africa bottom billion fastest billion

8/13/2019 Africa Bottom Billion Fastest Billion

1/44

AfricaEconomics

UpdateEconomics and strategy research

19 July 2011

AfricaThe bottom billion becomes the fastest billion

Important disclosures are found at the Disclosures Appendix. Communicated by Renaissance Securities (Cyprus) Limited, regulated by the Cyprus Securities & ExchangeCommission, which together with non-US af liates operates outside of the USA under the brand name of Renaissance Capital.

Charles Robertson+44 (207) [email protected]

Yvonne MhangoNothando Ndebele


2/44

19 July 2011 Africa: The bottom billion becomes the fastest billion Renaissance Capital

2

Executive summary 3

A h is tory of the world in 1,000 words 5

Modernisation theory 11

The Rostow take-off (or stages of growth) model 11 Africa 1960-1980: Stage one 11 Stage two in Africa: Education has improved, banking facilities are ready 12 Entering the third stage: Services over manufacturing 14

Africas demographic advantage over Asia 15 Urbanisation as a growth factor 17 The third stage Investment requirements 18 Foreign financing 19 Domestic financing 20

Institutional developments 22 Growth drivers: Services and construction 24

The critics of catch-up theory 27 Your questions? 27

Infrastructure: the key to faster growth 29

in SSA 29 Finding 1: Infrastructure contributed to over half of Africas improved growthperformance 29 Finding 2: Africas infrastructure lags its emerging markets peers 31 Finding 3: Socio-geo-economic issues add to the infrastructure challenges 31 Finding 4: Infrastructure services are twice as expensive as elsewhere 33 Finding 5: Power remains the continents largest infrastructure challenge 33 Finding 6: Africas infrastructure spending needs estimated at $93bn annually 36 Conclusion 37

What would result from sustained 38

higher growth? 38 What sectors and stocks do we prefer? 38

Appendix data 40

Disclosures appendix 41

Contents


3/44

3

Renaissance Capital Africa: The bottom billion becomes the fastest billion 19 July 2011

Age is not often associated with speed. But Africa, the worlds oldest continent, now

has more of the worlds fastest-growing economies than any other. Over 2000-2009,11 African countries grew at an annual rate of 7% or more a rate sufficient todouble the economy in 10 years. This is a big shift from the 1980s and 1990s, when

just three African countries achieved this level of growth. Of these 11 boomingeconomies, nine were in Sub-Saharan Africa (SSA); six benefited from higherenergy prices, and five were not associated with either energy or metal exports:Chinas demand for global commodities cannot be the only reason for this significantimprovement. After a generation of relative stagnation in the late 20 th century, manyin Africa have now begun the long-awaited period of catch-up with the developedworld. The bottom billion is becoming the fastest billion.

Figure 1: Africa accelerates past Asia, with the hi ghest number of countries t hat grew at 7% pa on averageover 2000-2009

Source: IMF World Economic Outlook, April 2011

Catch-up economic theory suggests all countries will eventually make the leap fromsubsistence farming to developed nation status, and that the later countries makethis transition, the quicker the growth when it finally happens. The technologies toboost productivity get cheaper and easier to import; Africas booming telecomssector is just one example. The global markets available to the poorest societies getever larger: In the 19 th century, the UK had no countries to export to that were richeron a per-capita GDP basis; today, Africa has richer export markets to pick from not

just in North America and Europe, but also across an increasing number of Asiancountries. Delivering that export growth is easier too, as telecoms opens up servicesas a route for export growth. Meanwhile, the evidence that effective policymakingcan lead to growth becomes progressively harder to ignore in recent years, evenNorth Korea and Cuba have made efforts to bring market forces into their economicsystems, but we find far more to be inspired by in Rwanda and Mauritius.

Just how fast can growth be? The fact that 11 booming African nations have alreadyachieved at least 7% annual growth is yesterdays story. Whats more important isthat three have grown at 10% pa, and we believe more can achieve or better this. Inour view, it would not take much for Nigeria to shift its 9% growth rate into doubledigits by widening access to cheaper electricity. We see scope for improvedgovernance in Cte dIvoire, in turn enabling it to emulate Sierra Leones 10%annual growth rate. The positive examples provided by countries like Rwandahighlight the success that others across Africa might copy.

02468

1012

A s i a

A f r i c a

C I S

M i d d l e

E a s

t

L a t a m

/ C a r

i b b e a n

C E E

1980-1989 1990-99 2000-09

Executive summary

Af ri ca s boom i s not just a China story

It is easier than ever to catch u p, as there

is an increasing number of increasingly

rich countries to sell to

Three countries g rew at 10% or mor e for

a decade; more could easily follow


4/44


4

Higher investment rates would go a long way towards broadening and accelerating

growth across Africa. This investment might flow from external sources as it did inSouth East Asia. Chinese lending to Africa is one example (see our China in Africa report, dated 21 April 2011), as is US retail giant Walmarts investment in Africanretail. Foreign portfolio flows can reduce borrowing costs for companies, and provideequity financing for businesses to expand.

We think such inflows look increasingly likely, as demographics favour directinvestment in Africa. Asias young population is now declining with East Asiasdropping 27% this decade and only SSA is positioned to experience 15-20%growth in the crucial 15-24 age range over the coming decades, which will providethe plentiful labour force the world economy will rely on.

Better still, this workforce is far better educated than a generation or two ago,after SSA saw nearly a tenfold rise in the gross secondary school enrolment rate to29% by 2005 from just 3% in 1960 (the latter was surely a contributory factor to theweakness of the 1980s). These are now around the levels of Mexico or Turkey inthe 1970s which helped pave the way to their strong growth performance insubsequent decades. Africas workforce is now well educated enough to support thetake-off.

Most positive would be a restoration of trust in the domestic economic environmentfrom locals themselves, and a recognition that returns on investment in Africa canfar outweigh those now available in the West. This can already be seen in the re-investment of profits by African businesses. We estimate higher investment couldadd 2 ppts to GDP growth rates (see pages 29 to 37), and note that this would have

increased the number of African countries doubling their economies within a decadeto 21 over 2000-2009. The challenge for investors will be in accessing the multiplegrowth stories that could result from this (see page 38 for our current stockrecommendations).

Even a slight improvement in the growth rate over the next two decades will producesome remarkable results. If, instead of nominal dollar growth of 9% annually, wesaw 10%, then Nigeria would become a $1trn economy by 2027. Sub-Saharan

Africa excluding South Africa alone would rise from $700bn (similar toIndonesia) to $4.5trn by 2030, assuming 10% growth in nominal dollar terms. Thesemay well prove to be conservative estimates.

The creation of a virtuous circle of higher growth leading to better governance inturn attracting more investment and faster growth is under way. Democracies arebecoming safer across the continent. We would not be surprised to see Africarecording some of the highest growth rates ever achieved in the coming decades.

Foreign financing wi ll provide some of

the support

As ia s populati on i s now in decli ne,

Afri ca s young adul t populati on is

growi ng at 15-20%

SSA is better educated than ever;

Botsw ana, Mauritius and SA h ave a

higher percentage in secondary

education than China or India

Higher investment (e.g. in infrastructure)

could add 2 ppts to GDP grow th and

would have put 21 African countries into

the high-growth category


5/44

5


There is still no consensus on why the UK became the first country to experience an

industrial revolution and a relative growth explosion. From 0-1000 AD, UK GDP wasroughly stable at $400 per capita roughly 15% below Chinese and Indian wealthlevels. By 1500 AD, the UK had superseded both these great Asian powers, but withper-capita GDP of $714, it did not quite equal France and clearly lagged thefinancial giant that was Medici Italy with per-capita GDP of $1,100. Even 200 yearslater, after an impressive 0.3% annual growth rate, UK per-capita GDP was $1,250and double that of China or India, but only just over half that of the new financialpowerhouse that was The Netherlands, on $2,130. The great leap forward onlykicked in from 1820 to 1850, when annual per-capita GDP began rising by 1.0%,after which UK per-capita income was the highest in the world.

Figure 2: Per-capita GDP from 0-1870 AD, constant 1990 PPP dollars

Source: Historical Statistics of the World Economy: 1-2008 AD, Angus Maddison

Naturally the Victorian British had many explanations for this, many of whichassumed an innate English superiority over other peoples (and most satisfyinglyover their age-old enemies, the French). But rather alarmingly, other Europeansbegan to catch up with the UK. Germans proved adept at copying, and thenimproving on UK iron and steel manufacturing techniques. They became moreefficient than the English themselves most distressing of all in the football arena.Through the 19 th century, Germany, the US, France and Australia and New Zealandbegan to grow more quickly than the UK, by importing foreign capital (often British),modern industrial equipment and improving British manufacturing techniques much as Kenya is doing with telephone banking today.

