Economic Outlook: African potential

By Scott Hazelton25 July 2014

Annual fixed investment growth

Annual fixed investment growth

The construction outlook for sub-Saharan Africa is generally positive, although there are wide swings in growth prospects across countries depending on individual political and economic policies.

The key driver for growth is commodity exports, and this dependence translates to economic vulnerability. The current situation of a sustained recovery in the US and Western Europe emerging from recession is a mixed blessing for the region. While stronger markets increase export demand, they also compete for capital. Since developed economies are less risky than emerging markets, they siphon away funds needed for infrastructure and industrial expansion in the developing world.

Another factor is that Chinese manufacturing and export growth is weakening, limiting its demand for raw materials and stagnating commodities prices.

Expanding domestic markets, income gains and regional integration will support economic growth of +5% - +6% in sub-Saharan Africa this year, which is second only to Asia (excluding Japan) for growth globally. Macroeconomic management is improving in most countries, poverty is declining and foreign direct investment is rising.

Growth in Africa’s middle class will create opportunities for consumer markets and improved housing. On the minus side, poor infrastructure (especially power generation), political instability and corruption remain obstacles to economic development.

In some countries, there is also terrorism or civil war. On balance, the outlook is positive, but it could be better.

There are also data challenges with Sub-Saharan Africa, which makes construction forecasting difficult. With limited historic information, indicators like fixed investment have to be used to gain an insight into the construction market, and this is a reliable proxy. The graph illustrates this data.

By country

Angola’s economic growth will continue to be driven by oil production and infrastructure. The nation’s oil production has the potential to increase to 2 million barrels per day (mbd) from 1.5 mbd, a critical development as this sector accounts for over half of GDP.
Angola plans to diversify its economy, using oil revenues to support non-oil industries and an ambitious infrastructure building programme.

New investment is occurring in refining and smelting while transportation infrastructure upgrades are being made in part to advance the agricultural sector. A US$ 9 billion liquefied natural gas pipeline will add to growth.

Early signs of economic diversification are appearing. Angola now exceeds the lower bound of a middle-income country, creating demand for residential and commercial construction. Tourism is also developing, although in addition to hotel construction, Angola also needs to clear landmines and rebuild transport and communications infrastructure.

In contrast to Angola, Cameroon is constrained by weakness in the hydrocarbon sector as oil production is declining and reserves are dwindling. However, new discoveries in the Rio del Rey, Douala Krini-Campo and Longone-Buni basins may alleviate the problem in the medium-to-long term, and create construction opportunities.

Cameroon has used international aid programs to reduce its external debt by 50%, freeing up revenue for infrastructure and development spending. Infrastructural improvements in the energy sector are expected to improve supply, and the water sector will also benefit as the government aims to double agricultural production.

Cote d’Ivoire will spend US$ 4 billion in agriculture development by 2015, including storage facilities and the rehabilitation of roads and irrigation infrastructure.

Infrastructure is also a problem for the Democratic Republic of the Congo (DRC), compounded by a mining sector hampered by lower copper prices. Debt forgiveness allows the DRC to fund infrastructure, but disputes with foreign oil and mining companies have exacerbated concerns about the business climate.

Rising aid and investment is a positive trend, and increased capacity in the energy sector could satisfy both domestic and regional power demand. For example, the Congolese and South African governments are moving ahead with the Inga III project to produce 4.8 GW of hydropower.

Progress on funding has been made with the Sino-Congolese Co-operation Agreement, which includes pledges to invest US$3 billion in railways, roads, and other infrastructure over 2009-19. This will be supplemented by bilateral and multilateral aid, also directed toward infrastructure.

Mozambique’s growth will be one of the fastest in the Southern African region. It should see strong foreign direct investment, primarily in the natural resource sectors and a fast-paced public-sector infrastructure programme, particularly railway links, port expansions, and electricity supply. These programmes will be financed through public-private partnerships and increased foreign borrowing.

Namibia is among the most politically stable economies in sub-Saharan Africa. The country is continuing the Targeted Investment Programme for Employment and Economic Growth (TIPEEG) to promote growth and job creation. TIPEEG provides for building dams (US$ 365 million) and rural electrification (US$ 100 million).

Other growth sectors include tourism, transport, housing and sanitation. The development of new mines combined with government-driven investment projects will make the construction sector among the fastest growing in the region.

Over the longer term, large-scale projects, such as the Erongo coal-fired power project, the Kudu power project, and the Baynes power project, are expected to enhance Namibia’s power supply, although most of these programs will only be realised in 2016 and beyond.

Nigeria’s GDP rebasing indicates it is Africa’s largest economy by a wide margin. Although Nigeria’s economy looms huge, its development level outside some scattered prosperous enclaves remains quite low.
The updated and more detailed look at its economy provided by the new numbers will make money managers, investors and development bankers pay more attention to the country. The nation’s crude oil reserves stand at 33.3 billion barrels, and Nigeria has the world’s seventh largest natural-gas reserves, with 159 trillion cubic feet.

The development of a trans-Sahara pipeline will increase natural gas production and exports.

South Africa’s pursuit of higher growth manifests itself with a substantial part of the budget allocated to infrastructure. Certain sectors will be targeted to grow the economy at a faster rate to absorb more of the unemployed and develop a stronger manufacturing base.

These include an intense infrastructure expansion in transport, water, energy, communication, and housing, as well as a focus on agriculture, mining, the green economy, and tourism. Infrastructure investment will be the largest spending category in the economy, with spill-over effects in various sectors and asset classes.

Developments in natural resources prices will dominate the outlook for sub-Saharan Africa, as exports of primary commodities average more than 90% of total exports across the region. However, public and private investment, especially in infrastructure, provides significant opportunities for construction.

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