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Looking back: Unpacking the trends that shaped Africa’s business environment

Thursday, 28 March 2019 Published: | Johan Burger

Source: Centre for African Studies

2018 has been an interesting year for Africa, with various events and trends becoming visible. 2016 saw the effects of the slowdown of China’s economic growth due to its rebalancing of its economy and the end of the commodity price super cycle. 2017 brought some relief. In Africa, 2018 demonstrated a number of continued trends, but also some new events.

This is Part I. Follow the links to Part II and Part III

Trend 1: Foreign investment in Africa

Africa has been the recipient of foreign investment form a variety of foreign countries. In addition to the normal investors such as China, Japan, India, etc., we are also seeing new entrants or countries that are making a comeback. The countries identified below are also not meant to be the only investors, but have been noted in the general media.

China is still Africa’s largest trade partner. A prominent development in 2018 was China’s outreach to African governments to participate in the Belt and Road Initiative (BRI), as well as the hosting of the Forum on China-Africa Cooperation (FOCAC) in Beijing.

In January 2018, China’s state-owned Sinopec was punted to buy Chevron’s assets in South Africa and Botswana. Sinopec pledged investments over five years post acquisition to upgrade the Cape Town refinery into a world-class plant. It also pledged to develop the fuel marketing business by introducing small and black-owned business as fuel retailers. China has invested in various sectors, such as mining, wine, urban development and now the petrochemical industry.

China’s EximBank has approved US$1.3 billion in financing for a utility-scale hydroelectric plant in Guinea. The 450MW plant is expected to produce sufficient capacity to export to Guinea’s neighbouring countries.

It has not always been plain sailing for China. The new Sierra Leone government recently stopped the project to build a new airport. The Mamamah airport construction was going to cost $400 million, through a loan agreement between the former government and China. The Chinese were also contracted to build, manage and maintain the airport.

China has frequently been accused of lending too much money to African governments, in the process putting them in debt distress. Examples in Africa recently mentioned include Djibouti and Zambia. At the latest FOCAC meeting in China, President Xi Jinping stated African government leaders should refrain from spending money on “vanity projects”.

A Chinese banking conglomerate wants to buy African infrastructure debts from the government starting in 2019, repackage them into securities and then sell them to investors. This could put African countries in more debt. For Chinese financiers, developers and multilateral development financial institutions, this will offer further opportunities to make money from Africa. With an eventual total capital investment of between $4 and $8 trillion for the BRI, should such a securitisation exercise go wrong, it will have a far more devastating impact on the global economy than the 2008/09 financial crisis.

In Namibia, Rio Tinto is selling its 68.62% stake in the Rössing uranium mine to China National Uranium Corporation (CNUC) for $106.5 million. China will now have complete control of Namibia’s active uranium production, with China General Nuclear (GCN) owning the Husab mine next to Rössing.

Egypt’s el-Sisi visited Beijing in September 2018, where he signed deals worth $18 billion with Chinese companies, covering a railway, real estate, energy projects and an oil refinery. Chinese companies have close to $6 billion of investments in Egypt.

Russia has also decided to join the competition for influence and trade in Africa. Russia had agreed to supply Sudan with a small-capacity floating nuclear plant to produce electricity within eight years. Russia has also reached out to Ethiopia. They have agreed to reinforce diplomatic and economic relations to raise the level of their cooperation, and undertook to work on nuclear energy for peaceful purposes.

Russia is now involved in various countries; from Egypt, Algeria, Morocco and Sudan in the north, to Mozambique, Angola, Namibia and Zimbabwe in the south, to the Central African Republic in Central Africa, to Nigeria in West Africa and to Ethiopia, Rwanda, Tanzania and Uganda in East Africa. One specific focus area of Russian investment is the development of nuclear power plants in Africa.

South Africa has also grown its investment ties with Russia. The trade volume between Russia and South Africa increased by 26% to almost $800 million in the first nine months of 2018. South Africa accounted for 20% of Russia’s total trade with all countries in the region. Russia and South Africa have signed an agreement for the implementation of joint projects in the market of platinum group metals, as well as on the exploration, extraction and processing of mineral resources until 2025. Russia and South Africa are also working on joint projects in nuclear energy, subsoil use, oil and gas, and projects in agriculture.

In response to China’s initiatives, former USA Secretary of State Rex Tillerson visited countries in Africa in March 2018 to convince Africa to rather support the USA in competition with China. The countries included Ethiopia, Kenya, Djibouti, Chad and Nigeria. In November 2018, the USA awarded $60 billion to the International Development Finance Corporation (IDFC), which will spearhead the financing of infrastructure projects and open avenues for US companies to increase investments in Africa. East Africa will probably be the primary beneficiary in Africa of the fund, which was created to increase the USA’s influence in Africa and rival the growing influence of China in Africa.

