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The African Economic Outlook 2008

The African Economic Outlook 2008. the Pulse of Africa. 31 st January 2008 Exane BNP Paribas Geneva. Javier Santiso Chief Development Economist , OECD Director , OECD Development Centre. Introduction. The challenge of diversifying growth drivers. 1. A new investment frontier?. 2.

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The African Economic Outlook 2008

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  1. The African Economic Outlook 2008 the Pulse of Africa 31st January 2008 Exane BNP Paribas Geneva Javier Santiso Chief Development Economist, OECD Director, OECD Development Centre

  2. Introduction The challenge of diversifying growth drivers 1 A new investment frontier? 2 Rising Suns: China and India 3 Conclusion: Africa and Global Decentering

  3. Comparative, up-to-date and forward-looking tool • Monitoring progress towards MDGs of African countries: 31 countries in 2007 and 35 in 2008! • Sound Statistical analysis and data computation • Original indicators (political troubles, diversification) and macro forecasts • New background research:Working papers on political indicators, privatisation, etc. Analysing crucial themes for Africa development • Previous years: privatisation, energy, SME financing, transport, water • AEO 2008: “Technical Skills Development in Africa” • Deeply rooted in African realities • Network of local experts, constant dialogue with stakeholders • Quality peer review involving AfDB country and sector economists A unique macro monitoring tool AEO 3

  4. UNECA From first-mover to regional reference AEO 2008: The reference on African economies From 2001: A groundbreaking collaboration 4

  5. Tunisia Morocco Algeria Libya Egypt Mauritania Niger Mali Senegal Chad Sudan Eritrea Gambia Guinea-Bissau Burkina Faso Djibouti Guinea Nigeria Ethiopia SierraLeone Côte d'Ivoire Togo Central African Republic Ghana Liberia Cameroon Somalia Equatorial Guinea Uganda Congo Gabon Kenya Rwanda Dem.Rep. Congo Burundi Tanzania Angola Malawi Zambia Mozambique Zimbabwe Madagascar Namibia Botswana Swaziland Lesotho South Africa Coverage 2008: 35 African countries AEO New in 2008: Cape Verde Liberia Libya Equatorial Guinea Cape verde Benin Sao Tome et principe 91% of GDP 86% of population AEO 2008 Comores Mauritius 5

  6. Introduction The challenge of diversifying growth drivers 1 A new investment frontier? 2 Rising Suns: China and India 3 Conclusion: Africa and Global Decentering

  7. Africa continues steady growth Growth Real GDP growth expected to exceed 5% for the fifth consecutive year in 2008 African growth is becoming more broad-based: • 2006: 23 countries over 5 % • 2007: 30 countries over 5% • 2006: 15 countries between 3-5% • 2007: 12 countries between 3-5% Africa Total OECD Source: OECD Development Centre / African Development Bank, 2007 7

  8. Commodity price inflation : a recent phenomenon? Commodities Global commodity prices 1900-2000 Source: OECD Development Centre, / Oxford Latin American History Database, 2008 *US$ nominal index 1970=1000 8

  9. The commodity boom: a key driver for Africa Commodities Global commodity prices 2001-2009 Source: OECD Development Centre / World Bank, 2008 9

  10. Oil exporters and importers’ diverging paths? Growth Source: OECD Development Centre / African Development Bank, 2007 Net Oil exporters: Algeria, Angola, Cameroon, Chad, Congo, Côte d'Ivoire, Congo DRC, Egypt, Equatorial Guinea, Gabon, Libya, Nigeria, Sudan 10

  11. World growth champion 2003-2007... ANGOLA 2007: Real GDP growth: +19 % Oil production: +20% 2008 outlook: real GDP growth: +11.5% Source: OECD Development Centre / African Development Bank, ERS/USDA Macroeconomic Dataset, 2008 Broadening investment: Non-oil sectors, construction, agriculture, manufacturing, services… Decreasing dollarization : Strong & stable Kwanza increases local-currency deposits from 41 to 49 % 2006 – 2007 Luanda Stock Exchange: Due to open first quarter 2008 Reconstruction: Fresh commitments from China (USD 7 billion credit), Paris Club repayments 11

