Economic Outlook: Southern Africa

17 July 2013

Scott Hazelton, director IHS Global Insight's construction and manufacturing industries practice.

Scott Hazelton, director IHS Global Insight's construction and manufacturing industries practice.

Economic growth in sub-Saharan Africa should average at least +5% this year and in 2014 – the best performance since the global downturn began in 2008, and second only to Asia for the best regional growth in the world.

South Africa, due to its strong trade links to the Eurozone, is an outlier in the region’s high growth momentum, but in total 11 of the world’s fastest growing economies during the next five years will be African, according to the International Monetary Fund (IMF).

Investors are responding to the opportunity with strong inflows to the continent, especially south of the Sahara, while the African Development Bank (AfDB) is readying an ambitious infrastructure bond program to boost African economies.

The proposed programme aims to raise up to US$ 40 billion for infrastructure development, with about half of the amount to be drawn from the considerable reserves now held by central banks around the continent.

If it works as expected, the programme will make AfDB Africa’s largest multilateral financier. To put it in perspective, the projected US$ 40 billion would compare to the US$ 19 billion dispersed this year through the AfDB and World Bank combined.

Assuming that the projects financed are well chosen and executed capably and honestly, the continent would receive a tremendous direct and indirect economic boost, but it would still only partially close the region’s huge infrastructure gap.

Indeed, Africa may need to invest over US$ 50 billion in the next decade on additional rail infrastructure alone. This would provide 4,000 km of rail to improve access to the continent’s mineral resources.

While there are extensive coal, iron and manganese deposits in West Africa and Mozambique, they are expensive to reach and develop due to lack of infrastructure. Mozambique alone could see upwards of US$ 20 billion in rail and port infrastructure as its coal reserves are desired by the large and rapidly growing nearby markets in Asia, especially India.

Roads are also an issue. Mozambique has about 30,000 km of road, with the main arteries surfaced. However, secondary roads tend to be poorly maintained and can become impassable in the rainy season. With Chinese funding, the country has begun an infrastructure improvement programme that will include the construction of a ring road to connect critical highways in Mozambique to South Africa by 2014/15.

Investment in roads is widespread and vitally needed. Under its Vision 2030 programme, Kenya has committing to building and upgrading thousands of kilometres of roads. The initial phase will see construction of the country’s first eight-lane superhighway, a major link to the great Trans-African highway from Cape Town to Cairo and connecting Nairobi with Somalia and Ethiopia.

Power shortages

Another critical infrastructure element is power, with most countries throughout Africa experiencing chronic shortages that disrupt industrial and commercial operations. Plans are being put in place to tackle this – Nigeria, for instance, intends to put 1 GW into the national electricity grid per year over the next decade, increasing total capacity by 10 GW, or about a +50% to +70% compared to the current reliable, as opposed to nominal, level of capacity.

While few details have been released, the plan is notable for two aspects. First, the focus will be largely on renewable sources, principally solar. Secondly, the investment is being made by a South Korean conglomerate, HQMC, pledging up to US$ 30 billion.

The HQMC venture is structured as a build-operate-transfer contract, which would provide Nigerians with both jobs and technical training in early project phases, and eventually turn over full ownership and control of the technology to Nigerians.

Uganda is also making additional investments in power generation, most recently contracting for the 600 MW Karuma hydropower dam, a US$ 1.65 billion investment. Construction should begin before the end of 2013, and represents the most significant power generation project in Uganda, in tandem with the commissioning of the 250 MW Bujagali hydropower plant in 2012.

The Karuma project is funded by China, which remains the dominant source of investment funds in Southern Africa. But it is not universally popular. Botswana experienced such problems with a Chinese-contracted power plant that future infrastructure deals along these lines are unlikely.

Expansion of electricity generation at Morupule B, a US$ 1.6 billion investment in four 150 MW coal-fired units, should have been up and running by the end of last year. However, it is not yet online and power cuts are affecting both business and citizens, impacting planned large investments in railways, roads and mining that are planned to link the country’s large untapped coal resources with ports in Namibia and Mozambique.

One of the obstacles to investment in Africa, particularly in infrastructure projects, is the labyrinth of regulations and government agencies that need to be traversed. For investment to occur at sufficient rates to promote economic progress, countries must make the process more transparent.

Cameroon has taken the lesson, revising its investment code in a bid to attract more foreign investment. Many of the new provisions effectively end the distinction between domestic and foreign investors.

Zimbabwe represents the problem with other African economies, however. While the country was able to attract some domestic and foreign investment following some market-reform measures in 2009, statistics show the interest has waned substantially since 2012.

One culprit is the aggressive implementation of the indigenisation programme that requires all foreign-owned companies to cede 51% shares to indigenous Zimbabweans. This was compounded by the threats of higher taxes, the possibility of outright nationalisation of businesses, and the revocation of previous government contracts.

Zimbabwe has vast natural resources that under the right investment climate could attract significant investor interest, but the country’s inhospitable business environment and limited access to financing are obstacles.

Private sector

Infrastructure spending is not the only growth engine, with private sector investment also offering significant opportunities in Southern Africa. However, the availability of quality data makes quantification difficult. As such, one needs to use other indicators, such as broad economic performance or fixed investment growth.

The opportunity for construction exists for companies willing to take some risk to provide the infrastructural foundation that will lead southern Africa on the long road to significant economic expansion.

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