The African Economic Outlook 2008 the Pulse of Africa Javier Santiso Chief Development Economist,...

The African Economic Outlook 2008

the Pulse of Africa

Javier SantisoChief Development Economist, OECDDirector, OECD Development Centre

31st January 2008

Exane BNP ParibasGeneva

The challenge of diversifying growth drivers1

A new investment frontier?2

Introduction

Rising Suns: China and India3

Conclusion: Africa and Global Decentering

Comparative, up-to-date and forward-looking tool

Monitoring progress towards MDGs of African countries: 31 countries in 2007 and 35 in 2008!

Analysing crucial themes for Africa development

Previous years: privatisation, energy, SME financing, transport, water

AEO 2008: “Technical Skills Development in Africa”

Deeply rooted in African realities

Network of local experts, constant dialogue with stakeholders

Quality peer review involving AfDB country and sector economists

Sound Statistical analysis and data computation

Original indicators (political troubles, diversification) and macro forecasts

New background research:Working papers on political indicators, privatisation, etc.

AEOAEO A unique macro monitoring tool

3

AEOAEO From first-mover to regional reference

From 2001:

A groundbreaking collaboration

UNECA

2008:

The reference on African economies

4

Algeria

Libya Egypt

Mauritania

Mali

Niger

Chad

Dem.Rep. Congo

Sudan

Central AfricanRepublic

Equatorial Guinea

GabonCongo

Cameroon

Angola

Guinea-BissauGuinea

Sierra Leone

Liberia

Côted'Ivoire

Tunisia

BurkinaFaso

Ghana

Nigeria

Togo

Ethiopia

Somalia

Djibouti

Eritrea

Kenya

Tanzania

Mozambique

SouthAfrica

Botswana

Zimbabwe

Namibia

Zambia

Swaziland

Lesotho

Malawi

Uganda

Burundi

Rwanda

Madagascar

Senegal

Gambia

Morocco

AEO 2008

Sao Tome et principe

Mauritius

Comores

Cape verde

Benin

New in 2008:

Cape Verde

Liberia

Libya

Equatorial Guinea

AEOAEO Coverage 2008: 35 African countries

91% of GDP

86% of population

5



Introduction



GrowthGrowth Africa continues steady growth

Real GDP growth expected to exceed 5% for the fifth consecutive year in 2008

African growth is becoming more broad-based:

•2006: 23 countries over 5 %

•2007: 30 countries over 5%

•2006: 15 countries between 3-5%

•2007: 12 countries between 3-5%

Total OECD

Africa

Source: OECD Development Centre / African Development Bank, 2007

7

CommoditiCommoditieses

Commodity price inflation : a recent phenomenon?Global commodity prices 1900-2000

Source: OECD Development Centre, / Oxford Latin American History Database, 2008

*US$ nominal index 1970=1000

8

CommoditiCommoditieses

The commodity boom: a key driver for Africa

Global commodity prices 2001-2009

Source: OECD Development Centre / World Bank, 2008

9

GrowthGrowth Oil exporters and importers’ diverging paths?

Source: OECD Development Centre / African Development Bank, 2007Net Oil exporters: Algeria, Angola, Cameroon, Chad, Congo, Côte d'Ivoire, Congo DRC, Egypt, Equatorial Guinea, Gabon, Libya, Nigeria, Sudan

10

ANGOLAANGOLA World growth champion 2003-2007...

Source: OECD Development Centre / African Development Bank, ERS/USDA Macroeconomic Dataset, 2008

• Broadening investment: Non-oil sectors, construction, agriculture, manufacturing, services…• Decreasing dollarization : Strong & stable Kwanza increases local-currency deposits

from 41 to 49 % 2006 – 2007• Luanda Stock Exchange: Due to open first quarter 2008• Reconstruction: Fresh commitments from China (USD 7 billion credit), Paris Club repayments

2007:Real GDP growth: +19 % Oil production: +20%

2008 outlook: real GDP growth: +11.5%

11

ANGOLAANGOLA …but slowing as production reaches capacity


Slowing growth prospects:

• OPEC quota: Limiting oil production to 1.9 m b/d. Impact on growth and government revenue from 2008

• Poor diversification: Specialisation in extractive industry, difficult business environment

• Limited spillovers : 25 % unemployment and 68% poverty; weak governance.

