Lions on the move: The progress and potential of African economies

McKinsey Global Institute

Discussion with the World Bank

July 20, 2010

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

1

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2

Key messages

The continent’s long-term growth prospects are strong, due to both trends in the global economy and within Africa’s domestic economies

Growth opportunities and challenges vary across countries, based on their level of economic diversification and the strength of their export engines

Africa has been the 3rd fastest growing region in the world since2000, reflecting government actions to improve political and macroeconomic stability and create a healthier business climate

Africa’s business opportunities in four sets of industriescould be worth $2.6 trillion by 2020, or $1 trillion more than today

3

Africa’s growth prospects

4SOURCE: International Monetary Fund; McKinsey Global Institute

Africa’s economic growth accelerated after 2000, making it the world’s third-fastest growing region

African annual real GDP, 2008 $ billion

Compound annual growth rate, %

839694461

200019801970

1,067

1990

2.41.9

4.2

Compound annual real GDP growth, 2000–08%, constant exchange rates

Developedeconomies

2.0

World 3.0

LatinAmerica

4.0

Centraland EasternEurope

4.8

Africa 4.9

Middle East 5.2

EmergingAsia

8.31,561

1,483

1,400

1,323

1,258

1,191

1,1441,108

5.6

01 02 03 04 05 06

5.5

4.9

07 2008

3.6

5

Compound annual growth rate, %

Sector share of change in real GDP, 2002–07Percent, 100% = $235 billion1

Africa’s growth was widespread across sectors

SOURCE: Global Insight; Arab Monetary Fund; African Development Bank; McKinsey Global Institute

6

2

2

5

5

6

6

9

10

12

13

24

Wholesale and retail

Resources

Transport, telecommunications

Agriculture

Manufacturing

Tourism

Other services2

Real estate,business services

Utilities

Construction

Financial intermediation

Public administration

1 In 2005 dollars. Includes 15 countries that account for 80 percent of Africa’s GDP: Algeria, Angola, Cameroon, Egypt, Ethiopia, Kenya, Libya, Morocco, Nigeria, Senegal, South Africa, Sudan, Tanzania, Tunisia, Zimbabwe.

2 Education, Health, Social Services, Household Services.

7.1

6.8

5.5

7.8

4.6

24

3.9

7.5

5.9

8.7

7.3

6.9

6

1 Each business policy metric is measured along a variety of dimensions that are aggregated into an index for each metric. Improvements in each metric are measured as an increase in the index level.

2 Reformers are defined as countries that improved along credit, labor and business regulations, and trade policy. The non-reformers have improved along only a subset of dimensions (14 countries) or none at all.

3 Percentage points.

SOURCE: Fraser Institute; World Bank World Development Indicators; McKinsey Global Institute

1.1

3.2

Non-reformers

Reformers

2.1 pp3

Acceleration in real GDP2, 2000–08 vs. 1990–2000Unweighted country average, %

16

Many countries enacted microeconomic reforms, and this was correlated with more rapid growth

Sample size

50

64

8284

Trade policyCredit regulation

Business regulation

Labor market regulation

Sample size

37 11 11 30 14

Share of African countries improving business policy metrics1

%

7

Growth

Labor force growth1

Labor productivity growth

-0.5

3.1

-0.2

2.8 2.2

2.7

2.6% 2.6% 4.9%Total GDP growth

1 Used working-age population (15-64) as a proxy for labor force.

SOURCE: Conference Board World Economy database; McKinsey Global Institute

Africa’s labor productivity grew for the first time in decades

Real GDP growth, Africa%

1980–90 1990–2000 2000–08

8

Going forward, Africa’s increasing ties to the global economy will bolster growth

SOURCE: International Monetary Fund Direction of Trade Statistics; McKinsey Global Institute

2837

51

655

9998959493929190

13

9796

100

90

0

Intra-Africa

Western Europe

Asia

Middle East

Latin America

80

70

60

50

40

30

20

10

07060504030201

NorthAmerica

Other

08

28

11

6

5

15

00

20

12

63

17

11

32

16

45

81

198

196

108

41

33

South-south trade: 50% of total trade

Composition of African trade by trading partner, 1990–2008% Absolute, 2008

$ billion

9

Private foreign capital flows to Africa have risen sharply since 2003, surpassing aid and remittances

SOURCE: World Bank World Development Indicators; McKinsey Global Institute Capital Flows Database

-10

0

10

20

30

40

50

60

70

80

90

20080520009590851980

Capital inflows1

Remittances

Gross aid inflows

1 Capital inflows are defined as net foreign direct investment (FDI), equity, debt, and other flows into Africa from foreign investors.

