CONNECTING AFRICA, GROWING AFRICA: BY KPMG ECONOMIST - LULLU KRUGEL2013-05-16
Lullu Krugel is employed as a senior economist at KPMGs Johannesburg office. Over the"past six years that she has been employed at KPMG, she has acted as an advisor and project manager for a range of private and public sector clients wanting to invest in South Africa, but also in the rest of the African continent. Her specific areas for focus are economic and socio-economic impact assessments of major capital and infrastructure projects, feasibility studies and market assessments, cost benefit analysis, commercial due diligence analysis, pricing, policy analysis and modelling and econometric modelling. Lullu is a frequent presenter at local and international conferences and a regular commentator in the media, where she shares her insights about opportunities on the African continent. She was also
part of KPMGs team for the BRICS summit and the KPMG National Development Plan team. For the latter project, she played a key role in the working group that prepared the business response for the South African National Development Plan on behalf of KPMG and KPMG clients, in particular with regards to job creation and economic growth. Her sector focuses include agriculture, infrastructure, healthcare and manufacturing. Lullu holds a Masters degree in economics from the Potchefstroom Campus of the Northwest University, where she was also an economics lecturer.
Connecting Africa, growing Africa
Africa is on the tip of the tongues of business people and investors all over the world. But what has brought the dark continent into the limelight?
Africa represents a unique"opportunity in a global environment where developed economies are not providing investors with reasonable return on investment. Advanced economies are only expected to grow by around 1.5 percent in 2013, whilst the International Monetary Fund forecasts that Sub-Saharan
economies will grow by 5.7% this year, up from 4.7% in 2012. These higher growth rates can be ascribed to a combination of favourable factors, including growth in export volumes, higher commodity
prices and foreign direct investment (FDI) inflows.
In fact, according to the United Nations Conference on Trade and Development (UNCTAD), FDI flows to developed countries fell drastically in 2012, reaching levels last seen almost ten years ago. FDI flows to
Africa, however, grew by 5.5 percent between 2011 and 2012.
The continent represents somewhat of an open playing field, with significant poten tial in largely untapped markets waiting for development.
The attractiveness of Africa as an investment destination has been positively impacted by a number of developments in the regulatory environment in African countries, making it easier to do business for
potential new entrants to markets, transparency with regard to macroeconomic policy and a focus on more market-friendly economic policies, a focus on addressing corruption and the introduction of investment incentives. In addition, increases in productivity on the continent, the diversification of African economies as they move away from resources, the size of the African market and rates of urbanisation are creating conditions that could potentially be favourable to investment.
Interest in Africa is driven by two megatrends:
The first is the well-documented, enormous global demand for Africas re-sources from mining, oil and gas to fertile,"unused agricultural land. The second is consumer-based demand resulting from
the rapidly growing -one billion plus- population, rapid urbanisation and a growing middle-class of young, globally minded and largely well-educated people.
Africa is home to 10% of the Worlds oil,"40% of its gold, between 80-90% of the chromium and 60% of the worlds total of"arable uncultivated land is found in Africa. This presents investors with unique opportunities to get involved in different parts of the value chain in both the agricultural and resources sector.
Africas population demographics does not"follow the -inverse pyramid- seen in developed countries, where there is real concern regarding the aging workforce that puts strain on young people to support those who cannot work anymore. This factor has contributed significantly to the sovereign debt crisis in Europe. In Africa, the growing young middle class outnumbers the older members of African society and investors should take advantage of this trend while it still exists.
To take advantage of these trends, however, it is important to realise that the economies that will be really successful in Africa will be the ones that can diversify their economies, using the income they receive from resources to develop other sectors such as retail, banking and services. Attracting FDI into diversified and higher value-added sectors remains an ongoing challenge for Africas economies. The primary"sector consistently remains the main focus of foreign investment, resulting in significant commodity dependence. In addition, Africa predominantly exports primary products and imports manufactured products, and as such, African economies have not been able to harness the benefits of
the commodities sector to increase the productive capacity throughout other sectors of their economy. This hampers the possibility of growth in the consumer expenditure related parts of the economy, such as retail and wholesale, smaller manufacturing industries and the housing market. Reducing inefficiencies related to poor transport infrastructure, including maintenance of existing infrastructure and the provision of new infrastructure, adds to Africas challenges. For instance, only"29.7% of the African road network is paved. The continents railway network"is also very poor and on average, it takes
much longer to transport a container across borders in Africa than anywhere else in the world. These factors contribute to higher transport costs on the continent if compared to the rest of world.
Most African countries rank in the bottom half of the Global Competitiveness Index with regards to the quality and availability of transport infrastructure. In terms of trading across borders, Africa also
does not fare particularly well, with Sub-Saharan Africa being the most expensive region in the world with regards to the US dollar cost of importing and exporting a container of goods.
A further challenge is the lack of a coherent regional approach to managing and harnessing partnership agreements and reducing inter-Africa trade barriers, which could improve the competitiveness of the
countries within Africa and drive FDI. On the back of the need for combined and coherent strategies, it is crucial that there is a greater degree of cooperation between the private sector and government.
Linked to this challenge, is the lack of bargaining power in multilateral negotiations. Currently, the only significant agreement that holds weight on the international scene is the Brazil, South Africa, India
axis. It is critical that Africa comes together as one bargaining power so as to promote an agenda that will harness the capabilities and resources of the African continent to the benefit of all Africans. However, this is easier said than done as each country has unique political, humanitarian and economic
requirements.
So, the question is now what steps should be taken to reduce these challenges and to position the continent to take advantage of the growth opportunities that exist?
The best place to start would be to consider the concerns highlighted by investors and addressing those in a practical manner. Some of these considerations, mostly related to increasingly connecting African
countries, include:
Africas time has come. For investors, now is the time to get a foot in the door. For African countries, however, it is time to realise the benefits to be had from increased connectivity and reduced barriers with its African neighbours.
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CONNECTING AFRICA, GROWING AFRICA: BY KPMG ECONOMIST - LULLU KRUGEL
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