Posted on Monday, 26 January 2009 15:59

Domestic demand to square the circle

By Nicholas Norbrook, Patrick Smith and Gemma Ware


Easing pressures on the African consumer could mitigate the worst of the downturn, as credit dries up and commodity prices recover slowly


Raising finance for expansion or mergers and acquisitons will get much harder for African companies this year. As the Chairman of South Africa’s Vodacom, Oyama Mabandla, told The Africa Report: “The credit markets have gone on holiday.”

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?This tightening of credit is a direct consequence of the US’s financial meltdown last year; the indirect results of the slowdown, such as falling commodity prices and dwindling foreign investment, will hit African companies more gradually over this year. Both foreign portfolio and direct investment will slow down sharply. Already, portfolio investors and foreign fund managers have pulled out of markets such as Nigeria, South Africa and Uganda. ?


The continent’s non-correlation with world markets works on the way down as well as the way up. Matthew Pearson, head of Africa equity research at Renaissance Capital, explains Ecobank’s recent failure to raise money on the international markets thus: “Why would a fund manager bother with a Togolese-based bank, when he has Morgan Stanley available at a knockdown price?” ?


The news is not all bad. Commodity prices may have tumbled, but if 2008 was an aberration due to speculation following a weakened dollar, some believe that prices should return to levels seen in 2006 by the end of this year. A lot of the money that poured into Africa played on this commodity boom, says Kenyan investor and analyst Aly-Khan Satchu. “We’re going to see a sharp slide in that slam-dunk money…a lot of that money will look for a different type of home. The balance in Africa is moving away from the commodity producers to the consumers.”


?African companies are generally not over-borrowed. Though they may have been criticised for their conservatism about credit, they are probably thankful for it now. They have also benefited from the near ten-year growth spurt in many parts of Africa, which has created a denser web of smaller companies, the supplier network for the titans who make up our Top 500. This stronger, more diversified business ecosystem is being driven by and helping to drive domestic demand, an increasingly important force. Top 500 turnover by sector and country


?Over the last ten years, the service sector has been the beneficiary, as our rankings of Africa’s Top 500 companies makes clear. Although the Western consumer may be in reverse gear, the African consumer will have a great deal of inflation relief from receding oil and food costs, the latter making up half of household spending, freeing discretionary funds for telecoms, travel and retail.?


The construction boom is a vital part of this new domestic demand economy. Though construction may slow as credit tightens, the slack will be taken up by government infrastructure investments and Africans in the diaspora with their own housing projects. This will help those oil-rich countries sitting on comfortable foreign-exchange reserves, such as Nigeria and Algeria, but applies across the board and may even create some jobs.


?It is too early to tell where the bigger players in Africa will try to recoup their losses. The prospect of stagnating domestic demand in more industrialised countries such as Egypt could cause these investors and companies to focus regionally or in Sub-Saharan markets. ?


They will watch and wait, says Tamer Hafez, contributing editor at Business Today Egypt. “I really do believe that for Egyptian companies 2009 will be a year of consolidation and rigorous monitoring of what is happening in the EU and US markets.”?


Not an imaginary slump


?Any company exporting to the West will face a real slump in income, but mostly in the higher-end manufacturing and services sectors. Though there may be less demand for call centres in Morocco and Tunisia, North African fruit and vegetable exports to Europe, for example, should be spared. The textile sector will gain from European companies relocating to the Maghreb to take advantage of the cheaper workforce. Arezki Daoud, editor of the North Africa Journal, says that companies have to be creative if they want to crack the US market: “The survival and the success of the textile industry will depend on the ability of the Moroccans and Tunisians to be aggressive competitors.”


?Looking closer to home may be the answer in East Africa, where cross-border business within regional groupings (such as the East African Community) will seem more attractive. “This is a high-growth, super-growth curve,” says Kenya analyst Satchu. “One’s got to look at it regionally, and the region is the Swahili sphere.” ?


What our rankings show most clearly is the growing diversity of economic activity in several countries. Growth in Africa should outperform other parts of the world, except East Asia. Take Mozambique’s Mozal. A few years ago it was just on the drawing board, but now it ranks high in the continent’s Top 100 companies, a powerful reminder of the recent, rapid and successful diversification of whole economies.?


Constant diversification explains the ever-growing economic weight of Algeria, Egypt, Morocco and South Africa, but it is also becoming an important factor in regionally-important countries like Cameroon, Côte d’Ivoire, Ghana, Kenya and Nigeria. In all cases, the new elements are dynamism, bold investment, smarter management and heightened competition. ?


Despite the political problems, Kenya’s economy has bounced back much faster than expected: both its business and political class appear to be propelled by self-interest in their efforts to shore-up the grand coalition government. Diversification – tea, coffee, light manufacturing, ICT and financial services as well as tourism – was the other secret of Kenya’s resilience. As prices for Kenya’s key commodity exports remain in the doldrums, the ingenuity of its businessmen will be tested again.?


Interview: Oyama Mabandla
Non-executive chairman of
Vodacom, South Africa

The crashing oil price may not be all bad news for Nigeria if it boosts efforts to develop the indigenous and more productive areas of the economy. With its internal market of 140m people, Nigeria offers great economies of scale to companies that can find a way around the still-chronic problems with electricity, water and traffic jams.


?Nigerian companies have already been hit by their own mini-credit crunch. This year will be tough for Nigeria’s stock exchange and financial sector, and many predict a further involuntary consolidation of the banking sector before the end of the year. ?


In contrast to the political plaudits offered to Ghana in the wake of another free election and peaceful transfer of power, investors will be taking a much more critical look. President John Atta Mills’s new government starts the year with two ballooning deficits – the budget and the current account. But there are two bright spots for Ghana’s key exports: financial-system worries have driven up the gold price, and cocoa prices are at a 30-year high, buoyed perhaps by casualties of the slowdown who find solace in increasing their chocolate consumption.

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