Turkey has also been continuing the expansion of its footprint in Africa. Amongst others, Sudan has been the recipient of Turkish investment pledges, and expertise in education and health. Turkey also pledged to enhance cooperation in the fields of energy, agriculture, electricity, livestock, transport, aviation, health and education. Turkey would also open a bank in Sudan to facilitate trade between the two countries.

In East Africa, Tanzania businessmen and traders have been urged to utilise the partnership opportunities offered by their counterparts from Turkey. Areas which appeared to be of more interest to potential Turkish investors, include agriculture, construction, industries, energy, and the hospitality industry.

The GCC states have also started to target Africa in a more focused manner. This includes economic ties in Côte d’Ivoire’s agriculture, mining, tourism, and real estate sectors. Qatar’s Minister of Foreign Affairs also visited Sudan to boost the strategic relations between the two countries in the various domains.

Singapore has also increased its footprint in Africa in 2018. Singtel announced it would invest $250 million in Airtel Africa (Airtel) to tap into Africa’s growing use of mobile money and mobile wallets. Airtel has secured $1.25 billion from international investors, which includes Temasek Holdings (Singapore) and Softbank Group International (Japan). Singtel holds a 39.5% effective stake in the parent company.

Nordic businesses such as Ericson and H&M are also tapping into opportunities in Ethiopia despite challenges in the business environment. The industrial parks, access to bank loans, financial incentives and access to new sectors like telecom, energy and logistics are the drivers of attraction.

Trend 2: Economic development in Africa

In the $2 trillion-plus sub-Saharan Africa economy, growth was projected to increase from 2.7% in 2017 to 3.1% in 2018. The regional business climate is improving, with 40 African countries implementing a total of 107 reforms in the past year, up 24 on the previous year. Sub-Saharan Africa is home to five of 2018’s top 10 improvers  – Côte d’Ivoire, Djibouti, Kenya, Rwanda and Togo. Strengthening governance, fighting corruption and tackling obstacles such as inadequate electricity and financial services will support further business growth. Overall, growth prospects for sub-Saharan Africa are favourable, although greater economic diversification would strengthen resilience to commodity price shocks. The IMF has predicted that in 2019, 18 out of 45 sub-Saharan African countries will grow at 6% or higher compared to 10 in 2016 – well above the global trend.

In East Africa, industry players feel the opening of the local market to imports would have a devastating impact on efforts to expand the industry, and could destroy the livelihoods of 1.5 million small scale farmers who depend on dairy farming, amongst others. East African textile companies are under threat from second-hand clothing imports from especially the USA. Subsidies in EU countries create an even more unequal playing field. Southern Africa and West Africa also frequently suffer from cheap imports that threaten the local industries.

East African countries, led by Ethiopia, Kenya, Tanzania and Rwanda, have been enjoying growth rates of more than 5%. The region’s positive economic growth, low labour costs, political stability, an improved regulatory environment and a big market of over 120 million people all make a contribution. Growth is expected to reach 5.9% in 2018 and 6.1% in 2019. According to the AfDB, the industrial sector contributed 39% of the region’s average real GDP growth in 2017. Nissan, Volkswagen, Peugeot and CNH have all announced plans for their own assembly lines.

In East Africa, Kenya appears to be losing its lead position in FDI to Ethiopia, due to new investors turning their focus on the latter following wide-ranging socio-economic reforms. Ethiopia could surpass Kenya in the value and number of capital projects in less than 2 years. An EY report on FDI readiness ranks Kenya third in Africa after South Africa and Morocco in attracting investors with 67 FDI projects. In the agriculture sector, Kenya’s horticulture sub-sector is growing in leaps and bounds. The value of horticulture production rose 41% in 2017 compared with 2016 on account of good prices.

Rwanda has been quite busy in the economic domain. Non-traditional exports have been an important driver of growth, forming the basis for export-led development in the country. To promote the development of value-added products, Rwanda is promoting the export of semi-processed or finished products and more sophisticated niche products instead of exporting raw materials and commodity products.

Rwanda raised tariffs on the importing of second-hand clothing from the USA. The ban violated the country’s obligations under AGOA. The USA subsequently removed textile products from the list of products Rwanda could export to the USA under AGOA.