African financial inflows$ billion

10SOURCE: United Nations; McKinsey Global Institute

7060 55

27 21 18

North America

100% =

Latin America

82

Rural

Urban

79

Europe

73

China

1,032

45

Africa

1,219

40

India

1,351

30

349594830

Cities with >1 million people

52 5210948 63 48

Africa is almost as urbanized as China and has as many cities of1 million people as EuropeShare of rural vs. urban population by region, 2010%, million

11

Share of households in each income bracket%, millions of households

By 2020, more than half of African households will have discretionary spending power

Consuming middle class(10,000–20,000)

Emerging consumers(5,000–10,000)

Household income brackets$ PPP1 2005

Globals (>20,000)

Basic consumer needs(2,000–5,000)

Destitute (<2,000)

SOURCE: Canback Global Income Distribution Database (C-GIDD); McKinsey Global Institute

Households with income >$5,000Million

59 85 128

Basic needs

Discretionaryincome

1 Purchasing power parity adjusts for price differences in identical goods across countries to reflect differences in purchasing power in each country.

3424

18

29

3229

1821

23

2020F

196100% = 244

17

12

2008

14

8

163

2000

11

6

12

Africa represents about 60 percent of the potentially available cropland in the world

80

970

2009

590

300

Sub-SaharanAfrica

LatinAmerica

Others

216

38

45

49

53

53

66

72

Others

Tanzania

Central AfricanRepublic

Mozambique

DRC

Angola

Sudan

Zambia

75

31

39

155

Others

Venezuela

Argentina

Brazil

1 Cropland defined as land producing output greater than 40% of maximum yield under rain-fed conditions, excluding forest areas.

SOURCE: World Bank/Food and Agriculture Organization, Awakening Africa’s sleeping giant; McKinsey Global Institute

Additional available cropland, 20091

Million hectares

13

Opportunities and challenges across countries

14

Zambia

Uganda

Tunisia

Tanzania

Sudan

South Africa

Sierra Leone

Senegal

Rwanda

Nigeria

Namibia

Mozambique

Morocco

Mauritius

Mali

90

Libya

KenyaGhana

Gabon

Ethiopia

EquatorialGuinea

Egypt

Côte d’Ivoire

Congo, Rep.

DRC

Chad

Exports per capita, 2008, $

10000

1000

100

10

Economic diversificationManufacturing and service sector share of GDP, 2008, %

8070605040

Madagascar

3020 100

Cameroon

Botswana

Angola Algeria

Africa’s future growth prospects differacross four groups of countries

SOURCE: Organisation for Economic Co-operation and Development; World Bank World Development Indicators; McKinsey Global Institute

Diversified

Oil exporters

Transition

Pre-transition

Size of bubble proportional to GDP

NOTE: We include countries whose 2008 GDP is approximately $10 billion or greater, or whose real GDP growth rate exceeds 7% over 2000–08. We exclude 22 countries that account for 3% of African GDP in 2008.

$500–1,000

$1,000–2,000

$2,000–5,000

>$5,000

<$500

GDP per capita

15

Diversified economies’ must increase their global competitiveness, since unit labor costs are much higher than China or India

1 Unit labor costs are defined as the wages divided by the output per worker and are computed by taking the average of a large sample of firms in a particular country.

SOURCE: Enterprisesurveys.org; Ramachandran, Gelb, and Shah (2009); Kinda, Plane et al (2009); McKinsey Global Institute

Unit labor costsWages/value added per worker

60

57

46

23

16

Morocco

Egypt

South Africa

India

China

Unit labor costs1

Wages/value added per worker

16

4

54

5

31

37

-5

127

Algeria

100% =

35 24.0Nigeria

18.344 7

Libya 11.063 2

Angola 12.286 8 1

SOURCE: World Bank World Development Indicators; McKinsey Global Institute

Africa’s oil exporters should use their wealth to diversify their economy – a path Nigeria is taking

Real GDP growth by industry sector, 2002–07%, 2000 $ billion

Resources

Agriculture

Manufacturing

Services

17

36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86

2008

2008 20041994

19881982

1969

1964

20041999

1992

1989

19821962

10,000

1,000

100

Economic diversificationManufacturing and service sector share of GDP

%

Export engineReal exports per capita2005 $

Africa’s oil exporters have diversified less than their international peers

SOURCE: World Bank World Development Indicators; McKinsey Global Institute

AlgeriaNigeriaIndonesiaMalaysia

Size proportional to real GDP per capita

18

Share of exports to other African countries, %

Intra-regional trade is growing in transition economies, particularly for manufactured goods

SOURCE: Comtrade; International Trade Centre; McKInsey Global Institute

Primary commodities exports

Manufactured goods exports

20.8

6.5

+16% p.a.

