.1 46.9 48.8 50.8 31.2 51.8 58.3 40.9 41.9 29.6 55.3 45.0 44.7 31.1 39.4 60.5 39.1 42.9 55.8 46.0 41.9 26.4 62.9 29.1 22.1 50.1 47.6 46.5 22.5 30.0 48.4 30.4 33.0 24.5 35.5 46.0 41.5 36.0 39.7 61.8 34.3 44.5 39.9 39.8 38.4 30.1 53.6 n/a 26.5 39.0 40.2 43.5 33.9
Source: BMI. *Scores are from 0-100 where a lower score indicates higher risk.
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Analysts: Matthew Searle, Geraint Tudor, John Ashbourne Editor: Lisa Lewin Production: Neil Murphy Publishers: Richard Londesborough, Jonathan Feroze

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BMI Special Report Africa Dissecting The Growth Story 2013-02-01 - 15093406 PDF

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IMPORTANT NOTICE:

Published by:Business Monitor International

Africa: Dissecting The Growth Story

Published by: Business Monitor International

Africa: Dissecting The Growth Story

Upside Inflation Risks ............................................................................................................................. 11

Divergence In Fiscal Policy ..................................................................................................................... 14 Resource Stance Reconsidered .................................................................................................................. 16

Topical Thematic Analysis ................................................................................................ 18

China And Africa - Is The Party Over? ........................................................................................................ 65

Appendix: BMI Forecasts And Ratings ............................................................................ 70

Macroeconomic Forecasts ......................................................................................................................... 71

Macroeconomic Forecasts ......................................................................................................................... 72

Business Monitor International

Africa: Dissecting The Growth Story

Africa Rising Or Is It?

Business Monitor International

Africa: Dissecting The Growth Story

Business Monitor International

Africa: Dissecting The Growth Story

Strong Growth Despite Global Headwinds

Table: BMI's Global Assumptions

2012e 7.7 -0.7 2.2 1.27 111.70 7,955 1,669

2013f 7.5 0.1 2.3 1.25 107.00 7,700 1,775

2014f 6.7 1.2 2.5 1.20 102.00 7,300 1,825

2015f 6.0 1.6 2.5 1.20 98.00 7,100 1,780

2016f 5.8 1.8 2.4 1.20 96.00 7,000 1,700

2017f 5.8 1.8 2.4 1.20 96.00 7,000 1,600

Business Monitor International

Africa: Dissecting The Growth Story

Business Monitor International

Africa: Dissecting The Growth Story

Table: Economic Growth, % y-o-y

Q111 9.7 3.3 4.8 5.0 7.8 7.0 4.6 6.8

Q211 8.0 20.6 4.2 4.9 5.5 7.5 1.0 6.7

Q311 6.6 17.1 3.8 4.0 8.6 7.4 1.7 4.6

Q411 9.1 16.0 4.6 2.2 7.5 7.8 3.2 8.1

Q112 7.6 15.7 3.2 3.0 6.3 6.3 2.7 7.1

Q212 8.5 2.5 3.5 2.7 8.1 6.4 3.4 6.9

Q312 5.7 4.6 3.7 6.8 6.5 1.2 6.5

Upside Inflation Risks

Business Monitor International

Africa: Dissecting The Growth Story

Close To Cyclical Low

Source: BMI, Central Banks & Statistical Offices

Business Monitor International

Africa: Dissecting The Growth Story

Business Monitor International

Africa: Dissecting The Growth Story

Divergence In Fiscal Policy

Business Monitor International

Africa: Dissecting The Growth Story

Source: BMI, Finance Ministries. BMI Forecasts.

Business Monitor International

Africa: Dissecting The Growth Story

Source: BMI, Bank of Ghana

Resource Stance Reconsidered

Business Monitor International

Africa: Dissecting The Growth Story

Table: BMI Forecasts For Real GDP Growth, %

Source: Central Banks and Statistical Offices/BMI. BMI Forecasts.

Business Monitor International

Africa: Dissecting The Growth Story

Topical Thematic Analysis