12

Positive factors:

• Sustained growth due to favourable international environment

• Good macro management: repayment of external debt (4.8% of GDP)

• Investment: Up 7.2%; increasing FDI tonon-oil sectors

ALGERIAALGERIA Below par in light of assets


Threats:

•Increasing export specialisation

•Strongly Underexploited potential of non-oil sectors

• Youth unemployment over 30%

•Low absorption capacity

•Poor governance

Outlook for 2007: +3.1%

13

EGYPTEGYPT Africa’s foreign investment darling

Threats:

•High budget deficits•Subsidy system still accounts for 27% of govt. spending.

•Inflation (+8.5%) and food prices putting pressure on households •Youth unemployment remains high •Central Bank’s inflation targeting will lead to hikes in interest rates


Positive factors:

•Top FDI recipient in Africa ($11.1bln 2007 )

•Very strong export sector (+19.3% at $222bln 06/07)

•Investment up: Dom. +34.2%; Public +47%; Private +62%

•Sustained reforms: new VAT & real estate tax laws, tariff reductions, improved business environment.

•Important new gas resources discovered in Upper Egypt

14

South South AfricaAfrica

Gearing up for 2010 World cup


Positive factors:

• Sound macro management, credible institutions

• Good policy mix : budget surplus +0.7 % in 2007/08, inflation within target 3-6 % over 2004-07

• Investment up (+12 %) to address capacity constraints (mining, manufacturing and construction)

• Reduced external vulnerabilty : due to reserve accumulation and raising investor confidence. Limited impact of U.S subprime

• Well-developed financial sector: 10% of GDP.

Growth 2004-07: +5%

Outlook:2007 +4.9% 2008 +4.6%.

Threats:

• Very high current account deficit: 2006 -6.5%, 2007 -7% (Russia +9,7%; Brazil +1,2%; China +9,5%)

•Lack of competition in key sectors: monopolies in transport (Transnet), telecom (Telcom), energy (Eskom)

•Energy shortages: Cost of power cuts: Rand 2.9 - 8.6 billion. No new capacity on grid until 2012

•Inadequate transport infrastructure: mining penalised by deficiencies in freight supply chains

•Poverty and inequality : High crime; 44.4 % poor; Gini coefficient 0.68 in 2006

15

Fiscal PolicyFiscal Policy The rewards of good macro management

Public finance management is generally good and improving

Greater macroeconomic stability attained :•Fiscal balance is positive•Inflation is stable

Africa: inflation and fiscal balance(2000-2006)

Source: OECD Development Centre / African Development Bank, 2007 16

ReservesReserves Lower debt, higher reserves

Source: Avendaño, Reisen and Santiso, “The Macro Management of Asian Driver Related Commodity Booms”, OECD Development Centre Working Paper, forthcoming 2008.

Reducing vulnerability via the Greenspan-Guidotti rule. Ratio of Reserves to Short-term Debt*:

Note: Logarithmic scale defined as the scale of measurement using the logarithm of the defined ratio.

17

InstabilityInstability Long-term decline in political risk

Regime Hardening (LHS)

18

Qualitative data obtained from Marchés Tropicaux et Méditerranéens. Data is used to construct two indicators referring to: Political instability: occurrence of strikes, demonstrations, violence and coup d’état. Hardening of the political regime : incarcerations of opponents, measures threatening democracy such as dissolution of political parties, violence perpetrated by the police and the banning of demonstrations or public debates.

Source: OECD Development Centre “Moving towards political stability? Monitoring political instability, governments response and economic performance in African countries” forthcoming article, April 2008.

InstabilityInstability Zimbabwe political mess has little regional impact

Zimbabwe & its neighbours’ growth:

No contagion of political instability:

* Botswana, Mozambique and Zambia

* *

*

Source: OECD Development Centre, 2007 19

KenyaKenya Infrastructure bottlenecks may compound instability

Kampala/Lake Victoria - Mombasa rail line is the main export channel for landlocked Central Africa

High growth rates in East Africa risk being strangled by crumbling infrastructure

Uganda, Rwanda, Burundi, Eastern Congo and South Sudan all rely on the port of Mombasa:Imports: fuel, aid, diverse suppliesExports:

25% and 33% of Ugandan and Burundi GDP transit through Kenya

Tanzania’s port of Dar es Salaam, is at full capacity, and unable to handle extra Central African spillover

High cost of a fragile infrastructure

Source: OECD Development Centre, African Economic Outlook 2008

20

AidAid Over the « hump » of debt relief

Source: OECD Development Centre / African Development Banks, 2008

21

MDGsMDGs Slow progress, despite growth


22

OutlookOutlook Oil exporter & importers: divergent paths?