9.9

1.5

+27% p.a.

20082000

Nominal exports, 2008$billions

23%

62%

19

Africa’s $2.6 trillion business opportunity

20

Four groups of industries could have combined revenue of $2.6 trillion by 2020

SOURCE: McKinsey Global Institute

Estimated annual revenue, 2020$ billion

Compound annual growth rate, 2008–20%

Growth, 2008–20$ billion

1 Took 2030 value of $880 billion and calculated straight line equivalent for 2020.2 Represents investment. Assumes need remains as same share of GDP through 2020.

4%

2%

5%

9%

4%~980

520

110

220

130

2,620

200

500

540

1,380Consumer-facing

Resources

Agriculture

Total

Infrastructure

21SOURCE: Global Insight; United Nations Conference on Trade and Development; McKinsey Global Institute

African consumption has grown by $275 billion since 2000—similar to Brazil’s and more than in India

... with greater absolute growth in consumption than in Brazil or India

222

247

274

451

662

India

Russia

Brazil

Africa

China

Private consumption growth, 2000–08 2008 $ billion

Household consumption has grown steadily in Africa …

1990 1995 2000 2005

200

1 600

800

600

400

1 400

1 200

1 000

0

India

China

Russia

Brazil

AfricaPrivate consumption2008 $ billion

CONSUMER-FACING INDUSTRIES

22

While food will account for the largest share of consumer spending,nonfood sectors will grow faster as incomes increase

SOURCE: World Bank World Development Indicators; Euromonitor; McKinsey Global Institute

Household spending 2008

Household spending growth, 2008–20

2008 $ billion

101

26

28

46

51

97

144

369

Telecom

Banking

Education

Other

Food and beverages

Housing

Health care

Nonfood consumer goods

60

21

30

35

32

62

101

175

Total 861 515

Compound annual growth rate, 2008–20%

3.3

4.5

4.2

4.2

4.9

6.2

4.9

4.0

4.0

CONSUMER-FACING INDUSTRIES

23

An African “green revolution” could raise agricultural productionto $880 billion per annum by 2030

Source: Food and Agriculture Organization; McKinsey Global Institute analysis

5.8 2.7

500

140

235

225

880

280

Revenue in 2010

Cultivation of new land

Yield growth Revenue in 2030 under baseline scenario

Shift to high-value crops

Revenue in 2030 in Green Revolution scenario

Compound annual growth rate 2008–30%

Africa agricultural production revenue $ billion

AGRICULTURE

24

Pesticide 7

Fertilizer 14

Horticulture 490

DownstreamMidstream

Equipment 7

Seed 7

Upstream

239

Grainprocessing

58

Biofuels 23

Cereals 138

Vegetable/fruitprocessing

66

868

Otherprocessing 60

35

Livestockprocessing 33

Livestock 112

Cash crops 129

Downstream agricultural processing also offers a large business opportunity

Africa agriculture revenue potential, 2030USD billion

SOURCE: McKinsey Global Institute

0–5 percent

5–15 percent

15–20 percent

20+ percent

ESTIMATED OPERATING MARGIN

AGRICULTURE

25

Africa’s resource production volumes are expected to grow by 2 to 4 percent for most key commodities

SOURCE: RMB; International Energy Agency; McKinsey Metals Practice Commodity Models

1.01.6

3.03.5

4.0

9.1

Iron ore

GoldCoalGas Copper Oil

Share of African production 2008%

1 9 3 2 73 3

Annual production growth of major African resources, 2008–20%

RESOURCES

23% of foreign resource deals in Africa now include an infrastructure or industrialization component, up from just 1% of deals in the 1990s

26

Key take-aways

Africa's collective GDP, at $1.6 trillion in 2008, is now roughly equal to Brazil's or Russia's. Economic growth has accelerated, making the continent the third-fastest growing region in the world.

Africa's growth acceleration was widespread, including 27 of its 30 largest economies. All sectors contributed, including resources, finance, retail, agriculture, transportation and telecommunications. Natural resources directly accounted for just 24 percent of the continent's GDP growth in recent years. Key to Africa's growth surge were improved political and macroeconomic stability and microeconomic reforms.