Figure 3: Growth spreads outside NW Europe per-capita GDP, 1870-1910, constant 1990 PPP dollars


0

500

1,000

1,500

2,000

2,500

3,000

3,500

1 1000 1500 1600 1700 1820 1850 1870

United Kingdom France Italy India China Netherlands

500

1,500

2,500

3,500

4,500

5,500

1870 1880 1890 1900 1910

UK France Germany US CanadaNew Zealand Russia Argentina Japan

A history of the world in 1,000 words

Why was the UK the first to modernise?

It was not just Br itains Victorian values

other European nations qui ckly followed

the UK lead


6/44


Figure 4: Population size in 2010 (mn)

Source: IMF, Renaissance Capital estimates

Tunisia Algeria

Morocco Egypt

Libya

W.S ChadMauritania Mali Niger

C.V Sudan Eritrea

Senegal Djib.Gambia

G-B Burkina FasoGuinea

South EthiopiaSudan

Sierra L. Cen. A R Liberia Cote D'Ivoire Nigeria Som.

Ghana BeninTogo

1 box = 1m1 box = total pop less than 1m

Kenya

Uganda

Cameroon

156mn Nigeria = Russia (140) = Bangladesh (165)85mn Ethiopia = Vietnam (88) = Germany (82) = Egypt (78) Eq G. Rwanda Tanzania70mn Dem Rep Congo = Iran (75) = Turkey (71) STP50mn SA = Korea (49) = Spain (46) Gab. Dem Rep of Congo40mn Kenya= Algeria (36) = Poland (38) = Canada (34) = Uganda (34) Congo24mn Ghana = Saudi Arabia (26) = Australia (23)14mn Zimbabwe = Zambia (13) = Cambodia (14) = Greece (12) Burundi10mn Rwanda = Hungary (10) = Czech Republic (11)

AngolaRomania

ZambiaMalawi

Madagascar Poland Mozambique

Nmb. Bts. Zimbabwe Mrt.

Swz.

Lesotho South Africa


7/44

7


Figure 5: GDP size in 2010 (bn), current dollars


Morocco Algeria Tunisia

Libya

Egypt

Niger W.S M au ri ta ni a Chad

Mali

Gambia

C.V SenegalBurkina Faso

G-BGuinea

NigeriaBenin

S-L Ghana Togo SudanCote D'Ivoire

Lib.

EritreaDjib.

CAR SomaliaEthiopia

1 box = $1bn1 box = total GDP less than $0.5bn CameroonBlank box = No availab le GDP data

South Africa = Argentina = Iran = Austria ($357-377bn) UgandaNigeria = Egypt = Ireland = Israel = Singapore ($204-223bn)

Eq GuineaKenya

ST&PGabon Rwanda

Congo Dem RepBur. Tanzania Seychelles

Malawi

ZambiaMoz.

ZimbabweMad.

Botswana Angola Mauritius

Les. Sw azil .

Namibia

South Africa


8/44


9/44

9


Instead it was the resource-less dragons of Taiwan, Hong Kong, Singapore as well

as South Korea which boomed through the 1970s. By the 1980s and 1990s, theyhad been joined by the tigers of Thailand, Malaysia and Indonesia. China itself hadfinally joined the growth party in the 1980s and India stepped up in the 1990s and2000s. Meanwhile, the Japanese model, which was so admired in the 1980s andappeared to put Japan on course to challenge the US, crashed, and consensusinstead turned to the Chinese model.

While it is still generally ignored, Africa joined the boom a decade ago. The oil-richeconomies of Angola and Equatorial Guinea were the fastest-growing Africaneconomies, but a number of East African countries, including Uganda, Rwanda andTanzania, achieved record growth rates.

The pace of growth has also accelerated. The improvement in Nigerian per capitaGDP in constant prices over the six years of 2002-2008 took India eight years toachieve in the late 20 th century, it took Korea 11 years to achieve in the mid-20 th century, and it took France 27 years to manage the same in the 19 th century.

Figure 8: More Afr ican countr ies recorded average annual growth of 7%-plus over 2000-2009 than ever


What is clear from the above is that the growth virus does not respect ethnic,religious or geographic boundaries. It is not Victorian English values, ChineseConfucian/communism or East African entrepreneurship that offer the only model to

follow. Growth and high living standards have been created in resource-rich Canadaand resource-less South Korea, in the formerly tropical swamps of Singapore andthe cold winters of Sweden. There is no reason to assume it will not encompass usall.

0

2468

101214161820

E q .

G u i n e a

A z e r b a i

j a n

T u r

k m e n

i s t a n

Q a t a r

A n g o l a

M y a n m a r

C h i n a

S i e r r a

L e o n e

A f g h a n i s t a n

N i g e r

i a

A r m e n

i a

K a z a k

h s t a n

E t h i o p i a

T a j

i k i s t a n

C a m

b o d i a

B h u t a n

R w a n

d a

C h a d

M a l

d i v e s

M o z a m

b i q u e

U g a n d a

S u d a n

V i e t n a m

B e l a r u s

M o n g o

l i a

L a o s

I n d i a

T a n z a n i a

U A E

T r i n

i d a d

& T o b a g o

The growth model has infected

continental sized powers like China andIndia, as well as city states like

Singapore

Today it is Afric a which dominates the

high growth economies

Neither culture nor climate are barriers to

the growth virus


10/44


10

The only potential long-term barrier we see is the risk that the earth itself cannotcope with the consumption levels demanded by an ever-richer human race. Thisassumes that our ingenuity is unable to respond to these potential challenges.History is, however, encouraging. The agricultural revolution saved us fromstarvation. In the 1830s, Europe was running short of wood and panic buying wasdriving up lumber prices and cutting down the forests of the Austrian empire. Coalproved to be a solution. Oil saved the whales. It may yet be African solar power thatsaves us from global warming. But these are far from our areas of expertise, sobelow we focus on what catch-up theory suggests happens next, which countriesare making the most progress, and what is both holding Africa back and providingthe opportunity for faster progress.

Figure 9: Catching up is a global phenomenon per-capita GDP since 1820, constant 1990 PPP dollars


0

5,000

10,000

15,000

20,000

25,000

30,00035,000

1 8 2 0

1 8 2 6

1 8 3 2

1 8 3 8

1 8 4 4

1 8 5 0

1 8 5 6

1 8 6 2

1 8 6 8

1 8 7 4

1 8 8 0

1 8 8 6

1 8 9 2

1 8 9 8

1 9 0 4

1 9 1 0

1 9 1 6

1 9 2 2

1 9 2 8

1 9 3 4

1 9 4 0

1 9 4 6

1 9 5 2

1 9 5 8

1 9 6 4

1 9 7 0

1 9 7 6

1 9 8 2

1 9 8 8

1 9 9 4

2 0 0 0

2 0 0 6

United KingdomFranceGermanyItalySpainUnited StatesCanadaCzechoslovakia ArgentinaBrazilChileJapanSouth KoreaThailandTaiwanSingaporeIndia


11/44

11


The Rostow model is summarised as follows:

Stage one: Traditional society. Agriculture dominates; low per-capita GDP, due toa lack of technology. Hierarchical society.

Stage two: Preconditions for take-off. Secular education, formation ofentrepreneurial class; some capital mobilisation, with currency and banking, andmodest manufacturing. Take-off occurs within 10-50 years.

Stage three: Take-off. When the rate of productive investment rises from 5% to10% or more of national income, and one or more substantial manufacturing sectorsdemonstrates a high rate of growth. Sector-led growth becomes common. Economicprocesses, rather than tradition, predominates. Maturity reached after 50-100 years.Equivalent to industrial revolution.

Stage four: Drive to maturity. Investment rates of 10-20% extend technologyacross the economy, and keep growth above population increase. New sectors takeover from previous growth sectors. Poverty rates fall.

Stage five: Age of high m ass-consumption. This enables countries toconcentrate on their specific priorities, e.g. military/security issues, equality/welfareissues, luxuries for their elites.

