Our Opinion: 2015
Africa’s emerging middle class
The media coverage surrounding President Obama’s visit to Africa challenged many people’s preconceptions of the continent. It is one of the most exciting regions in the world today, with rapid economic growth and an increasing population.
Over the past two years, Africa has been in the news for all the wrong reasons. The ongoing fight against the terrorist group Boko Haram continues in Nigeria, and last year’s Ebola outbreak claimed more than 11,000 lives before it was brought under control. Logic would also suggest that the collapse in energy and commodity prices will harm the economy further.
Traditionally, Africa has been associated with commodities. The continent is endowed with substantial natural resources. Half of the world’s diamonds come from Africa. There are large reserves of coal, iron, bauxite and other metals. As for oil, Nigeria and Angola produce around 5% of the global supply between them.
These natural resources should have made the continent rich. Instead, they’ve held development back. The biggest problem is that corrupt leaders in many African nations sold access to natural resources to mining and oil companies at well below their market cost, in return for bribes, which were spent on building up large militaries to secure their grip on power, rather than funding infrastructure development.
Meanwhile, insurgent groups and local warlords used their control of various resources to fund economically devastating conflicts. The most obvious example is the diamond industry, which has seen a high-profile crackdown on “blood diamonds” (or conflict diamonds) in recent years. But many other minerals have played a similar role.
Natural resources crowded out development in more conventional ways too. During the commodity boom of the 1970s and early 1980s, Africa (and Latin America) borrowed huge sums of money from banks against future revenues that failed to materialize. The debts quickly became unsustainable and Africa was forced to go through a long debt restructuring process that involved austerity programmes and cuts to investment in vital infrastructure.
However, in the past decade Africa has begun to get its house in order. There has been a major crackdown on corruption and efforts to increase financial transparency. Mining and energy companies have also been persuaded to invest in processing and refining facilities close to the mines and oil wells, increasing the amount of value added.
At the same time, there has been a conscious effort to diversify Africa’s development away from energy and minerals. With wages rising fast in many Asian countries, several companies are looking to shift the production of low-cost, labour-intensive goods to Africa. China has been at the forefront of this process – Africa is now the destination for 15% of Chinese-led foreign direct investment. South Africa, with its relatively skilled workforce, has received a large chunk of this, but Ethiopia and Rwanda have also benefited. Indian and Turkish firms are also big investors in Africa.
Domestic investment, fuelled by African entrepreneurs, is improving too. Kenya is even developing its own fledgling technology sector. An estimated $650m has been raised by Kenyan start-ups looking to exploit the rapid rise in the use of the internet and mobile phones.
As a result of all this, the decline in the commodities sector has been offset by a surge in the development of services, construction and manufacturing sectors.
Whilst there’s no doubt that the majority of Africans live lives that are nowhere close to being middle class in the Western sense, the number making up the middle class population is growing rapidly. Last year, Standard Bank looked at 11 key countries (Angola, Ethiopia, Ghana, Kenya, Mozambique, Nigeria, South Sudan, Sudan, Tanzania, Uganda and Zambia) and found that the number of people earning at least $5,500 a year had tripled from around 4.5 million in 2000 to 15 million in 2014. The report predicted the wider middle class in those countries will keep expanding, reaching 40 million by 2030, with 20 million of these earning more than $8,500.
This growing wealth is creating a consumer economy that is increasingly similar to those in developed countries, if a lot smaller. As a result, some of the world’s largest consumer brands are focusing their efforts on Africa. Procter & Gamble has been one of the most successful in tailoring its offerings to the African market, although others have also been successful. One strategy that has worked particularly well is to offer goods in smaller quantities than would usually be available in richer countries. This means they can be priced at a level affordable for an African consumer who is keen to buy an international brand, but who has a more modest budget.
The rise of the African consumer is not just being felt in the numbers and type of goods that Africans buy, but also where and how they shop. Until recently, most Africans outside South Africa bought most (if not all) of their food, clothes and goods from informal stalls or small shops.
However, global supermarkets are starting to enter the market, with Carrefour expected to open its first store in Kenya this year. And, with around 20% of Africans having access to the internet, e-commerce is also taking off, and is expected to be worth as much as $75bn in the next ten years.
The airline industry is also expected to do well. Until now, air travel has been held back by a lack of infrastructure and regulations that effectively gave small national carriers monopolies. This has allowed them to get away with substandard service and sky-high prices. As a result, Africa only accounts for around 1% of the world’s air passengers. However, the market is being liberalised, allowing new entrants to emerge. Economic growth is also leading the major international carriers to increase their services to the continent.
We ensure that our investment partners do not overlook the opportunities that Africa provides, so our adventurous clients have access to this fascinating part of the world in their portfolios. We also ensure that local entrepreneurs have access to the highest standards of UK regulated advice and have a comprehensive visiting schedule to the continent’s main markets.