Oil and Mineral exportersChallenges:

• Capitalise on windfall gains• Maximise spillover to rest of the

economy• Avoid Dutch Disease

Trade Balance Inflation

Growth Fiscal Balance

Oil importersChallenges:

• Contain inflationary pressure• Finance widening trade deficit• Streamline spending to prioritise

poverty reduction

Source: OECD Development Centre, African Economic Outlook, 2007

23

TradeTrade African economies safe from U.S downturn?

Source: OECD Development Centre / UN Comtrade, 2008. (data on Nigeria corresponds to last available year, 2003)

Due to a low share of external trade with the U.S, Africa is less vulnerable to effects of U.S subprime woes

Note: The “Others” category includes Latin America, Middle East. East Asia and South Asia. 24

TradeTrade Concentrated U.S / Africa trade

Source: OECD Development Centre / UN Comtrade, 2008.

25

TradeTrade Concentrated U.S / Africa trade


Main African Exports to the U.S

26

TradeTrade Moderate growth across sectors


27

TradeTrade Two very different export profiles

Source: OECD Development Centre / Comtrade, 2008(Data on Nigeria correspond to the last available year, 2003)

28



Introduction



29

InvestmentInvestment Africa, the new investment frontier?

Source: OECD Development Centre / UNCTAD, 2007

A rapidly evolving investment destination:

Lower external debt: from 183% of gdp in 2002, to 69% in 2006

South-South lending: South Africa exporting capital China investing & providing loans, direct entry into African banking sector (2007: $5bln in deals struck)

Today private capital = 80% of total flows (50% in mid-80s)

Decoupling: Africa’s low correlation with other asset classes has made it an important in portfolio diversification

Real lending rates still very high:SSA 13% other LIC/MIC: 8%,Developed countries: 3.5% (04).

Savings rate still very low:SSA: 10% (SSA LIC: 5%, other SSA: 12%)BICTS*: 28% average savings

Allocation puzzle: the poorest countries have become net exporters of capital over recent years

*BICTS: Brazil, India, China, Thailand & South Africa

30

FDIFDI Record investment inflows for 2007

Source: OECD Development Centre / UNCTAD, 2008

Africa FDI 2007 : $36 billion

• Highest figure on record

• +20% on 2006; +200% on 2004

•FDI outflows - $8 billion 2006

• Largely due to surging extractive industry investment: South Africa and oil producing countries are still receiving the bulk of direct investment to Africa

• Previously off-limit sectors opening to foreign investment:Banking: Congo, Egypt, NigeriaTelecoms: Botswana, Burkina Faso, Cape

Verde, Ghana, NamibiaLand ownership: Morocco

FDI inflows likely to remain strong, but unevenly distributed by sector and destination.

31

FDIFDI Africa still last, despite fast rising investment

Source: OECD Development Centre / World Bank, 2008

Source: OECD Development Centre based on UN Comtrade, 2008

1999 2000 2001 2002 2003 2004 2005 2006

World 3117 3199 15524 4684 6427 4595 10509 17569

Developed economies 2534 2380 14964 3668 3156 4571 9564 7173

Developing economies 583 819 559 1016 3270 2024 476 9721

Africa 52 769 520 809 569 1849 360 746

Latin America 373 - - 67 166 - - 125

Asia 158 50 39 141 2536 175 116 8850

Distribution of cross-border M&A purchases in Africa by home region, 1999-2006 (US$ million)

Source: OECD Development Centre based on UNCTAD cross-border M&A database, 2008

32

InvestmentInvestment Rising investment, unchanged allocationsGlobal Emerging Market Equity & Bond funds:

Total investments and regional allocations

0

10

20

30

40

50

60

0

20

40

60

80

100

120

140

160

180

US$

bill

ion

GEM Equity

Assets all funds (left-hand scale)

Asia

Latin America

Emerging Europe

Africa

0

10

20

30

40

50

60

0

5

10

15

20

25

30

US$

bill

ion

GEM Bonds

Source: OECD Development Centre / EPFR, 2008

33

EquitiesEquities South Africa: dominating the investment landscape

Source: OECD Development Centre / EPFR, 2008

• Global equity fund allocation remains stable: 10% total funds

• EM funds have grown considerably, especially since 2003

• In turnover, the SA stock exchange is worth 100 times that of Africa’s second market: Nigeria.

• Africa still lagging behind in investment compared to other emerging regions (Asia especially).

• Over 2001-2006 period, South Africa received as much portfolio equity investment as the entire rest of SSA, 46 times over…

• South Africa: received 147 times Botswana’s total equity investment over same period

34

Private Private EquityEquity

Ideally adapted to African constraints?