Africa 1960-1980: Stage one

Much of Africa was evidently at the first stage at the time of the independence wave,around 1960. Agriculture dominated the continents economies, and education wasvery limited. When the Democratic Republic of Congo (DRC) won independencefrom Belgium in 1960, there were just 30 graduates in the country, no doctors, nosecondary school teachers and no army officers. In the 1959-1960 school year, 136children completed secondary school education in the DRC. Kenya did not have itsfirst African lawyer until 1956 which may be one too many, according to some

American friends, but is indicative of the lack of professionals across the economy.In Northern Rhodesia (now Zambia), 35 Africans had gained higher education by1959, and in Nyasaland (now Malawi) the figure was just 28. Given the starting pointin 1960, it is not so surprising that Africas economies were in trouble as these

countries entered the 1980s.

While human capital was lacking at the grassroots, leadership at the top did little tocompensate. Many poor policy choices were made, from an excessive, ifunderstandable focus on building university education, but at the expense ofuniversal primary education, to the adoption of the latest Western or Maoist theories(its always China that has the solution), and neglect of the agricultural sector. Theresult was that growth had stuttered to a halt by the 1980s, in a continent burdenedby debt.

Modernisation theoryThe Rostow take-off (or stages of growth) model

Af ri ca w as agr icul tural and held back by

very low education levels in 1960

Political leaders followed foreign m odels

with li ttle relevance for Afric a


12/44


12

Stage two in Africa: Education has improved, bankingfacili ties are readyThe situation has clearly improved. Debt forgiveness programmes mean Africa nowhas some of the lowest debt burdens in the world. Political leaders can see what hasworked elsewhere, and are adopting reforms that make a difference. Micro-levelreforms mean some countries in Africa are leaping up the World Banks ease ofdoing business indicators Rwanda ranked first in 2010 (see our report Rwanda

An African inspiration , dated 12 April 2011). Education has been expandeddramatically.

In 1975, gross primary school enrolment was 61% across Africa, and only 54% inSSA (excluding SA). By 1990, the ratio was 75% across Africa and 69% in SSA, and

by 2005 it was 96% and 93%. For secondary schools, there was just 3% grossenrolment in 1960, 13% by 1975, 30% by 1990 and 39% by 2005. Nigeria was at7% in 1975 against 32% in 2005, Kenya is up from 13% to 48% and Ghana hasrisen from 35% to 43%. The richest African countries, including Mauritius, now have88% enrolment.

Figure 10: Secondary sch ool gr oss enrolment rates 1975-2005

Source: UN

To put SSA into perspective, its level of secondary school enrolment is now wellahead of the US when it was booming 100 years ago. Just 7% of Americans aged

14-17 attended school in 1890 but 90% after 1945. In 1940, fewer than 15% of highschool leavers went to college, but 62% by 1992. In 1900, only 10% of industrialCEOs in the US had a college education. Today SSA secondary enrolment rates aresimilar to those in Mexico or Turkey in 1975, and three times better than it was itselfin 1975. Ghana and Kenya are in stronger positions than China in 1990; andBotswana, SA and Mauritius are ahead of China, Indonesia and India today. Africanow has an educated workforce sufficient to support a take-off economy.

Not only is education improved, but we find plenty of anecdotal evidence thateducated and internationally trained African professionals are returning from the USand Europe, to use their skills in the strong growth economies in the continent.

0

20

40

60

80

100

120

B r a z i

l

S o u

t h A f r i c a

R u s s i a

M e x

i c o

T u r

k e y

C h i n a

I n d o n e s i a

I n d i a

A f r i c a

S S A e x c l

S A

Around 1975 Around 1990 Around 2005

Primary schooling is now virtually

universal; secondary school ing

enrolment is up nearly tenfold since 1960

SSA secondary school enrolment is now

similar to Mexico or Turkey in 1975;

Botswana and Mauritius have better

levels than China or India


13/44

13


To enter the second stage requires an effective banking system. Stock marketinvestors in Ghana, Nigeria, Kenya and Rwanda will all be aware that this is now inplace. Credit/GDP ratios have plenty of room to rise in the years ahead and helpfinance rising investment.

Figure 12: Credit to households and corporates as a propor tion of GDP, 2009, %

Source: IMF

0102030405060708090

M a u r i t

i u s

S o u

t h A f r i c a

U k r a i n e

L i t h u a n i a

H u n g a r y

C r o a t

i a

C z e c h

R e p u b

l i c

K a z a k

h s t a n

P o l a n

d

B r a z i

l

S l o v a

k i a

I n d i a

R u s s i a

R o m a n

i a

N i g e r

i a

T u r

k e y

P h i l i p p i n e s

K e n y a

I n d o n e s i a

Z i m b a b w e

M e x

i c o

4 2 d

B o t s w a n a

( 2 0 0 8 )

G h a n a

A r g e n

t i n a

Z a m

b i a

R w a n

d a

Private sector debt ratios are way below

the 200% levels seen in t he UK, Spain or

the US

Figure 11: Key education data and per-capita GDP in major EM and African c ountriesPrimary gross enrolment Secondary gross enrolment Per-capita GDP

1975 1990 2005 1975 1990 2005 1990 2005 2010 Africa 61 75 96 13 30 39 Angola 78* 86 102** 10 10 15*** Angola 879 1,699 4,478Botswana 70 104 107 14 40 77 Botswana 3,187 5,985 7,627DRC 89 54 82** 14 22 32** DRC 227 118 186Ethiopia 18 33 78 5 14 24 Ethiopia 259 165 350Ghana 64 71 87 35 37 43 Ghana 603 824 1,312Guinea 34 34 86 13 9 31 Guinea 434 319 448Kenya 103 101 108 13 48 48 Kenya 504 547 809Mauritius 105 109 102 38 53 88 Mauritius 2,426 5,219 7,593Mozambique 48 63 102 4 7 13 Mozambique 249 336 458Nigeria 50 85 95 7 23 32 Nigeria 348 824 1,389North Africa 76 88 105 27 60 naRwanda 54 70 128 4 8 14 Rwanda 348 287 562SA 99 107 103 na 66 96 SA 3,039 5,267 7,158SSA ex. SA 54 69 93 9 19 29Tanzania 53 69 107 3 5 11 Tanzania 176 366 548Uganda 45 67 118 4 12 18 Uganda 259 321 501Zambia 92 94 115 15 21 30 Zambia 475 612 1,221Zimbabwe 71 101 104*** 9 47 41*** Zimbabwe na 461 594* 1974** 2007 data*** 2006 data

Around1975

Around1990

Around2005

Around1975

Around1990

Aroun d2005 1990 2005 2010

Brazil 122 141 136 47 106 Brazil 3,465 4,832 10,816Russia 107 94 95 93 Russia na 5,348 10,437Mexico 108 114 112 31 55 83 Mexico 3,458 8,163 9,566Turkey 100 99 96 27 47 79 Turkey 3,860 7,108 10,399China 124 129 111 57 38 72 China 341 1,726 4,382Indonesia 89 119 118 21 48 64 Indonesia 699 1,300 3,015India 84 93 112 26 37 54 India 378 716 1,265

Source: UN


14/44


14

Entering the third stage: Services over manufacturing

The third stage is where Africa might be different. Walt Rostows key book, Stagesof Economic Growth , was written in 1990, before this analyst had heard of theinternet. If development then required a country to export to the rest of the world, itcould only be done physically. Today, services might be able to replacemanufacturing as the engine of growth in Ireland, exports of services are worth48% of GDP, while Greek exports of goods account for just 7% of GDP. Rwandaalready exports more services than goods. Productivity gains in Pakistan and SriLanka are rising faster than in manufacturing, and the productivity level is higher inboth countries, and Nepal 1. Whether it is call-centres in Kenya or conferences inRwanda, there could be room for many countries in Africa to leapfrogmanufacturing, reducing the need for costly investment in transport infrastructure.

Growth in ICT has been phenomenal. There are an estimated 0.5bn mobile phonesin Africa. For every 10 additional phones per 100 people, GDP growth rises by 0.6-1.2% according to one study. In 2007, just one fibre cable connected SSA to theworld now there are seven, and next year the total will reach 12. Internet capacityhas risen from 340 gigabits to 34,000 gigabits per second, and the cost of internetservices has dropped by 95% since 2007 and may be down by 99% in 2012 2.

Figure 13: Telecoms c atch-up Mobile penetration as % of population

Source: MTN, NCC, Offcom, Arcep, Renaissance Capital estimates

This is not to say we wont see manufacturing in Africa. Beneficial trade dealsbetween Africa and the US have already encouraged a modest amount ofmanufacturing to relocate to Africa even from China into special economic zones.Rising wages in China make this an increasingly plausible scenario, but Africaschallenge will be competing with Vietnam, and others in South East Asia and South

Asia.