  12. …but slowing as production reaches capacity ANGOLA Source: OECD Development Centre / African Development Bank, 2008 • Slowinggrowth prospects: • OPEC quota: Limitingoil production to 1.9 m b/d. • Impact on growth and government revenue from 2008 • Poor diversification: Specialisation in extractive industry, difficult business environment • Limitedspillovers : 25 %unemployment and 68% poverty; weakgovernance. 12

  13. Below par in light of assets ALGERIA Outlookfor 2007: +3.1% Source: OECD Development Centre / African Development Bank, 2008 • Threats: • Increasingexportspecialisation • StronglyUnderexploitedpotentialof non-oilsectors • Youthunemployment over 30% • Lowabsorption capacity • Poorgovernance Positive factors: Sustainedgrowthdue to favourable international environment Good macro management: repayment of externaldebt (4.8% of GDP) Investment: Up 7.2%; increasingFDI tonon-oilsectors 13

  14. Africa’s foreign investment darling EGYPT Source: OECD Development Centre / African Development Bank, 2008 • Positive factors: • Top FDI recipient in Africa ($11.1bln 2007 ) • Very strong export sector (+19.3% at $222bln 06/07) • Investmentup: Dom. +34.2%; Public +47%; Private +62% • Sustained reforms: new VAT & real estate tax laws, tariff reductions, improved business environment. • Important new gas resources discovered in Upper Egypt Threats: High budget deficits Subsidy system still accounts for 27% of govt. spending. Inflation (+8.5%) and food prices putting pressure on households Youth unemployment remains high Central Bank’s inflation targeting will lead to hikes in interest rates 14

  15. Gearing up for 2010 World cup South Africa Growth 2004-07: +5% Outlook: 2007 +4.9% 2008 +4.6%. Source: OECD Development Centre / African Development Bank, 2008 • Threats: • Very high current account deficit: 2006 -6.5%, 2007 -7% (Russia +9,7%; Brazil +1,2%; China +9,5%) • Lack of competition in key sectors: monopolies in transport (Transnet), telecom (Telcom), energy (Eskom) • Energy shortages: Cost of power cuts: Rand 2.9 - 8.6 billion. No new capacity on grid until 2012 • Inadequate transport infrastructure: mining penalised by deficiencies in freight supply chains • Poverty and inequality : High crime; • 44.4 % poor; Gini coefficient 0.68 in 2006 • Positive factors: • Sound macro management, credible institutions • Good policy mix : budget surplus +0.7 % in 2007/08, inflation within target 3-6 % over 2004-07 • Investment up (+12 %) to address capacity constraints (mining, manufacturing and construction) • Reduced external vulnerabilty : due to reserve accumulation and raising investor confidence. Limited impact of U.S subprime • Well-developed financial sector: 10% of GDP. 15

  16. The rewards of good macro management Fiscal Policy Africa: inflation and fiscal balance (2000-2006) • Public finance management is generally good and improving • Greater macroeconomic stability attained : • Fiscal balance is positive • Inflation is stable 16 Source: OECD Development Centre / African Development Bank, 2007

  17. Reducing vulnerability via the Greenspan-Guidotti rule. Ratio of Reserves to Short-term Debt*: Lower debt, higher reserves Reserves Note: Logarithmic scale defined as the scale of measurement using the logarithm of the defined ratio. Source: Avendaño, Reisen and Santiso, “The Macro Management of Asian Driver Related Commodity Booms”, OECD Development Centre Working Paper, forthcoming 2008. 17

  18. Long-term decline in political risk Instability Regime Hardening (LHS) Source: OECD Development Centre “Moving towards political stability? Monitoring political instability, governments response and economic performance in African countries” forthcoming article, April 2008.  Qualitative data obtained from Marchés Tropicaux et Méditerranéens. Data is used to construct two indicators referring to: Political instability: occurrence of strikes, demonstrations, violence and coup d’état. Hardening of the political regime : incarcerations of opponents, measures threatening democracy such as dissolution of political parties, violence perpetrated by the police and the banning of demonstrations or public debates. 18

