Could 2012 see a bounce back in Africa?

Where North Africa is concerned it would be foolhardy to make firm predictions but Morocco and
Tunisia have both successfully elected new constituent assemblies and Egypt looks well on the way
to electing a new parliament, although the elections are only due to be completed in January. The
process has not been without violence and more may come but at least the process is underway and
in some countries has been completed. It is worth remembering that both the Egyptian and Tunisian
economies had been regularly delivering GDP growth in excess of 4 per cent over many years running up to
2011 and if 2012 proves more settled, there is no structural reason why these growth rates should
not return. Indeed, we might even hope for better, since the two key components of economic
growth are political liberty and free market economics – and North Africans will hopefully have more
political liberty in 2012 than they have had for the last half century.

The poor performance of the sub-Saharan African markets is less easy to explain, given that GDP
growth in most sub-Saharan countries will have been over 5 per cent in 2011, with Ghana expanding by
over 20 per cent Nigeria by close to 8 per cent (not far short of China’s growth rate) and even Ethiopia will have
notched up growth of 7.5 per cent. In fact, sub-Saharan Africa has been doing so well that even accounting
for the economic contraction in North Africa and GDP growth of less than 4 per cent in South Africa, the
IMF predicts African GDP growth as a whole will have reached 6 per cent in 2011 and expects 5.75 per cent again
in 2012.

The reasons for this strong economic performance in sub-Saharan Africa are not difficult to explain:
• Commodity prices remain high by historic standards and Africa continues to benefit from a
structural increase in commodity production as China and other countries develop its
resources.
• Africa’s middle-class continues to expand. Africa possessed 60mn people earning over US$
3,000 a year in 2010 – the World Bank forecasts that by just 2015, this figure will have risen
to $100mn.
• Foreign Fixed Direct Investment is accelerating. In 2010 it was US$55bn – up 5x in 10 years
and in 2011 the total will certainly be more.
• Africa’s trade with the world’s fastest growing economies is rising rapidly, especially with the
BRICS. Where trade with the BRICS represented just 1 per cent of total African trade 20 years ago, it
now represents 20 per cent. This has helped Africa to remain largely immune to the growth
paralysis that is affecting the developed world.
The reasons for the underperformance of sub-Saharan Africa’s stock markets are less easy to explain
but would certainly include the following:
• African stock markets boomed in the 10 years up to 2008, sucking large volumes of
speculative portfolio investment into small, illiquid markets. Portfolio flows remained
negative in 2011 as investors across the globe reduced risk and this has had a magnified
effect in Africa’s markets, where low volumes exacerbate price movements in either
direction.
• Local investors, hurt by losses sustained in the wake of the post credit crunch crash, have
remained on the sidelines and are unlikely to return in force until international investors
lead the way.
• In Nigeria, there has been great uncertainty in the banking sector in 2011, which accounts
for 70 per cent of its stock market’s capitalisation, in the run-up to September’s Central Bank
deadline for all inadequately capitalised banks to either merge or close their doors.
However, that rationalisation process is now complete.
• East Africa, principally Kenya and Uganda, has been in the grips of the worst drought for 50
years. In countries where food comprises such a large percentage of the ‘inflation basket’
the effect on prices has been disastrous, with inflation rising to 20 per cent and above. Even so, East
African GDP growth in 2011 will still have exceeded 4 per cent.
So what is the outlook for 2012? Unless the world enters a major recession, the IMF’s prediction of
just below 6 per cent GDP growth for Africa looks fairly solid, given that Africa’s growth is internally driven
and structural. Remember, even in 2008, when developed economies contracted by up to 5 per cent,
African GDP still expanded by over 4 per cent. Despite the possibility of a mild recession in the developed
world, it is unlikely 2012 will be anywhere near as bad as 2008.
• North Africa has the potential to bounce back strongly and at least return to trend GDP
growth of 4 per cent.
• The rationalisation of the Nigerian banking sector has been completed and Nigerian banks
are now well capitalised, with financial ratios that would be the envy of most European
banks.
• In East Africa, drought is unlikely to strike twice and a normal harvest will facilitate a strong
recovery, not that the region did too badly in 2011, with GDP growth of over 4 per cent.

What we do not know, of course, is whether investors will start to buy Africa again. If developed
market sovereign debt fears continue to haunt the markets in 2012, then the risk trade will be off
the table and there is little reason why investors should assume the extra perceived risk of investing
in Africa, despite the compelling fundamentals. However, if Europe sorts itself out and the US
economy grows at 2 per cent-3 per cent, which looks increasingly likely, then the risk trade will come back into
fashion and few economies are going to offer the attractive growth prospects Africa does, at
valuation levels that are now compellingly cheap.

Dylan Evans, Director International Investor Relations, Standard Bank