1 The Economist , 21 May 2011.2 http://www.time.com/time/magazine/article/0,9171,2080702-1,00.html

0

0.2

0.4

0.60.8

1

1.2

1.4

K e n y a

S e n e g a l

N i g e r

i a

S o u

t h A f r i c a

G h a n a

U g a n d a

C a m e r o o n

C o n g o - B

E g y p t U

K

F r a n c e

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

With the internet, services might replace

manufacturing as the growth dri ver

As Chinese wages ri se, Afr ic a may wi nmanufacturing market share too


15/44

15


Figure 14: Per-capita GDP, current $ pri ces: China losing i ts low-wage status

Source: IMF

Africas demographic advantage over Asia

Demographics as a growth factor

When countries get richer, child mortality rates fall and life expectancy increasessignificantly. Over the course of a couple of generations, we respond to this bygreatly reducing the number of children we have. But for those two generations,there is a population explosion, and the number of young people greatly increases.This both increases demand in the economy and helps to keep wages down. Onefactor behind low Chinese inflation in recent decades has been the high supply ofyoung workers. One factor now prompting 25% wage increases in China is that thesupply of young people is in sharp decline.

The West is well past this point. The number of 15-24 year olds is expected to beconstant between 2010 and 2020 in North America (US Census Bureau), and to

decline by 6% in Western Europe. Latin America and the Caribbean will see onlymarginal growth of 2% before declining over the next 30 years. South East Asia isstagnating, too.

0500

100015002000250030003500400045005000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

China India Nigeria Kenya Rwanda

SSA is now going through a population

explosion as China begins to experience

demographic shortages

Figure 15: Population of 15-24 year olds by region, 2000-2050

Source: US Census Bureau

From SE Asia to Latin Ameri ca, the

number of young adults is stagnating

-

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

400,000,000

2000 2010 2020 2030 2040 2050

Eastern Europe Eastern Asia South Asia SE Asia SSA Latam + Caribbean Northern Africa


16/44


17/44

17


Urbanisation as a growth factor

A rapid rise in population is associated with rapid growth in urbanisation. A host ofrecent work on the advantages of the city indicates that it is more cost-efficient tomanage transport, food distribution and most services in urban areas. Theavailability of labour is greater and cities become both a symptom and a trigger forfaster growth.

Below we show data in two ways. First we show the actual share of the populationthat is urbanised it remains in the 10-20% range in Uganda, Ethiopia and Rwanda.Somewhat surprisingly, Nigeria and Ghana are more urbanised than China.

Figure 18: Share of popu lation living in urban areas

Source: UN

More interesting perhaps is when we put urbanisation rates on a timeline usingJapan as our base economy. We do this on the assumption that urbanisation tendsto be correlated with rising wealth, with particularly rapid growth as urbanisationrates rise from 35% to 60% (as Japan did from 1950-1980). Rich countries tend tolevel out when around 70-80% population is urbanised. South Korea started itsurbanisation acceleration some 10 years after Japan, and Turkey is some 10 yearsbehind South Korea.

Figure 19: Using Japan urbanisation data for 1950-2010 we can see how o thers compare

Source: UN, Renaissance Capital estimates

0102030405060708090

U g a n d a

E t h i o p i a

R w a n

d a

K e n y a

I n d i a

V i e t N a m

Z a m

b i a

Z i m b a b w e

C h i n a

P h i l i p p i n e s

N i g e r

i a

G h a n a

J a p a n

T u r

k e y

S t h K o r e a

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

0

10

20

30

40

50

60

70

8090

1 8 5 5

1 8 6 5

1 8 7 5

1 8 8 5

1 8 9 5

1 9 0 5

1 9 1 5

1 9 2 5

1 9 3 5

1 9 4 5

1 9 5 5

1 9 6 5

1 9 7 5

1 9 8 5

1 9 9 5

2 0 0 5

Japan

Sth Korea 1950-2010

Vietnam 1950-2010

Philippines 1950-2010

China 1950-2010

India 1950-2010

Turkey 1950-2010

Nigeria 1950-2010

Kenya 1950-2010

Ethiopia 1950-2010

Urban areas tend to be mo re efficient and

faster growing than rural areas

Nigeria and Ghana are already more

urbanised than China

Nigeria and China with urbanisation rates

of 50% are where Japan was during i ts

rapid wealth gains in the 1960s


18/44


18

Nigeria is roughly where Turkey was in 1985, and where Japan was in 1965. We

think it will likely see the urbanisation rate rise from 50% to 60-70% over the next10-20 years. This may well coincide with a period of very rapid growth for Nigeria, asothers have seen at this time. Countries l ike Ethiopia have not yet reachedJapanese urbanisation rates for 1950.

While urbanisation can support growth, it also offers the clearest sign of an acuteneed to build infrastructure, as has remained clear from the slums of London in the19 th century to the favelas of Rio de Janeiro or Nairobi today. Investment is key.

The third stage Investment requirements

According to Nobel prize winner Michael Spence, achieving multi-decade levels ofgrowth of 7% pa has only been achieved by 13 countries all of which hadinvestment levels of 25% of GDP. The reverse does not apply: high savings do notguarantee growth.

Figure 20: 25 years of 7% annual growth were achieved by these countriesPeriod of high

growth of 7% or morePer-capita incom e at the

beginning and in 2005 (constant 2000 dollars)Botswana 1960-2005 210 3,800

Brazil 1950-1980 960 4,000China 1961-2005 105 1,400

Hong Kong 1960-1997 3,100 29,900Indonesia 1966-1997 200 900

Japan 1950-1983 3,500 39,600

Korea 1960-2001 1,100 13,200Malaysia 1967-1997 790 4,400

Malta 1963-1994 11,100 9,600Oman 1960-1999 950 9,000

Singapore 1960-1999 2,200 25,400Taiwan 1965-2002 1,500 16,400

Thailand 1960-1997 330 2,400Source: The Next Convergence, Michael Spence, World Bank, World Bank Development Indicators

Within this governments need to invest 5-7% of GDP, primarily in education (seeabove) and infrastructure (see below). The positive news for SSA is that governmentdebt ratios are very low, suggesting such investment is plausible.

Figure 21: Public debt as % of GDP is very low in SSA economies

Source: Renaissance Capital estimates

0102030405060708090

100

Z i m b a b w e

H u n g a r y

I n d i a

B r a z i

l

P o l a n

d

K e n y a

A r g e n

t i n a

C h i n a

T u r

k e y

M e x

i c o

U k r a i n e

V e n e z u e

l a

C z e c

h R e p u b

l i c

S o u

t h A f r i c a

G h a n a

S o u

t h K o r e a

R o m a n

i a

I n d o n e s i a

Z a m

b i a

R w a n

d a

K a z a k

h s t a n

N i g e r

i a

R u s s i a

One study suggests that achieving 25

years of 7% annual growth r equires 25%

investment/GDP ratios

There is r oom for SSA governments to

boost investment


19/44


20/44


21/44

21


Figure 24: Loan/deposit ratios, 2010 data


Pension reform might be a further avenue for domestic financing. While SA looksmore akin to The Netherlands or the UK, the rest of SSA shows some surprisinglyhigh pension fund assets, with Kenya above Kazakhstan and Nigeria above Russia.The obvious link between what pension funds need (long-dated assets) andinfrastructure financing needs, suggests increased private pension levels could helpfund the infrastructure that would boost growth.

Figure 25: Pension assets /GDP, Ghana vs SSA peers, 2009

Source: Local authorities

Figure 26: Pension assets, 2009Pension

assets, $bnGDP,$bn

Population,mn

Pension assets,% of GDP

Pension assets,$/capita

Ghana 1.4 25.8 23.1 5.4 60.6Nigeria 12.2 168 152 7.3 80.5Kenya 5.1 29.4 35.9 17.3 142SA 359 285 49.3 126 7,282Russia 38 1,235 142 3.1 267Kazakhstan 12 108 16 11.5 796Zimbabwe 1.8 6.7 11.7 26.9 154Zambia 1.2 12.7 12.0 9.7 100

Source: Local authorities, Renaissance Capital estimates

020406080

100120140160180200

U k r a i n e

K a z a k

h s t a n

R u s s i a

S o u

t h A f r i c a

N i g e r

i a

R w a n

d a

C h i n a

K e n y a

Z a m

b i a

G h a n a

Z i m b a b w e

Loan to deposit ratio (2010)

05

101520253035404550556065

S o u

t h

A f r i c a

Z i m b a b w e

K e n y a

K a z a k

h s t a n

Z a m

b i a

G h a n a

N i g e r

i a

R u s s i a


22/44


22

Mobile phone banking may also pull savings into the formal economy and support

domestically financed credit extension. The Mpesa system in Kenya has alreadyextended banking services from roughly 20% of the population to at least 50% of theadult population between March 2007 and December 2010 4. Not only does it forman alternative way to bring cash into the banking system, it might also encourageremittances by cutting costs 5. So far the interest earned on all Mpesa accounts isequivalent to $7.5m and the average saving is just $3 per account, but as thesystem develops, this may well change.