  19. Zimbabwe political mess has little regional impact Instability No contagion of political instability: * * Zimbabwe & its neighbours’ growth: * 19 * Botswana, Mozambique and Zambia Source: OECD Development Centre, 2007

  20. Infrastructure bottlenecks may compound instability Kenya High cost of a fragile infrastructure Kampala/Lake Victoria - Mombasa rail line is the main export channel for landlocked Central Africa High growth rates in East Africa risk being strangled by crumbling infrastructure Uganda, Rwanda, Burundi, Eastern Congo and South Sudan all rely on the port of Mombasa: Imports: fuel, aid, diverse supplies Exports: 25% and 33% of Ugandan and Burundi GDP transit through Kenya Tanzania’s port of Dar es Salaam, is at full capacity, and unable to handle extra Central African spillover Source: OECD Development Centre, African Economic Outlook 2008 20

  21. Over the « hump » of debt relief Aid Source: OECD Development Centre / African Development Banks, 2008 21

  22. Slow progress,despitegrowth MDGs Source: OECD Development Centre / African Development Bank, 2007 22

  23. Oil exporter & importers: divergent paths? Outlook Fiscal Balance Growth Oil and Mineral exporters Challenges: • Capitalise on windfall gains • Maximise spillover to rest of the economy • Avoid Dutch Disease Oil importers Challenges: • Contain inflationary pressure • Finance widening trade deficit • Streamline spending to prioritise poverty reduction Trade Balance Inflation Source: OECD Development Centre, African Economic Outlook, 2007 23

  24. African economies safe from U.S downturn? Trade Due to a low share of external trade with the U.S, Africa is less vulnerable to effects of U.S subprime woes African Exports by Destination - 2006 Note: The “Others” category includes Latin America, Middle East. East Asia and South Asia. Source: OECD Development Centre / UN Comtrade, 2008. (data on Nigeria corresponds to last available year, 2003) 24

  25. Concentrated U.S / Africa trade Trade Source: OECD Development Centre / UN Comtrade, 2008. 25

  26. Concentrated U.S / Africa trade Trade Main African Exports to the U.S Source: OECD Development Centre / UN Comtrade, 2008. 26

  27. Moderate growth across sectors Trade Source: OECD Development Centre / UN Comtrade, 2008. 27

  28. African Exports by Product - 2006 Two very different export profiles Trade Fuel exporters Diversified exporters Source: OECD Development Centre / Comtrade, 2008 (Data on Nigeria correspond to the last available year, 2003) 28

  29. Introduction The challenge of diversifying growth drivers 1 A new investment frontier? 2 Rising Suns: China and India 3 Conclusion: Africa and Global Decentering 29

  30. Africa, the new investment frontier? Investment • A rapidly evolving investment destination: • Lower external debt: • from 183% of gdp in 2002, to 69% in 2006 • South-South lending: • South Africa exporting capital • China investing & providing loans, direct entry into African banking sector (2007: $5bln in deals struck) • Todayprivate capital = 80% of total flows (50% in mid-80s) • Decoupling: Africa’s low correlation with other asset classes has made it an important in portfolio diversification • Real lending rates still very high: • SSA 13% • other LIC/MIC: 8%, • Developed countries: 3.5% (04). • Savings rate still very low: • SSA: 10% (SSA LIC: 5%, other SSA: 12%) • BICTS*: 28% average savings • Allocation puzzle: the poorest countries have become net exporters of capital over recent years • *BICTS: Brazil, India, China, Thailand & South Africa Source: OECD Development Centre / UNCTAD, 2007 30

  31. Record investment inflows for 2007 FDI • Africa FDI 2007 : $36 billion • Highest figure on record • +20% on 2006; +200% on 2004 • FDI outflows - $8 billion 2006 • Largely due to surging extractive industry investment: South Africa and oil producing countries are still receiving the bulk of direct investment to Africa • Previously off-limit sectors opening to foreign investment: • Banking: Congo, Egypt, Nigeria • Telecoms: Botswana, Burkina Faso, Cape Verde, Ghana, Namibia • Land ownership: Morocco •  FDI inflows likely to remain strong, but unevenly distributed by sector and destination. Source: OECD Development Centre / UNCTAD, 2008 31

