African economies are attracting UK business and funds

As investors wake up to untapped potential in Africa, Pete Guest looks at opportunities for British businesses south of the Sahara

African businesspeople and veteran investors often complain that the continent’s problem is mainly one of perception.

But, as more companies seek out opportunities south of the Sahara, it seems the prevailing sentiment around Africa has changed, despite flare-ups of instability in key economies, including South Africa, Kenya and Nigeria.

With the eurozone entering a second recession in three years, exporters and investors alike are looking for growth in more “frontier” geographies, tapping into demographic expansion, urbanisation and the creation of an educated, acquisitive middle class that is emerging in many African countries.

“We’re not pretending that in the space of a decade, someone has waved a magic wand and all of Africa’s challenges have gone away,” says Michael Lalor, lead partner in Ernst & Young’s Africa Business Centre. “But there’s no doubt that Africa has made remarkable progress, not only on economic terms, but also on social and political terms, and it’s been sustained and consistent progress.”

Six of the ten fastest growing economies in the world were in sub-Saharan Africa

From 2000 to 2010, six of the ten fastest growing economies in the world were in sub-Saharan Africa. Between 2011 and 2015, the International Monetary Fund (IMF) forecasts it will be seven of the top ten.

Hydro-carbons and minerals have, in some cases, driven that growth, with the petro-economies of Angola and Nigeria among the leaders, but that is only part of the story.

In 2011, sub-Saharan Africa’s total population was estimated to be around 900 million. Including the Maghreb, it puts the continent at more than one billion people. That population is growing at a greater rate than any other region and is forecast to reach two billion by 2050. It is also increasingly urbanising.

In 2010, the United Nations’ Human Settlement Programme forecast that by 2030 more than half of all Africans will live in cities, from around 40 per cent in 2009. By the early-2040s there will be more than one billion people living in urban centres.

These demographic trends have contributed to booming markets for consumer goods, everything from tomato paste to white goods to four-by-fours and, of course, beer. Heineken, SABMiller and Diageo have all built strong businesses across the continent. The McKinsey Global Institute estimates that Africa’s consumer spending will reach $1.4 trillion by 2020.

The boom has also increased interest in infrastructure, and commercial and residential property, driving demand for construction materials. Nigeria’s Aliko Dangote, the richest man in Africa, is due to list his $11-billion cement business in London in 2013.

British and European exporters have woken up to the potential too. Export credit insurer Coface has seen a 24 per cent increase in its business in Africa in the first nine months of this year, much of it related to the engineering and construction sector.

“The metals sector, both in terms of metals trade and precision engineering, I always find is a good barometer to the way that countries are developing,” says Grant Williams, risk underwriting director at the company.

“If you go back a couple of years ago and look at China buying steel… I wouldn’t say that Africa is in quite the same explosive growth cycle, but the sales of capital-related products, metal for buildings, railways and so on, are increasing.”

Investors are also alive to the potential. Nearly $700 million of private equity deals have been announced in sub-Saharan Africa so far this year, according to the Emerging Markets Private Equity Association.

Private equity is buying in because as well as immediate growth, multinationals will be looking to make acquisitions in Africa further down the line. Foreign direct investment into sub-Saharan Africa has increased with a compound rate of 30 per cent since 2007, Ernst & Young says, despite the financial crisis limiting the availability of capital for businesses.

“Three years ago, if ten of our multinational clients had engaged us on opportunities for growth in Africa, it would have been a lot,” Mr Lalor says. “In the last year alone, we’ve engaged with 200-plus clients’ growth opportunities in Africa. We’ve got no doubt the numbers are growing.”