Rwanda is now looking at having a larger portion of flower exports, to bolster its prospects as a flower exporter, spur foreign earnings and create new jobs. The attractive investment climate and government’s clear policy of supporting the development of the flower industry, were the other pull factors. Overall, Rwanda is looking at increasing its flower production to 44,000 tonnes per year or $140 million worth of export receipts by 2020.

Rwanda recently focused strongly on the Chinese market for tourism. Chinese tourists can now directly book tour packages to Rwanda, following the launch of the ‘Visit Rwanda’ online pavilion on Fliggy, Alibaba’s travel platform that is accessed by over 500 million users in China.

Rwanda has recently reached out to companies to invest in its timber production and other related industries to boost forestry and timber business locally. For Zambia, which is diversifying from copper, timber has the potential to become a major export commodity that could generate a lot of foreign exchange, create jobs and help reduce poverty. The sector can contribute over US$10 billion to GDP if well managed.

Ghana has also embarked upon the journey of adding value to its raw materials, thereby stimulating its manufacturing base, tapping into the benefits of import substitution and export revenues. Ghana is now a member of a growing group of African countries that have legislated the beneficiation of raw materials before exports.

In the cocoa industry, President Nana Akufo-Addo and President Alassane Ouattara have signed the “Abidjan Declaration” to defend the interest of the two countries in the global cocoa industry. The agreement will address the common challenges cocoa producers from Ghana and Côte d’Ivoire face.

Ghana, a relative newcomer to the oil industry, plans to award as many as nine offshore blocks off its west coast in 2018 and 2019 in a mix of competitive tenders and direct negotiations.

Companies in the Ghanaian coffee industry have asked the government to invest in coffee to boost the economy. According to the experts, coffee can rake in more revenue to shore up the $2 billion that cocoa generates annually, and also create more than 500,000 jobs for the youth.

A Nigerian study has revealed that its maritime sector is losing about $4.13 billion annually due to its inability to exploit the ‘blue ocean economy’. Through various incentives, indigenous ship owners can now acquire new ships for local use and gradually build up their fleet at low cost. There are also initiatives between Nigerian entities to ensure that ship-owners can participate in shipping Nigeria’s crude.

In addition to stimulating the fishing industry, Angola plans to privatise 74 state companies over the next few years, predominantly those in the industrial sector. President Lourenço undertook to reduce state interference in the economy, which remains centrally controlled.

Saudi Arabia will invest at least $10 billion in South Africa, mostly in the energy sector, including building oil refineries, petrochemicals and renewable energy. The UAE has also announced plans to invest $10 billion in key sectors of South Africa’s economy, such as tourism and mining. The Saudi move is part of President Ramaphosa’s drive to attract $100 billion in investment in the next five years to boost the ailing economy. President Ramaphosa also recently said China would invest $14.7 billion in South Africa.

Zimbabwe has plans to privatise and merge its ailing parastatals. SOEs have performed poorly in recent years; most are struggling to service their debt, and they have faced allegations of entrenched corruption and poor levels of corporate governance. Zimbabwe also signed a $1 billion deal with Sinosteel Corp in 2018 to build a 400MW coal bed methane-fired power plant and set up two new ferrochrome smelters.

Trend 3: Manufacturing in Africa

Manufacturing and industrialisation are the current buzzwords for transforming Africa’s economies. To reduce any dependence on the extraction and sale of raw commodities, it makes sense to diversify Africa’s economies.

B2B spending in manufacturing in Africa is projected to reach $666.3 billion by 2030, $201.28 billion more than that it did in 2015. Africa is also considered to be the world’s next great manufacturing centre, potentially capturing part of the 100 million labour-intensive manufacturing jobs that will leave China by 2030. This trend creates a huge opportunity for Africa countries (like Ethiopia, etc.), all of whom have recently adopted policies enabling manufacturing and industrial development.

VW developed an assembly plant in Kigali, Rwanda. In addition, the digital mobility concept, “Moving Rwanda,” will connect the production of VW cars, the share usage concept and training. VW will build their own cars with their own rates. These cars will go into the mobility service and be used in the mobility space. Once they have been used here, they will be eventually sold off as used vehicles. Currently, new car sales in Rwanda is about 1,000 cars per year, with a population of approximately 12 million. Rwanda therefore needs time to grow this market.

Rwanda’s textile industry has started to turn towards the EU and the rest of Africa for alternative markets to make up for the loss of exports to the USA. An example of such a strategy is where Ethiopia is now producing textile products for companies such as PVH (USA) and H&M (Sweden).

Rwanda has also turned towards the manufacturing of sophisticated technological products. The Mara smartphone project is projected to take the smartphone business in Africa by storm.