If nine countries can sustain 7% growth without high investment, then we see agood chance of more achieving 10% or more annual growth rates with highinvestment.

Institutional developments

The cutting of red tape supports the acceleration of economic activity i nSSA. A significant part of SSAs growth story is attributed to the regionscommodity wealth, which is satisfying Asias huge appetite for natural resources.However, the fact that SSAs mineral-poor and oil-importing countries have alsobeen a significant part of this growth story implies that there is more to it thancommodities. Softer issues, including political stability, macroeconomic reformsand institutional developments, collectively explain the balanced growthperformance across SSA.

As SSA governments democratise, there is a growing awareness that their rolemust be limited to that of enablers. On the back of this some countries have madesome concerted efforts to make it easier for the private sector and foreign investorsto do business in their respective countries. The World Bank Doing Businesssurvey on over 150 countries shows, using various indicators, including the ease ofstarting a business, how countries have performed relative to each other inimproving their respective business environments. In the seven-year periodbetween 2004 and 2011, the countries that reduced the time to start a business bythe most number of days where Mozambique, the DRC, Lesotho, Angola andSenegal (see Figure 27). Today, the countries where one can start a business inthe shortest amount of time are Rwanda (three days), Mauritius (six days),Senegal (eight days), Mali (eight days) and Ethiopia (nine days) (see Figure 28).

4http://wwwds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2011/05/18/000158349_20110518143113/Rendered/PDF/WPS5664.pdf5http://www.vodafone.com/content/dam/vodafone/about/public_policy/policy_papers/public_policy_series_6.pdf

Mobile banking may also help pull

savings into the formal economy

High growth in Rwanda or Ethiopia maybe linked to easier business regulation


23/44

23


Figure 27: Time taken to start a business Figure 28: SSA countries where you can start a business in the shortest time

Source: World Bank, Renaissance Capital estimates Source: World Bank, Renaissance Capital estimates

The true test of the policy reforms that made SSAs business environment lesschallenging is whether it has indeed translated into greater economic activity orgreater investment. We found correlation between the change in the cost ofstarting a business and average economic growth in the 2004-2011 period wherethere is data available on the doing business indicators. Countries where the costof starting a business fell the most also had the highest economic growth rates(see Figure 29). Angola, for instance saw its cost of starting a business plummetto 163% of income per capita in 2011, from 1316% in 2004. Angolas economy

grew by an average of 7.8% in that period. Although, Angolas cost of starting abusiness remains significantly higher than that of Botswana and SA at 2.2% and6.0% of income per capita, respectively, it has fallen significantly from prohibitivelevels.

We also found a weak correlation between the cost of registering property andeconomic growth (see Figure 30). Ethiopia has one of SSAs lowest propertyregistration costs, at 2.1% of the property value in 2011. The East Africancountry is one of the fastest-growing countries in SSA. It is projected to grow by8.5% in 2011. On the contrary, in the Central African Republic, which has one ofthe SSA regions highest costs of registering property at 19.3% of the propertyvalue, economic growth is below the SSA average at 3.5%.

020406080

100120140160180

M o z a m

b i q u e

D R C

L e s o

t h o

A n g o l a

S e n e g a l

B o t s w a n a

E t h i o p i a

M a l

i

K e n y a

Z a m

b i a

N i g e r

i a

G h a n a

2004 2011

T i m e

( d a y s )

0

2

4

6

8

10

1214

R w a n

d a

M a u r i t

i u s

S e n e g a l

M a l

i

E t h i o p i a

C a p e

V e r

d e

C . A . R .

S i e r r a

L e o n e

G h a n a

M o z a m

b i q u e

T i m e

( d a y s )

Despite huge improvement in Angola,

further gains are still within reach


24/44


25/44


26/44


26

Figure 33: Financial services outperforms real GDP growth Figure 34: Hospitality sectors growth outperforms GDP growth in East Africa

Source: Local statistics office, Renaissance Capita estimates Source: Local statistics office, Renaissance Capital estimates

Outside the services sector, construction has been one of the fastest-growingsectors over the past decade in SSAs best-performing economies. In our view,this growth has been driven by two factors, urbanisation and infrastructuredevelopment. In the 2009/2010 fiscal year, Ugandas government made itsbiggest budget allocation to road transport infrastructure. That is indicative of thecommitment the government has towards infrastructure development and theresultant boost to construction activity. Kenya has had a fiscal stimulusprogramme in place since FY09/FY10 that largely involves infrastructuredevelopment in the transportation and energy sectors. Ghanas spurt inconstruction activity in recent years is partially due to the construction ofinfrastructure required to support oil production, which began in December 2010.

Figure 35: Construction ou tperforms GDP growth

Sources: Local statistical offices, Renaissance Capital estimates

All these highly growing sectors evidently imply relatively slow growth in sectorswe have not focused on. Agriculture remains a key area in which big productivityimprovements are possible, and we intend to focus on this in a future report.

0 4 8 12 16

Tanzania (2002-09)

Uganda (2005-09)

Ethiopia (1994-2002)

Ghana (2007-10)

GDP Financial intermediation

% YoY0 5 10 15

Rwanda (2000-10)


Kenya (2004-10)

GDP Hotels & restaurants

% YoY

0 4 8 12 16 20

Tanzania (2002-09)

Rwanda (2000-10)

Uganda (2005-09)


Mozambique (2008-09)

Kenya (2004-10)

Zambia (2008-10)

Ghana (2007-10)GDP Construction

% YoY


27/44

27


The critics of catch-up theory

There are critics of catch-up theory economics, and among the best weve read is byVladislav Inozemtsev. He highlights that a number of countries have made it tomiddle-income level, but have often stalled at this point. Latin America in the 1980sor the Philippines are examples. Whether this critique is accurate or not is notrelevant to the debate in Africa today. Aside from Mauritius, SA and Botswana, theyare only now entering the third stage, and making the transition to maturity andhigh consumption will be a challenge for the 2020s or 2030s.

Your questions?

Can growth continue when western economies are weak?

Yes. Asia succeeded in the 1970s despite the terrible market shocks of 1973-1975,the global debt crisis and the recession of 1980-1982. In fact, weve justexperienced a terrible global shock and Africa sailed through it.

If China slumps, will Africa?

Half the countries that have sustained growth of 7% annually in the past decade donot sell to China. Clearly the commodity exporters would do worse in the face of aChinese slump, but this need not bring down the whole continent. India has provedresilient and the same may apply to many African countries too.

Should we trust the data?

Few question Africas growth data when they show no growth. It is only high growththat surprises. The same questions have been asked about Chinese data toothough no-one can now deny the commodity price boom that China has caused overthe past ten years. While any economist is always sceptical of all data, we see noparticular reason to doubt the validity of African data today.

Does high growth mean much when these countries are so poor?

In the 20 th century, Africa was poor too, but this did not mean it experienced high

growth in the 1980s. As with China, India and Europe, everyone starts at low levels.

Wont Africas poor governance and political instability derail the story again?

As we demonstrated in our 22 June 2011 report, The revolutionary nature of growth ,as an inevitable byproduct of rising wealth levels countries move away fromautocracy towards democracy, which tends to reduce corruption. We are all awareof poor governance in Africa precisely because per-capita GDP did not rise in the1980s, so poor governance was not challenged. Today, as wealth levels rise,democratisation will follow and corruption should decrease. Africas wealth levelshave probably never been as high as they are today. This is not to say individualcountries will not take backward steps some will but the prospects are

improving.

Democratisation will follow growth


28/44


28

How can you ignore the infrastructure challenges?

We discuss this issue more fully in the next section. We concur that infrastructurebottlenecks are a challenge, especially the undersupply of power. We conservativelyestimate that addressing these bottlenecks could raise Africas GDP growth by anextra 2 ppts.