Future economic growth will be supported by Africa's increasing ties to the global economy. Rising demand for commodities is driving buyers around the world to pay dearly for Africa's natural riches and to forge new types of partnerships with producers. And Africa is gaining greater access to international capital; total foreign capital flows into Africa rose from $15 billion in 2000 to a peak of $87 billion in 2007.

The rise of the African urban consumer also will fuel long-term growth. Today, 40 percent of Africans live in urban areas, a portion close to China's and continuing to expand. The number of households with discretionary income is projected to rise by 50 percent over the next 10 years, reaching 128 million. By 2030, the continent’s top 18 cities could have a combined spending power of $1.3 trillion.

Africa's economic growth is creating substantial new business opportunities that are often overlooked by global companies. MGI projects that at least four groups of industries-consumer-facing industries, agriculture, resources, and infrastructure-together could generate as much as $2.6 trillion in revenue annually by 2020, or $1 trillion more than today.

27

The full report can be downloaded at:

McKinsey Global Institutewww.mckinsey.com/mgi

Thank you

28

Back-up

29

Africa’s workforce will become the world’s largest by 2040

SOURCE: United Nations World Population Prospect; McKinsey Global Institute

1 Population aged 15–64.

800

700

600

500

400

300

200

1,200

1,100

1,000

100

0Japan

North America

Europe

Latin America

Southeast Asia

China

India

Africa

40353025201510052000

900

90858075 956560551950 70

Size of the working-age1 populationMillion

30

99%91%

77%

2006–2010

196

23%9%

1%

119

2001–2005

108

1991–2000

All other deals

Deals with infrastructure or other component

Resource deals in Africa > $250 Million%, $ billion

Resource deals in Africa > $250 Million%, $ billion

SOURCE: Dealogic; Factiva; McKinsey Global Institute

Africa’s resource deals increasingly include an infrastructure or industrialization component

▪ 2001 De Beers $7 billion diamonds deal with Botswana government includes a sorting facility, commitment to value and aggregate locally, and creation of 3,000 jobs

▪ 2006 China National Oil Company $2.7 billion deal for deepwater oil rights in Nigeria includes $2 billion investment in Kaduna refinery

▪ 2007 Mittal $2.2 billion deal for iron ore in Senegal includes iron ore processing facility and railways to ports

▪ 2008 China Railway / Sinohydro $2.9 billion deal with DRC for 10 metric tons of copper and 2 metric tons of cobalt includes 3,200 km of railway, 31 hospitals, 145 health centers,2 universities

▪ 2010 China Petroleum and Chemical Corporation$2.5 billion deal for deepwater oil stake includes component to build a refinery in Angola

▪ 2001 De Beers $7 billion diamonds deal with Botswana government includes a sorting facility, commitment to value and aggregate locally, and creation of 3,000 jobs

▪ 2006 China National Oil Company $2.7 billion deal for deepwater oil rights in Nigeria includes $2 billion investment in Kaduna refinery

▪ 2007 Mittal $2.2 billion deal for iron ore in Senegal includes iron ore processing facility and railways to ports

▪ 2008 China Railway / Sinohydro $2.9 billion deal with DRC for 10 metric tons of copper and 2 metric tons of cobalt includes 3,200 km of railway, 31 hospitals, 145 health centers,2 universities

▪ 2010 China Petroleum and Chemical Corporation$2.5 billion deal for deepwater oil stake includes component to build a refinery in Angola

ExamplesExamples

RESOURCES

31

Africa invests $72 billion annually in infrastructure

Annual average infrastructure investment, 2005–08$ billion

11

62

11

6

Private share%

25

SOURCE: Private Participation in Infrastructure (PPI) Database, Africa Infrastructure Country Diagnostic; National budgets; McKinsey Global Institute

21

17

7

3

13

2

8

Total 7253 18

Water & Sanitation 80

Energy 19

Telecom 21

Transport 24

Public and Donor

Private

INFRASTRUCTURE

32

SOURCE: World Bank PPI database; PPIAF: “Building Bridges: China’s Growing Role as Infrastructure Financier for Africa”; ICA (2007); McKinsey Global Institute

Private and Chinese investment in infrastructure will be key to meeting Africa’s infrastructure needs

Private investment

13%

2008

17.9

07

17.9

06

22.1

05

15.4

04

10.5

03

8.7

02

5.1

01

8.0

2000

6.5

Telecom

Transport

Water and sewerage

Energy

Infrastructure investment in Africa$ billion

Compound annual growth rate%

4.5

7.1

1.71.30.60.30.5

46.1%

200706050403022001

Chinese investment

INFRASTRUCTURE