Ethiopia’s manufacturing sector has also been boosted by the government’s policies and other incentives. With help from PVH Corp – owner of Calvin Klein, Van Heusen, Izod, Arrow, Speedo, Tommy Hilfiger and other brands – Ethiopia is putting its name and Africa on the clothing map. USAID, the AfDB, JICA and other international players have thrown their support behind the Hawassa project.

To protect is infant manufacturing sector from being over-run by China’s cheaper and more efficient producers, Kenya recently refused to sign an FTA that China has been negotiating with the EAC states since 2016. Kenya prefers a preferential trade agreement with China, such as the USA’s AGOA. Kenya signed a double taxation agreement (DTA) with China in October 2018 to incentivise Chinese firms setting up base in Kenya.

President Kenyatta announced his Big Four development agenda at the start of his second term as president to address the challenge in manufacturing, amongst others. Manufacturing in Kenya presents a challenge to the government. Output volume of the sector declined by 1.1%, primarily due to lower production of food products, beverages and tobacco, leather and related products, etc. From 2013, the manufacturing sector’s contribution to GDP dropped annually from 11.05% (2013), to 10.76% (2014), 10.54% (2015), 10.22% (2016) and 9.77% (2017). Developing industrial parks, SEZs and EPZs are part of the approach to grow the sector.

Trend 4: Infrastructure in Africa

Africa has vast infrastructure needs. According to the AfDB, Africa’s infrastructure requirements are estimated to be between $130 billion and $170 billion, far higher than the previous estimation of $93 billion a year. Nigeria’s infrastructure cumulative financing needs are estimated to reach $3 trillion by 2044 or about $100 billion annually. The AfDB stated the new estimates left a financing gap of $108 billion. Given this, and urgent needs in various sectors, Africa must attract private capital to accelerate the building of critical infrastructure needed to unleash its potential.

To close this financing gap, the AfDB is working with leading global development finance institutions to set up a mutualised co-guarantee platform to de-risk investments and facilitate projects that have the capacity of transforming Africa under the Africa Investment Forum.

In Rwanda, a group of local and international players in the housing sector announced a $200 million project on the construction of affordable housing units to address the shortage of accommodation in Kigali. This would benefit nearly 50,000 people in terms of employment and business opportunities. The deal will also offer alternative financing to homeowners who often rely on expensive commercial bank loans to construct houses.

Rwanda has also addressed its energy infrastructure. Government has adopted digital technologies in the power distribution system as it increasingly looks for ways of how to efficiently respond to Rwanda’s power demands.

Technology is increasingly playing an important role in many African countries in various industries. With Rwanda doing its best to ramp up its manufacturing sector, the availability of abundant low-cost electricity is essential.

The Kenyan government undertook to construct 100,000 affordable housing units in line with the Big 4 agenda. They want to implement interventions that will ensure that developers can produce housing units at scale, homebuyers can access affordable financing facilities, and that the enabling environment facilitates innovation, embraces technology, and commercial arrangements that can bring down the cost of construction.

In the next five years, Kenya is expected to open 13 new hotels, adding 2,400 rooms and increasing hotel capacity by 13%. Kenya’s hospitality sector was expected to grow by more than 8% in 2018. 31 hotels are being erected in Ethiopia, which will add 5,747 rooms. This puts Kenya at second place with new hotels numbering 20, adding 3,444 rooms, Tanzania at third with 15 hotels and 1,494 rooms, Uganda at fourth with 9 hotels (1,238 rooms) and Rwanda with seven new hotels and 655 rooms.

In Southern Africa, the port of Walvis Bay is getting a new container terminal and an oil jetty, both being built by a Chinese company, i.e. the China Harbour Engineering Company (CHEC). The project lies at the heart of Namibia’s ambition to become a logistics hub in the southern African region. The port’s throughput capacity of container terminals will be more than doubled to 750,000 TEUs per year. It will also add the first government-controlled oil storage facility in Namibia and a cruise jetty to boost tourism to the country. Upgrading the key port is significant to the entire SADC region, as it will boost imports and exports of mineral-rich landlocked nations like Zimbabwe and Botswana that are using the port as access, and in the meantime increase Namibia’s appeal to global investors. The port construction will spur upgrading of nearby roads and railways as well, fuelling Namibia’s infrastructure boom that hopefully will create employment.

The above are by no means an exhaustive list of the infrastructure development projects that were implemented during 2018.

The author, Johan Burger, is the director of the NTU-SBF Centre for African Studies, a trilateral for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang platform Technological University and the Singapore Business Federation.