29/44


30/44


30

Figure 36: Changes in growt h per c apita caused by changes in growth fundamentals, 1990-2005

Source: World Bank report, Calderon 2008

Figure 37: Contribution of infrastructure to total factor productivity

Source: World Bank reports, Escribano, Guasch, and Pena 2008

As pointed out earlier in the report, within infrastructure the rollout of telecoms hasbeen a major driver to GDP per-capita growth across Africa. Power has made theleast contribution, in most instances detracting from growth:

Figure 38: Changes in growt h per capita c aused by changes in different infr astructure sector s, 1990 -2005

Source: World Bank report, Calderon 2008

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

W. Europe SE Asia N. Africa W. Africa E. Africa S. Africa C. Africa

Stabilisation policies Structural policies Infrastructure

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

NamibiaBotswanaMauritiusSouth Africa

KenyaTanzania

CameroonZambiaEthiopiaMalawi

Infrastructure Others

-0.4-0.20.00.20.40.60.81.01.21.4

N. Africa W. Africa E. Africa S. Africa C. Africa Africa

Telecoms Power Roads


31/44

31


Finding 2: Africas infrastructure lags its emergingmarkets peers

A report published in 2008, Making sense of Sub-Saharan Africas InfrastructureEndowment , identified that SSA countries lag their peers in the developing world onnearly all aspects of infrastructure development (Yepes, Pierce, and Foster 2008).However, this has not always been the case. The study shows that 40 years agoSSA was well ahead of its South Asian peers. Generation capacity per millionpeople was almost three times higher. By 2000, South Asia had advanced to almosttwice the generation capacity per million people. Somewhere along the line, thecontinent was caught sleeping and failed to invest in its assets.

Figure 39: Africas infr astructure deficitNormalised units SSA low income countries Other low-income countriesPaved-road density 31 134Total road density 137 211Main-line density 10 78Mobile density 55 76Internet density 2 3Generation capacity 37 326Electricity coverage 16 41Improved water 60 72Improved sanitation 34 51Note: Road density is measured in kilometres per 100 sq kilometres of arable landNote: Telephone density is measured in lines per 1,000 populationNote: Generation capacity is measured in megawatts per 1,000,000 populationNote: Electricity, water, and sanitation coverage in percentage of population.

Source: World Bank report, Yepes, Pierce, and Foster 2008

Figure 40: Road density, km/000, km2

Source: WDI

Finding 3: Socio-geo-economic issues add to theinfrastructure challenges

SSA comprises 49 nation states, following the formation of South Sudan. Many ofthe SSA states are small and a significant number are landlocked. Infrastructuredevelopment has largely been driven by the need to gain access to export markets,hence the development of rail, road and water corridors to seaports. Ports are

congested and we have heard stories of consignments being held up at ports for up

0

10

20

30

40

50

60

70

80

C o n g o

S u d a n

G a b o n

E t h i o p i a

A n g o l a

T a n z a n i a

M o z a m

b i q u e

K e n y a

S e n e g a l

A f r i c a

- A v e r a g e

Z a m

b i a

N i g e r

i a

G h a n a

Z i m b a b w e

S o u t h A f r i c a

U g a n d a


32/44


32

to three months in some instances. Average delivery times from vessels to

consignee are above those in other emerging markets.

Figure 41: Average delivery time for co ntainers from vessel to co nsigneeGateway Destination Distance (km) Transit time (days)Mombasa, Kenya Kampala, Uganda 1,100 20Mombasa, Kenya Kigali, Rwanda 1,700 27Dar es Salaam, Tanzania Bujumbura, Burundi 1,800 21 Abidjan, Cote d'Ivoire Bamako, Mali 1,200 7Dakar, Senegal Bamako, Mali 1,200 10Cotonou, Benin Niamey, Niger 1,000 11Douala, Cameroon Ndjamena, Chad 1,900 38Lagos, Nigeria Kano, Nigeria 1,100 21 Almaty, Kazakhstan Germany 7,000 20Bangkok, Thailand Vientiane, Lao 670 2Kolkata, India Kathmandu, Nepal 1,250 9Tianjin, China Ulaanbaatar, Mongolia 1,700 8

Source: World Bank report, UN Report, Arvis 2005, quoting an international logistics company

There has been less emphasis placed on developing intraregional trade. Despite theadvent of economic and trade unions in various regions across Africa, these havebeen slow in encouraging intra-regional trade links. Global exports (i.e. exports from

Africa to the rest of the world) account for 27% of SSAs GDP growth while intra- Africa exports for only 4% (2009). If the infrastructure bottlenecks were removed,would intra-Africa trade double or increase tenfold? The answer probably liessomewhere in the middle. Higher exports might then boost manufacturingproductivity and produce a virtuous circle, as seen in Mauritius.

Figure 42: Cost of transport in Af rica From major ports to citi es

Source: World Bank, UNCTAD

The problem is not restricted to intra-regional trade. Intra-country, SSA countries arefacing relatively rapid rates of urbanisation as the rural population throngs to cities insearch of a better life. Meanwhile there has been underinvestment in infrastructure,due to both capital constraints and poor planning. As a result, existing infrastructureassets are under increasing strain and failing to meet demand. The result is higheroperating costs for businesses and higher costs of living for consumers. We paymore for less. In SA, consumers are asked to reduce their power consumption, while

0

5

10

15

20

25

0

100

200

300

400

500

M O M N a i r o

b i

M O M K a m p a

l a

M O M

J u b a

M O M

K i g a l

i

M O M

B u

j u m

b u r a

D A R t o K

i g o m a

D A R L u s a

k a

D A R K i g a l

i

D A R B u j u m

b u r a

D A R

G o m a

D A R L u b u m

b a s h

i

B e i r a

t o L u b u m

b a s h

i

D A R

H a r a r e

D u r

b a n

L u s a

k a

D o u a l a

B a n g u

i

D o u a l a N

j a m e n a

D a k a r B

a m a k o

L o m e

N i a m e y

L o m e

O u a g a

d o u g o u

A b i d j a n

B a m a k o

L a g o s

A b u j a

L a g o s

t o G o m

b e

USD/t USDc/t Km


33/44

33


the per-unit cost of power to households has been approved to rise by over 25% pa

for three years.

Finding 4: Infrastructure services are twice as expensiveas elsewhere

According to a study published in 2008, across the board SSAs infrastructureservices cost at least twice as much as in other emerging markets. The report statesthat high costs are usually a function of high investment costs but in some sectorsthey are merely a function of low competition and hence high margins. The gap insome sectors, such as mobile telephony, has been reduced over the past two years

with greater competition driving down costs. In some sectors the gap may very wellhave widened as prices to consumers have been increased to pay for investment inadditional infrastructure assets.

Figure 43: Electricity tariffs USc/kW: 2009

Source: UPDEA Africa

Finding 5: Power remains the continents largestinfrastructu re challenge

Power consistently emerges as the primary limiting factor to growth in the region.We hear it from corporates in Lagos, Nairobi, Harare and even SA. We see itourselves anecdotally in the power outages during business meetings shortlyfollowed by the humming of generators kicking in to fill the gap. Supply simplycannot meet demand, and this is widely acknowledged. What is often not known isthe magnitude of the power deficit. It is estimated that SSA generates roughly thesame power as Spain. Strip out SA and the picture becomes even less encouraging.Nigeria, for example, with a population three times that of SA, generates a tenth ofSAs power output, with total official generating capacity of 3,500 MW similar tothat consumed by Narita airport in Tokyo. This is evidenced in the low per-capitaconsumption of power across SSA, excluding SA.

05

101520

253035

40

Z i m b a b w e

L i b y a

S o u

t h A f r i c a

A n g o l a

E g y p t

E h t i o p i a

Z a m

b i a

S u d a n

A l g e r

i a

M a u r i t

i u s

K e n y a

C o n g o

N i g e r

i a

M o z a m

b i q u e

N i g e r

T u n

i s i a

N a m

i b i a

D R C

M a l a w

i

T a n z a n i a

C A R

M o r o c c o

G u i n e a

U g a n d a

C a m e r o o n

R w a n

d a

G h a n a

T o g o

B e n

i n

G a b o n

C o t e

d ' I v o i r e

B u r u n

d i

C h a d

M a l

i

S e n e g a l

M a d a g a s c a r

R w a n

d a

B u r

k i n a

F a s o

G a m

b i a

L i b e r i a


34/44


35/44

35


Figure 45: Underlying causes of Africas power supply c risis

Source: World Bank report, Eberhard and others 2008

The overall economic costs of power outages are high. Another World Bank study in2007 attempted to measure this cost by looking at the underlying cost of runningback-up generators or stalling production during outages. Overall these costsranged between 1-4% of GDP. Some countries, such as Malawi, were estimated tobe losing up to 6% of GDP in power outages. It is estimated that the private sector islosing up to 5% of sales annually, due to power outages. This figure is projected tobe as high as 20% for informal enterprises. The result is either lower margins orclaw-back via higher prices to the end consumer. A clear example of this is the highretail price of cement across SSA. While cement prices range from $50-80/tonne in

Asia, in SSA that range is $130-400/tonne. Cement prices are higher in SSA,partially as a result of higher production and distribution costs caused byinfrastructure bottlenecks.