  32. Africa still last, despite fast rising investment FDI Source: OECD Development Centre based on UN Comtrade, 2008 Distribution of cross-border M&A purchases in Africa by home region, 1999-2006 (US$ million) Source: OECD Development Centre / World Bank, 2008 Source: OECD Development Centre based on UNCTAD cross-border M&A database, 2008 32

  33. Rising investment, unchanged allocations Investment Global Emerging Market Equity & Bond funds: Total investments and regional allocations Source: OECD Development Centre / EPFR, 2008 33

  34. South Africa: dominating the investment landscape Equities • Global equity fund allocation remains stable: 10% total funds • EM funds have grown considerably, especially since 2003 • In turnover, the SA stock exchange is worth 100 times that of Africa’s second market: Nigeria. • Africa still lagging behind in investment compared to other emerging regions (Asia especially). • Over 2001-2006 period, South Africa received as much portfolio equity investment as the entire rest of SSA, 46 times over… • South Africa: received 147 times Botswana’s total equity investment over same period Source: OECD Development Centre / EPFR, 2008 34

  35. Ideally adapted to African constraints? Private Equity • Total emerging world private equity funds raised: • $21.5 billion raised in first half of 2007 • Sub-Saharan Africa 2006: $2.3 billion raised (+198%) • Average deal size 2005 $1.2 million, trending towards larger deals • South Africa: 81% of investments, Nigeria 50% of remainder(2005) • Top sectors: Transport, consumer-related investments, telecommunications/IT (2005) • Later stage funds : 75% of all in-country investments 2005 • “In-country” investments: 96% total. “Outbound ” (intra-African) investments nonetheless in strong progression. • Emerging Capital Partners: first $1 billion pan-African fund (2006) * * * * * *OECD Development Centre / African Venture Capital Association, 2007 35 Source: OECD Development Centre / Emerging Markets Private Equity Association, 2008

  36. Introduction The challenge of diversifying growth drivers 1 A new investment frontier? 2 Rising Suns: China and India 3 Conclusion: Africa and Global Decentering

  37. Deepening bilateral trade relationships Asia Source: OECD Development Centre based on UN Comtrade, 2008 37

  38. The risks of excessive specialisation: The challenge of China and India’s rise Asia Source: OECD Development Centre, based on Comtrade data, 2008 Note: Herfindahl-Hirschmann index calculated as , where represents the market share of good j on the exports of country i in its total exports . 38

  39. Herfindahl-Hirschmann Index by Destination Higher specialisation in export markets? Asia Note: Herfindahl-Hirschmann index calculated as , where represents the market share of country j on the exports of country i in its total exports . 39 Source: OECD Development Centre, based on Comtrade data, 2008.

  40. Growing yet concentrated African exports China Partnering with the Asian drivers: opportunities and risks of further specialization in raw commodities Source: OECD Development Centre / UN Comtrade, 2008 40

  41. High value-added imports from Asia: China Partnering with the Asian drivers: opportunities / risk of raising the bar for competing in labor intensive industries Source: OECD Development Centre / UN Comtrade, 2008 41

  42. Net Exports with Asia: growing deficit China Source: UNComtrade/OECD 42

  43. A new and exciting paradigm shift China Source: UNComtrade/OECD Source: OECD Development Centre / IMF, 2007. 43

  44. Attractive investments with low correlations Investment Source: OECD Development Centre, based on Thomson Datastream, 2008 44

  45. Introduction The challenge of diversifying growth drivers 1 A new investment frontier? 2 Rising Suns: China and India 3 Conclusion: Africa and Global Decentering

  46. Global Decentering and Africa’s XXIst century Conclusions • Commodities are only part of the story. African countries are growing whether they be exporters or importers of raw materials • Africa is increasingly opening up to new actors, interests and sources of capital •  to watch: private equity and sovereign wealth funds • China and India have already shifted the state of play • Africa is at the forefront of a ‘global decentering’ 1 2 3 4 46

  47. Thank you More information: www.oecd.org/dev/aeo

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