It’s been a challenging year for Africa. A strong US dollar, weak commodity prices and a slowdown in China have weighed heavily on the continent’s economies and stock markets.
At the same time, investors should be aware that Africa is not without its bright spots, and is home to clear pockets of potential. While the IMF has revised Sub-Saharan Africa’s 2016 growth forecast down to 4.5 per cent, that is still higher than forecasts for many other emerging and developing regions. And although the global economic backdrop means that the challenges this year are likely to continue into the next, there are reasons to be optimistic about the year ahead.
Egypt, for one, is forecast to grow 4.5 to 5 per cent in financial year 2015-16. Having weakened 11 per cent this year, the Egyptian pound is expected to weaken further, and foreign direct investment is likely to follow. While only 46 per cent of the memorandums of understanding signed at the Egypt Economic Development Conference in March have been finalised, they still amount to more than US$40 billion, and most address the sector’s most in need – gas and electricity.
FDI will be even more critical in light of a decline in tourism and its impact on foreign currency inflows. On the political front, elections for a new parliament have been completed. The governing body finally convening early next year will mark another major positive step in the political transition.
In Nigeria, the surprisingly peaceful victory by the All Progressives Congress opposition party attracted investors back to a market that had been largely neglected, and pushed the index up 16 per cent in the span of a week. Following the election, the focus has returned to the economic challenges facing the oil-dependent country. The president’s main focus has been tackling corruption, and there have already been some encouraging developments on that front. While analysts and investors are hoping for a currency devaluation, the central bank has been adamant in its resistance. In the meantime, the macroeconomic environment remains uncertain in light of low oil prices. However, with the recent appointment of highly qualified people in key ministries it will hopefully be only a matter of time before positive developments materialise. Despite Nigeria’s economic challenges, valuations remain attractive.
One economy that has shown consistent growth is Morocco. The economy expanded at an annual rate of 4.3 per cent in the second quarter of this year, accelerating from 4.1 per cent in the preceding quarter, thanks to stronger agriculture production. Its free trade zones have emerged as a key contributor to stronger exports. Zones such as the Tangier Free Zone have diversified the economy away from volatile sectors such as mining and agriculture towards higher value-added industries such as aeronautics and cars. The currency is pegged to the euro and has mirrored its decline against the dollar.
Kenya, meanwhile, is tipped to boast some of the world’s fastest growth rates. From an estimated 5 per cent last year, the IMF forecasts growth to rise to 6.9 and 7.2 per cent in 2015 and 2016, respectively. However, there are risks those expectations could be revised downwards as the country grapples with a weakening currency and a current account deficit. Despite an expected decline in tourism, growth in the production of tea and especially coffee has accelerated. Indicators of industrial activity such as electricity consumption have also picked up.
Tunisia has taken positive steps in electing a president and parliament. The tourism-dependent economy, badly affected by two deadly terrorist attacks on foreign visitors this year, has been helped along by an increase in olive oil and date export revenue, but has remained largely stagnant since the 2011 popular uprising. The finance ministry has forecast growth of just 0.5 per cent this year, half of last year’s figure. Hoping to reduce its public deficit by 3.9 per cent next year, Tunisia might ask the IMF for a new aid package at least equal to a $1.7bn credit line granted in 2013.
Despite the economic and political challenges experienced in Tunisia and Kenya, African markets offer windows of opportunity for investors next year. Egypt and Morocco have forecast impressive growth figures, with the former expecting substantial foreign investment and the latter diversifying its economy through the growth of free trade zones. And in Nigeria, a well-guided economic policy will bring back investors.
Sherif Salem is an emerging markets portfolio manager at Invest AD