High growth/low investment

System disrupted by conflict

Droughts


36/44


36

Figure 46: Cement price, $/tonne

Source: Company data, Renaissance Capital estimates

Finding 6: Africas in frastructure spending needsestimated at $93bn annually

Representing about 15% of the regions GDP, this figure seems large and alarming.Earlier estimates by the Commission for Africa put the figure lower at $39bn pa.However, the World Bank argues this number was not based on a detailed studyand cannot be used as a viable guide. A second study by the Commission placesthe figure at between $80-90bn pa.

What does SSA get for $96bn a year?

7,000 MW of new power generation capacity pa

22,000 MW of cross-border transmission lines pa

Interconnection of capitals, ports, border crossings and secondary cities viaa road network

Road access to all high-value agricultural land

Double land under irrigation annually

Household electrification rates raised by 10% each year

Mobile telephony and public access broadband for 100% of the population

Clearly, this is the ultimate wish list: the continent is unlikely to invest $96bn pa. According to the World Bank report, this amount could be reduced significantly ifinefficiencies plaguing the existing infrastructure were removed. For example,countries are currently spending about two-thirds of the allocated budget due tobureaucracy, red-tape and skills-shortage. Another inefficiency that could beaddressed is the under pricing of infrastructure services. Despite the relatively highcosts to users, pricing is often not high enough to cover the investment andmaintenance costs of assets. This is exacerbated by undercollection of tariffs andrevenues. It is estimated that revenue undercollection alone is as high as $4bn

050

100150200250300350400450

K e n y a

T a n z a n i a

Z i m b a b w e

S i e r r a

L e o n e

N i g e r

i a

C a m e r o o n

T o g o

G h a n a

S e n e g a l

Z a m

b i a

M o z a m

b i q u e

B e n

i n

S u d a n

U g a n d a

G a b o n

K a t a n g a

A n g o l a

N i g e r

B u r

k i n a

L i b e r i a

R w a n

d a

E t h i o p i a

C o t e

d ' I v o i r e

M a l

i

B u r u n

d i

R e p o f

C o n g o

E a s

t D R C

S S u d a n


37/44

37


annually in power and water. A third way to reduce the budget would be to spend

more intelligently. It costs up to five times as much to rehabilitate road infrastructurevs the amount required for road maintenance. If more capital was allocated to roadmaintenance in the first place, there would be less of a need for expensiverehabilitation projects.

Figure 47: Economic burden associated with power utili ty inefficiencies in s electedcountries, % of GDP

Source: World Bank report, Briceno-Garmendia, Smits, and Foster 2008

Figure 48: Underpricin g of pow er in selected countri es, as % of GDP

Source: World Bank report, Briceno-Garmendia, Smits, and Foster 2008

Conclusion

Infrastructure has been a clear contributor to economic growth in the region.However, it is also clear that the full impact of infrastructure is throttled bybottlenecks; Africa is undersupplied in terms of rail, road and water freight assets.These bottlenecks impede the growth of global exports while also hindering thedevelopment of intraregional trade. Within each country, the rapid rates ofurbanisation continue to stretch the existing asset base resulting in congestion, poordelivery and outages. Of all the infrastructure bottlenecks, power remains thegravest. It has a direct impact on economic productivity via the need to installbackup generators, forego production during outages and delay expansionaryprojects in both the public and private sector. Removing these bottlenecks will takecapital, cohesive action across regions and, most importantly, time. Weconservatively estimate that SSAs GDP growth could be raised by 2 ppts if

infrastructure bottlenecks were reduced.

0 1 2 3 4 5

DRCGhana

UgandaMalawi

CameroonNigeria

SenegalTanzania

RwandaEthiopia

MozambiqueKenya

ZambiaSouth Africa

Unaccounted losses Undercollection

0.0 1.0 2.0 3.0 4.0

MalawiZambia

TanzaniaCameroon

RwandaEthiopiaSenegalNigeriaKenya

MozambiqueGhana

South Africa

Underpricing


38/44


38

As it stands, the IMFs April World Economic Outlook assumes that Africas GDP will

rise from $1,730bn in 2010 to $2,692bn by 2016, very similar to Indias assumedlevel of $2,777bn in 2016. The nominal dollar GDP growth rate averaged 10% over2000-2009, and the IMF assumes 9% over 2010-2016. If we up this just marginallyto 10%, that would already push nominal GDP to $3,220bn, putting Africa close toBrazils assumed level of $3,303bn.

Achieving nominal dollar growth of this amount depends largely on the dollar itself,but it is not hard to envisage Africa growing by 6% with US inflation of 2% andcurrency appreciation getting us to that 10% level.

Sustained growth at this rate would make Nigeria a $1trn economy by 2027 and$1.5trn by 2030. This does not look particularly ambitious to us. Nigeria aims to bethe worlds 20 th biggest economy by 2020, which would probably require at least15% annual growth in nominal dollar terms putting the economy at $1trn already by2019 to put this into perspective, we expect 26% dollar growth in 2011 alone.

Assuming just 10% nominal dollar growth would make the other major oil producer Angola a $0.6trn economy by 2030. Among the energy importers Kenya would top$200bn by 2030 along with Ethiopia, with a cluster of $150bn economies rangingfrom Cte DIvoire to Cameroon.

Smaller economies such as Rwanda could boost GDP sixfold over 20 years from$6bn to $38bn.

Arguably, North Africa and SA are least likely to achieve such sustained rates of

growth as they are already relatively wealthy. Taking just SSA alone, and excludingSA, such sustained growth rates would push nominal GDP up from $698bn in 2010

roughly between Indonesia and Switzerland to $4,488bn by 2030.

The real question is not whether Africa can grow at 7% annually and 10% in dollarterms, but whether 10-15% is possible annually and 15% or more in dollar terms.With the right push on infrastructure we believe this is plausible for a number ofcountries, with the main constraint being financing and potential overheating ifgrowth is geared too much towards consumption rather than investment.

Within SSA, which markets do we believe have the best prospects? Unsurprisingly,we are confident about the long-term prospects where we have offices, including

Nigeria, Kenya, Ghana, Rwanda, Zambia and believe Zimbabwe could be one of thepositive surprises of the decade. Countries we should watch closely include SierraLeone, Cte DIvoire, DRC, Ethiopia, Uganda, Tanzania, Malawi, Mozambique and

Angola.

What sectors and stocks do we prefer?

Growing populations and accelerating urbanisation imply that agriculture, foodproducers and beverages will be positively impacted by higher growth.

We are particularly positive on the outlook for agriculture. The sector cannot keep upwith the pace of urbanisation, which has resulted in a growing food deficit over thepast decade. Not only is the continent charged with feeding itself, but increasingly

What would result from sustainedhigher growth?

Nominal do llar gr owth over 2000-2009 did

average 10% for Afr ica

To conti nue, we can assume 6% real

growth, 2% US inflation and real currency

appreciation

Nigeria would be a trn-dollar economy by

2027, or by 2019 in a 15% nomin al doll ar

growth environment not impossible ifthey grow by 26% in dollar terms, as

looks likely in 2011

Economies like Rwanda could increase

six ti mes by 2030

SSA excluding SA could rise from $700bn

in 2010 simi lar to Indo nesia to $4.5trnby 2030


39/44

39


Africa will have to feed the world. Industrial-scale farming is likely to be a hallmark of

African farming in the future. We have BUY ratings on Karuturi ( BUY, TP INR13).Karuturi offers exposure to flower, rice, maize and palm oil production in Ethiopiaand Kenya. We also have a BUY rating on Feronia ( BUY, TP CAD0.60), a palm oilproducer in DRC. Aside from its core asset of over 100,000 ha of palm oilplantations located along the Congo River, it also has a 10,000 ha arable farmingventure near Kinshasa. Zambeef ( Under Review ) provides exposure to the growingdemand for beef, chicken and pork, as well as crops. Others stocks to considerinclude the sugar producers, Mumias ( Not Rated ) in Kenya and Zambia Sugar ( NotRated ) and Dangote Sugar ( Not Rated ) in Nigeria.

