Economic Outlook Southern Africa: Infrastructure needs

03 October 2012

Fixed investment growth

Fixed investment growth

Many key countries in Southern Africa offer strong construction markets, but the lack of availability of data can make them difficult to quantify. An alternative approach is to use broad economic data such as fixed investment growth, to get a perspective on the region's demand.

Despite expectations for slower global growth during the remainder of 2012 and in 2013, prices of major sub-Saharan export commodities should remain above the lows of the 2009 recession. This should keep growth strong in the short term at least, with real GDP growth projected at +5.1% for 2012 being the highest since 2008.

This is constrained by a subdued performance in South Africa and Nigeria which, combined account for 54% of Sub-Saharan Africa's GDP. If the Euro Zone crisis deepens, this would generate risks, particularly for regional economies heavily integrated in the world economy.

Disparities within Sub-Saharan Africa will persist, with major oil and metals exporters still gaining the upper hand. In South Africa, the region's largest economy, real GDP growth is forecast to average +2.9% in 2012, from +3.1% in 2011 and -1.5% during the 2009 crisis.

In Nigeria and Angola - the region's second and third-largest economies - real growth in 2012 is expected to average +6.7% and +10%, respectively, driven largely by oil prices averaging around US$ 80 per barrel, along with increased oil production and accelerated infrastructure development. Moderate trade gains will continue to support the region's external balances, as exports continue to be gradually reoriented towards faster-growing Asian economies.

A key to sustained economic growth in the region is infrastructure investment. Only in comparatively scattered pockets of the region do utility, transportation, and communication networks exist that are adequately developed to support a "take-off" phase of general economic growth. Much of Southern Africa's untapped potential (ie in agriculture) is literally inaccessible because producers do not have a feasible way to send their goods to the market.

Development banks

The African Development Bank (AfDB) has proposed a new bond programme, targeted at infrastructure development, intending to raise up to US$ 40 billion, with approximately half of the amount to be drawn from the considerable reserves now held by central banks around the continent. If it comes to fruition, it would make the AfDB the leading multilateral financier of infrastructure projects on the continent, although China's position as the top investor in African infrastructure projects is not likely to be challenged. This year, the AfDB and World Bank combined disbursed only US$ 19 billion.

While it would close the region's huge infrastructure gap only partially, provided the projects financed are well chosen and well executed, the region will receive a tremendous direct and indirect economic boost. Africa has established itself with the world's second fastest economic growth behind Asia, and its momentum seems positive.

Indeed, further financing appears to be forthcoming from China. It has promised US$ 20 billion in loans to African countries over the next three years - double the amount pledged at the previous China-Africa conference in 2009. The funds would support infrastructure, agriculture, manufacturing and the development of small and medium-sized businesses.

Beijing's current engagement with Africa should be viewed within the context of its domestic economic needs. China needs the resources to sustain its growth, requiring massive levels of energy to keep the economy afloat - China's relations with Africa primarily centre on access to energy and other high-value commodities.

In line with this, there is a clear government policy in support of commercial ventures. Economic links between China and Africa are also facilitated by a mutual respect for the principles of non-interference and neutrality, with China believing that contentious issues such as human rights to be a matter of domestic concern only. This has enabled it to pursue trade links by increasing aid "without trade conditions" - often sparking criticism for undermining Western efforts to encourage good governance.

Weak infrastructure and educational attainment also contribute to inflation in the region. In South Africa, average real wage growth will remain high over the medium term as a result of critical skill shortages in the very industries related to infrastructural development. In Angola, the latest inflation data indicates that the biggest upward factor in the consumer price index was household goods (furniture and appliances) which are mostly imported and in high demand among those with sufficient income, but are subject to delivery snarls and shortages.

Commodity prices

Relatively high commodity prices through the first half of 2012 supported sub-Saharan African economies, particularly for Angola, Cameroon, Chad, the Democratic Republic of the Congo, Republic of the Congo, Equatorial Guinea, Nigeria and Sudan, all of which registered double-digit growth rates in both imports and exports. Significant contributions to export and import trade from net oil importers came from Liberia, Sierra Leone, Mozambique, Zambia, South Africa, and Uganda.

Developments in global commodity markets will continue to dictate the macroeconomic and the construction outlook for sub-Saharan Africa in the medium and long terms. Commodity prices have always been a key determinant of economic growth in the region, and continue to dominate trade in this region.

Exports of primary commodities average more than 90% of total exports across the region. Nigeria, Ghana, Côte d'Ivoire, the Democratic Republic of Congo, Angola, and Zambia are examples. Even in South Africa, which is not as dependent on the export of raw commodities as other nations, gold, metals and other minerals account for 57% of export revenues, making it susceptible to swings in commodity prices.

The region must diversify from its dependence upon raw commodities, but this will take time and require nations to engage in the discipline of leveraging its mineral wealth to other economic sectors. The track record is not strong, but key countries have reformed mining codes, improved transportation infrastructure and made necessary investments in value-adding industries associated with commodities, such as refining and smelting.

The natural progression of most economies is to move from commodity provision, to ancillary manufacturing activities, followed by more advanced manufacturing and ultimately a flourishing services sector. Southern Africa is in the early stages of this journey, and much needs to be done for infrastructure, education and income equality for the region to blossom completely.

However, the opportunity exists now for construction companies to provide the infrastructural foundation that will lead Southern Africa on the long road to significant economic expansion.

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