Africa Is Surely Just A Commodities Play, Right?
On June 25, my colleagues at Business Monitor International (BMI) hosted another Country Risk roundtable, dedicating 90 minutes to discussing the outlook for Sub-Saharan Africa (SSA) and whether the region will be able to decouple from the global economy. For those interested, the BMI Africa team kindly provided the presentation slides for the event.
As probably everyone would agree, the event was a great success. Held in one of London’s beautiful Livery Halls, BMI’s Africa team managed to stir up some of the liveliest discussions I have ever seen at a roundtable event among London’s top Africa specialists. While the decoupling debate was well received and a whole range of topics was covered, nothing seemed to excite the audience more than one specific question: does Africa remain a pure commodities play? Believe me when I say that some attendees made it their mission to convince the other participants that commodities only play a peripheral role in Africa’s economic fortunes.
From what I gathered – and as one might have guessed – Africa has undoubtedly a lot more going for it than its commodity richness. In fact, Africa – home to almost a billion people – has a rapidly emerging consumer market, which probably one of the greatest potentials in the world (given its low base). Although China and its thirst for Africa’s natural resources has been making most of the headlines lately, foreign and domestic companies are fully aware of Africa’s awakening consumer class and have started to set up shop across the entire continent.
Although SSA’s financial markets are still relatively shallow, it is noteworthy that most equity listings (with South Africa the obvious exception) are not oil and mining conglomerates, but companies with a heavy focus on consumers and businesses: banks, breweries, supermarket chains, airlines, hotels, you name it. This is certainly a very encouraging development and highlights that SSA business does not solely centre around commodities. So far so good.
However, does this mean that natural resources are no longer major determinants of growth dynamics? For sure, it very much depends on how important commodities are in terms of a country’s GDP and foreign exchange inflows. Yet, as my colleagues have argued convincingly, the growth potential of major commodity producers, such as Nigeria, will certainly remain fully exposed to the price of oil for quite some time to come. Although the country has a flourishing non-oil economy, oil price fluctuations will continue to determine the overall health of the economy. For instance, following the recent crash in oil prices, the Nigerian naira sold off by around 20% against the US dollar and other majors, significantly reducing companies’ profit margins in foreign currency terms.
Furthermore, the shortfall in foreign exchange inflows caused a major reduction in domestic liquidity. This was a key contributor to the collapse in the Nigerian Stock Exchange (in particular banking shares), caused a spike in interbank lending rates and prompted the Nigerian government to impose stringent capital controls. Against this backdrop, most companies operating in the non-oil economy are inevitably exposed to the dynamics in the oil industry, thus significantly affecting the soundness of the overall economy.