More people in urban areas with higher levels of disposal income will also be goodfor food and beverage producers. We particularly like companies with establishedbrands in their markets beer companies spring to mind. Per-capita consumption ofbeer in Africa lags other developing markets. We are currently reviewing our ratingsand TPs for Nigerian Breweries, Guinness Nigeria, EABL (in Kenya and Tanzania)and Bralirwa (in Rwanda). We have a BUY rating on Delta ( BUY, TP $0.99) whichgives exposure to the recovering consumer disposable income sector in Zimbabwe.Other breweries in countries such as Zambia (Zambrew and Natbrew) and Ghana(Guiness Ghana) may also be considered.

In our view, branded food producers and retailers are also likely to be keybeneficiaries of higher GDP growth. In this space we have a BUY rating on Innscor(BUY, TP $0.76). The company is well-poised to benefit from its Zimbabweansupermarket chain (Spar markets), fast-food outlets and food producing division(National Foods).We are currently reviewing our ratings and TPs for Nigerian food

producers. With a population of over 150mn, this a key market for food producers. Inour view, the stocks to consider include the subsidiaries of global giants such asUnilever Nigeria, Nestle Nigeria and Cadbury Nigeria. Other stocks to considerinclude PZ Cussons, UAC Nigeria, Flour Mills and Dangote Flour Mills.

Higher GDP growth will also be reflected in a growing banking sector. We highlightNigerian banks within this sector. Not only is the macro picture for Nigeriafavourable, but we think the prospects for growing a consumer lending business areattractive coming off a relatively low base. The banking sector in Nigeria is fairlylarge, with numerous stocks to choose from, but our top picks would include Zenith(BUY, TP NGN19.8), First Bank ( BUY, NGN17.8) and Skye Bank ( BUY, TPNGN10.9).

While we are of the view that Africas growth is not just a resource story, we remainpositive on the outlook for production in resources, including oil and gas. Our toppicks include Bellzone ( BUY, TP GBP1.4), Beacon Hill Resources ( BUY, TPGBP0.405) and Afren ( BUY, TP GBP1.85)

Finally, given our view on the need for investment in infrastructure, we are positiveon the outlook for cement producers. A large number of countries face a supplydeficit which should support volumes as well as margins. We prefer Lafarge Wapcoin West Africa ( BUY, TP NGN55) and Athi River Mining (ARM) in East Africa, ( BUY,TP KES236).


40/44


40

Figure 49: Roads


Figure 50: Power


17

114

187

0 50 100 150 200 250

CongoSudanGabon

Ethiopia Angola

TanzaniaMozambique

KenyaSenegal

Africa-AverageZambia

NigeriaGhana

ZimbabweSouth Africa

UgandaBangladesh

EgyptIran

IndonesiaMexico

PakistanPhilippines

countries averageOthers emerging

IndiaBrazilChina

RussiaBRIC-Avg

Road (km)/ '000 sq km

0.13

0.26

0.62

0 0.2 0.4 0.6 0.8 1

AngolaCongoGabonGhana

EthiopiaKenya

MozambiqueNigeria

SenegalSudan

TanzaniaUgandaZambia

ZimbabweSouth Africa

Africa AvgBangladesh

Egypt, Arab Rep.Iran, Islamic Rep.

IndonesiaMexico

PakistanPhilippines

Other AverageBrazilChina

Russian FederationIndia

BRIC Avg

Kw/ '000 persons

Appendix data


41/44


41

Analysts cert if ication and disc laimer

This research report has been prepared by the research analyst(s), whose name(s) appear(s) on the front page of this document, to provide background information about theissuer or issuers (collectively, the Issuer) and the securities and markets that are the subject matter of this report. Each research analyst hereby certifies that with respect tothe Issuer and such securities and markets, this document has been produced independently of the Issuer and all the views expressed in this document accurately reflect his orher personal views about the Issuer and any and all of such securities and markets. Each research analyst and/or persons connected with any research analyst may haveinteracted with sales and trading personnel, or similar, for the purpose of gathering, synthesizing and interpreting market information. If the date of this report is not current, theviews and contents may not reflect the research analysts current thinking.

Each research analyst also certifies that no part of his or her compensation was, or will be, directly or indirectly related to the specific ratings, forecasts, estimates, opinions orviews in this research report. Research analysts compensation is determined based upon activities and services intended to benefit the investor clients of RenaissanceSecurities (Cyprus) Limited and any of its affiliates (Renaissance Capital). Like all of Renaissance Capitals employees, research analysts receive compensation that isimpacted by overall Renaissance Capital profitability, which includes revenues from other business units within Renaissance Capital.

Important issuer disclosures

Important issuer disclosures outline currently known conflicts of interest that may unknowingly bias or affect the objectivity of the analyst(s) with respect to an issuer that is thesubject matter of this report. Disclosure(s) apply to Renaissance Securities (Cyprus) Limited or any of its direct or indirect subsidiaries or affiliates (which are individually orcollectively referred to as Renaissance Capital) with respect to any issuer or the issuers securities.

A c omp lete set of disclosure s tatem ents asso ciat ed with the issuer s d isc ussed in t he Report i s availab le usin g the Stock Finder or Bond Finder for individualissuers on the Renaissance Capital Research Portal at:http://research.rencap.com/eng/default.asp

Investment ratings

Investment ratings may be determined by the following standard ranges:Buy (expected total return of 15% or more);Hold (expected total return of 0-15%); andSell (expectednegative total return). Standard ranges do not always apply to emerging markets securities and ratings may be assigned on the basis of the research analysts knowledge ofthe securities.

Investment ratings are a function of the research analysts expectation of total return on equity (forecast price appreciation and dividend yield within the next 12 months, unlessstated otherwise in the report). Investment ratings are determined at the time of initiation of coverage of an issuer of equity securities or a change in target price of any of the

issuers equity securities. At other times, the expected total returns may fall outside of the range used at the time of setting a rating because of price movement and/or volatility.Such interim deviations will be permitted but will be subject to review by Renaissance Capitals Research Management.

Where the relevant issuer has a significant material event with further information pending or to be announced, it may be necessary to temporarily place the investment ratingUnder Review. This does not revise the previously published rating, but indicates that the analyst is actively reviewing the investment rating or waiting for sufficient informationto re-evaluate the analysts expectation of total return on equity.

If data upon which the rating is based is no longer valid, but updated data is not anticipated to be available in the near future, the investment rating may beSuspended untilfurther notice. The analyst may also choose to temporarily suspend maintenance of the investment rating when unable to provide an independent expectation of total returndue to circumstances beyond the analysts control such as an actual, apparent or potential conflict of interest or best business practice obligations. The analyst may not be atliberty to explain the reason for the suspension other than to Renaissance Capitals Research Management and Compliance Officers. Previously published investment ratingsshould not be relied upon as they may no longer reflect the analysts current expectations of total return.

If issuing of research is restricted due to legal, regulatory or contractual obligations publishing investment ratings will beRestricted. Previously published investment ratingsshould not be relied upon as they may no longer reflect the analysts current expectations of total return. While restricted, the analyst may not always be able to keep youinformed of events or provide background information relating to the issuer.

Where Renaissance Capital has not provided coverage of an issuer for a period of 12 months, coverage shall be deemed discontinued.

Where Renaissance Capital has not expressed a commitment to provide continuous coverage and/or an expectation of total return, to keep you informed, analysts may preparereports covering significant events or background information without an investment rating (Unrated).

Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the securitys expected performanceand risk.

Renaissance Capital reserves the right to update or amend its investment ratings in any way and at any time it determines.

Disclosures appendix


42/44


42

Renaissance Capital equity research d istribut ion r atings

Investment Rating Distribution Investment Banking Relationships*Renaissance Capital Research Renaissance Capital ResearchBuy 129 37% Buy 5 71%Hold 49 14% Hold 2 29%Sell 13 4% Sell 0 0%Under Review 25 7% Under Review 0 0%Suspended 0 0% Suspended 0 0%Restricted 0 0% Restricted 0 0%Unrated 136 39% Unrated 1 14%

352 7*Companies from which RenCap has received compensation within the past 12 months.NR Not RatedUR Under Review


43/44

Renaissance Capital research team

Head of Equity Research David Nangle +7 (495) 258-7748 [email protected] Head of Equity Research Milena Ivanova-Venturini +7 (727) 244-158

africa bottom billion fastest billion

Documents