Sub-Sahara Africa is rising
Contrary to common perceptions of poverty and war, Sub-Sahara Africa’s economic growth has been accelerating since 2000 and continued to grow during the global financial crisis (GFC) in 2007-8. In fact, some countries in Sub-Saharan Africa (SSA) are growing faster than China.
Strong economic prosperity is an outcome of fundamental improvements in political stability, macroeconomic policies, and favourable business climate.
Strong economic performance is stimulating a surge in foreign direct investment (FDI) from USA, Europe, India and China all competing to capture a market share, diversify investment risk and recover from the GFC. FDI has increased more than four times from US$40 billion in 2000 to $US180 billion in 2014. Historically, Africa has attracted more foreign aid than FDI, however, in 2014, FDI into SSA exceeded foreign aid by $30 billion (Bdlive, 2015).
Economic growth is expected to continue over the next two decades
By 2050, Africa will have two billion people. This is equivalent to 100% growth over the next 30 years. Demographic growth will create new challenges and opportunities that will continue to reshape the African economic landscape. At a continental level, SSA can leverage the following assets to stimulate sustainable long-term growth.
- A growing, young, educated and active population. Overall, the SSA labour force will grow by 830 million by 2050. This constitutes approximately 60% share of overall growth in global workforce, greater than both China and India.
- A growing middle class will generate an increase in domestic demand.
- SSA has approximately 600 million hectares (24%) of the world’s most fertile arable land to sustain a growing population.
- According to Africa Development Bank, the continent has abundant untapped natural resources, including an estimated 10% of global oil reserves, up to 90% chromium/platinum group metal and 40% gold.
Poverty is declining but at a slower pace
Previously, anticipated substantial improvements in social well-being have not accompanied economic growth in SSA. According to the World Bank, poverty rates have declined from 56% in 1990 to 43% in 2012, however, they are falling at a slower pace than other developing regions. More than 30% of Africa’s population earn less than $1.25 per day. Consequently, there impact investing is rapidly ramping up as social conscious investors seek to earn “profits with purpose”.
More investors are seeking profits with purpose
The appetite to invest in companies that create social, environmental and economic value is increasing globally. However, market awareness levels and participation from poor communities remain low. According to J.P Morgan, the market size for impact investing will grow from $60 billion to $1 trillion over the next five years with 22% expected to land in SSA. SSA will continue to be a top destination for impact capital if current market conditions persists.
Contrary to negative industry perceptions, portfolio performance for impact investments is largely in line expectations of traditional investments. In 2015, J.P. Morgan reported that approximately 27% of fund managers outperformed the market while less than 10% of fund managers reported a financial under-performance. Of investors surveyed, 86% expressed an interest in investing in new fund managers and 9% expressed an interest to invest with first-time fund managers.
According to a recent survey by J.P. Morgan, 65% of fund managers believe that social impact investing is more competitive now than it was five years ago. Market concentration is high due to a few large international investors targeting market segments greater than $20 million. These large players tend to be financial institutions, banks and pension funds investing in infrastructure. Overall, these large investors contribute 50% capital inflows through partnerships with governments. Whilst the largest number of investors are high net worth individuals and family trusts, they provide only 15% share of impact capital into SSA.
Whilst the willingness to invest in SSA is ramping up, barriers to entry remain high. These barriers include limited market information, lack of formal structures, and a limited range of appropriate investment vehicles across the risk-return spectrum. Other challenges facing impact investors include difficulty in exiting investments, differences in cultural orientations and language barriers.
There is huge opportunity for Australian retail and institutional investors to diversify their portfolios and achieve superior returns by investing the Sub-Sahara Africa markets. To mitigate common pitfalls, investors must engage fund managers with local networks and local market intelligence and co-invest with local investors who understand the local culture.
Jo Chidwala is an experienced business leader with proven record of accomplishment to transform businesses by formulating and executing product and pricing strategies that generate value. He is a strategic thinker with strong analytics, modelling and communication skills; can lead and motivate teams to drive projects to completion.