Total emerging world private equity funds raised:

• $21.5 billion raised in first half of 2007

• Sub-Saharan Africa 2006: $2.3 billion raised (+198%)

• Average deal size 2005 $1.2 million, trending towards larger deals

• South Africa: 81% of investments, Nigeria 50% of remainder(2005)

• Top sectors: Transport, consumer-related investments, telecommunications/IT (2005)

• Later stage funds : 75% of all in-country investments 2005

• “In-country” investments: 96% total. “Outbound ” (intra-African) investments nonetheless in strong progression.

• Emerging Capital Partners: first $1 billion pan-African fund (2006)

2003 2004 2005 2006

$3.4 bln $6.4 bln $25 bln $33 bln

*OECD Development Centre / African Venture Capital Association, 2007

*

*

*

*

*

Source: OECD Development Centre / Emerging Markets Private Equity Association, 2008

35

http://www.ethos.co.za/live/index.php



Introduction



AsiaAsia Deepening bilateral trade relationships

Source: OECD Development Centre based on UN Comtrade, 2008

37

AsiaAsia The challenge of China and India’s rise

Source: OECD Development Centre, based on Comtrade data, 2008

n

np

HH

n

jj

11

1

1

2

Note: Herfindahl-Hirschmann index calculated as , where represents

the market share of good j on the exports of country i in its total exports .

iijj Xxp /

0.00.10.20.30.40.50.60.70.80.9

Vene

zuel

a

Ecua

dor

Chile

Pana

ma

Boliv

ia

Peru

Para

guay

Hond

uras

Guya

na

Urug

uay

Colo

mbi

a

Cost

a Ri

ca

Mex

ico

Guat

emal

a

Braz

il

Export Concentration in Products for Latin AmericaHerfindahl Hirschman Index

2001 2006

Export Concentration in Products for AfricaHerfindahl Hirschman Index

0.00.10.20.30.40.50.60.70.80.91.0

Ango

la

Chad

Nige

ria

Cong

o

Mal

i

Nige

r

Moz

ambi

que

Alge

ria

Zam

bia

Cam

eroo

n

Ghan

a

Gam

bia

Nam

ibia

Côte

d'Iv

oire

Sene

gal

Zim

babw

e

Keny

a

Sout

h Af

rica

Tuni

sia

Mor

occo

2000 2005

The risks of excessive specialisation:

38

AsiaAsia Higher specialisation in export markets?

Source: OECD Development Centre, based on Comtrade data, 2008.

n

np

HH

n

jj

11

1

1

2

Note: Herfindahl-Hirschmann index calculated as , where represents

the market share of country j on the exports of country i in its total exports .

iijj Xxp /

Herfindahl-Hirschmann Index by Destination

39

ChinaChina Growing yet concentrated African exportsPartnering with the Asian drivers:

opportunities and risks of further specialization in raw commodities

Source: OECD Development Centre / UN Comtrade, 2008

40

ChinaChina High value-added imports from Asia:

Source: OECD Development Centre / UN Comtrade, 2008

Partnering with the Asian drivers: opportunities / risk of raising the bar for competing in labor intensive industries

41

ChinaChina Net Exports with Asia: growing deficit

Source: UNComtrade/OECD42

ChinaChina A new and exciting paradigm shift

Source: UNComtrade/OECD

05

101520253035404550

EU - 15 United States

Asia (exc. China)

China

Shar

e of

tot

al e

xpor

ts

African Exports by destination

2000

2006

0

0.2

0.4

0.6

0.8

1

1.2

1995 2000 2005

USD

Bill

ions

Africa' FDI to China

0

10

20

30

40

50

60

Total Trade ODA FDI Contracted Projects

ÙSD

Bill

ions

Africa-China economic links 2006Summary

0

5

10

15

20

25

2001 2002 2003 2004 2005 2006

USD

Bill

ions

China's lending role in AfricaChina Exim bank - Export Credits

Export Sellers Credit

International Guarantees

Export Buyers Credit

Source: OECD Development Centre / IMF, 2007.

43

InvestmentInvestment Attractive investments with low correlations

Source: OECD Development Centre, based on Thomson Datastream, 2008

44



Introduction



ConclusionsConclusions Global Decentering and Africa’s XXIst century

Commodities are only part of the story. African countries are growing whether they be exporters or importers of raw materials

Africa is increasingly opening up to new actors, interests and sources of capital to watch: private equity and sovereign wealth funds

China and India have already shifted the state of play

Africa is at the forefront of a ‘global decentering’

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2

3

4

46

Thank you

More information:www.oecd.org/dev/aeo

The African Economic Outlook 2008 the Pulse of Africa Javier Santiso Chief Development Economist,...

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