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27 June 2022

Investors should be heartened by Africa’s economic resilience in a trying global environment

In an era of heightened geopolitical tension and rising inflation, it is easy for investors to ‘retreat’ and eschew opportunities outside of the developed world.

This can extend to Africa, and there is an air of scepticism of Africa’s economic recovery and long-term growth prospects. While not as severely impacted as the West and other developed economies, Africa’s growth was dented by Covid-19 as trade flows stuttered and tourism stalled. This has prompted the IMF to predict that Sub-Saharan Africa will grow at just 3.8% in 2022, much lower than the average performance since 2000.

However, there remains much cause for optimism, not just over the next decade, but in the second half of 2022. This positive outlook lies foremost in recognising that the pandemic has not impaired the continent’s main structural drivers of growth. Africa’s youthful population, ongoing urbanisation and development of its financial services, technology and power infrastructure continue to serve as the cornerstones for its ascent.

In the short-term, the continent has shown promising signs of organic recovery from the pandemic which will be boosted further when China, Africa’s biggest trading partner, reengages. Meanwhile Africa’s commodity markets, the backbone of many of the continent’s largest economies, are relatively buoyant and countering some of the headwinds in the international environment.

It is perhaps sage to consider why the pandemic has had a less searing and enduring impact on Africa. Despite persistently low vaccination rates, Africa has been shielded from widespread severe Covid-19 disease thanks to its young population. Africa’s median age of 20 is less than half that of Western Europe and those above the age of 60 account for less than 7% of the population.

With the prevalence and severity of lockdowns receding markedly, personal mobility has improved. As a result, there is less artificial constraint on many of the continent's economies and the growth rate, especially of services, has surged.

Green shoots are present across the continent

Africa’s collective strength is its diverse economic backdrop; growth is multi speed and with varying primary drivers. Western-shelf countries, dominated by oil markets such as Angola and Nigeria, are enjoying accelerated growth after several years of tepid single-digit performance. Angola has been unshackled from five years of recession through to 2020, and the current favourable fiscal backdrop allows further room to consolidate political and economic reforms.

Countries in the eastern shelf, Kenya, Tanzania, Uganda and Ethiopia, were resilient in the face of the pandemic, maintaining respectable growth rates in the mid-single digits. A tourism revival will provide a noticeable boost to the East African Community. Some of Africa’s other tourism dependent economies, South Africa, Egypt and Morocco, are also benefitting from increased personal mobility in source markets and a pent-up willingness to travel.

Perhaps most significantly, optimism is resurfacing in one of the region’s largest economies, South Africa. The country has stabilised following the large-scale riots last July and President Ramaphosa has facilitated two major reform programmes.

Energy reform is a bedrock pursuit and President Ramaphosa is ushering accelerated private sector participation in the primary energy realm, which was previously a closed shop. This includes in renewables, which now make up 3-4% of SA’s energy mosaic. Private sector companies can now generate 100 MegaWatt (MW) of power, up from 1 MW, without onerous licensing conditions. This is a game changer, even if the results of this reform will largely surface over the medium-term.

Second, President Ramaphosa ushered the recent auction of digital spectrum for mobile telecommunication firms. This additional landmark measure will go some way in further modernising Africa’s digital infrastructure, thereby broadening access and lowering communication costs.

That said, there remain at least two major headwinds that will inhibit more spirited near-term growth across the continent. The first of these is global monetary tightening which will curtail capital flows to the continent and elevate risk aversion. The second is the impact of the war in Ukraine. While most African countries have less than 2% of their overall international trade with Russia and Ukraine, there are some notable exceptions, such as Egypt and Malawi. Moreover, for the vast majority of Africa, more than half of these countries’ wheat supplies come from Russia and Ukraine, with Benin and Somalia completely reliant on these two countries.

While rekindling the path to sustained strong economic growth will be neither smooth nor universal, there remains ample reason to be constructive on Africa over the coming years. The general resilience that countries across the continent have demonstrated during the pandemic underscores its structural evolution over the last two decades. The next few years are set for more reforms akin to what beckons in South Africa, including gearing for a net zero future, albeit with a consideration for the continent’s current needs. Investors should therefore be approaching opportunities in Africa with purpose and with a realisation of the financial, socioeconomic and environmental gains on offer.

Goolam Ballim, Chief Economist, Standard Bank Group