African economic slump reveals hot spots ripe for investment

When the International Monetary Fund slashed sub-Saharan Africa’s growth projections this spring, it seemed that the continent’s brief day in the sun had come to an end. The IMF downgraded the growth forecast from 5.8 percent to 4.5 percent in May and again to 3.8 percent in September.

The move came as no surprise, given decreased momentum in major markets such as Nigeria, where growth slowed to a paltry 2.3 percent in the year’s second quarter. The South African economy underwent a 1.3 percent contraction during the same period. This dismal news sparked speculation that a recession was ahead, and investors began to fear an economic contagion that would spread to other regional economies.

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But Africa’s commodities slump draws back the curtain on its more diverse investment opportunities, such as the growing information and communication technology and financial technology markets in a number of countries. Infrastructure projects in Uganda’s rail industry, Eritrea’s shipping sector, and Kenya’s real estate market indicate burgeoning investment hot spots. The anemic performances of the developed African economies should inspire investors to examine the robust possibilities in these and other emerging markets.

Pockets of Resilience

Africa boasts a number of growing economies, though some are more stable and investment-ready than others. The following three markets are poised for exponential growth in the next several years:

Ghana

This country of nearly 27 million defies rumors of an ailing economy. Ghana’s GDP was up 4.1 percent in the first quarter of 2015, compared with a 3.8 percent contraction at the same time last year. The country’s fiscal deficit decreased from 2.1 to one percent during the same period, a change spurred by government reforms such as slashed fuel subsidies. This news should reassure investors, especially after the country’s energy crisis exacerbated an already struggling business sector in 2014.

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The ICT market here presents especially lucrative opportunities because Ghana’s business process outsourcing sector will set the standard for the rest of Africa. The 2016 general election should generate further interest because it approaches amid demands for solutions to a strained economic environment.

Rwanda

Forecasts show Rwandan economic growth between seven and 7.5 percent this year, thanks to budgetary support from its development partners. Rwanda’s industrial market harbors particularly interesting possibilities because many investors view the country as a gateway to the vastly untapped market in the Democratic Republic of Congo.

Ethiopia

This sub-Saharan nation is emerging as the continent’s manufacturing hub because of low production costs and fast-growing income levels (though starting at a low base). It’s already attracted multinationals, such as Jordan’s Hikma Pharmaceuticals and the Chinese shoe corporation Huajian, and will likely draw more investment in 2016.

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Socioeconomic business initiatives are also hot investment prospects, as there’s a strong need for sustainable solutions in agriculture and development. The social enterprise company Hello Tractor found a warm welcome in the Nigerian market, where it sells its GPS-enabled agricultural technology to help small farmers. Philips, the Dutch technology company, developed new healthcare, lighting, and consumer products to serve rural, off-grid populations. Such strategies will prove critical to long-term regional growth as many African countries ease their dependence on commodities and focus on society-wide economic stimuli.

A Caveat to Investing

The opportunities in sub-Saharan Africa are many, but frontier and emerging markets still pose serious financial risks. Smart investments begin with a boots-on-the-ground strategy, seeing firsthand the challenges and potential inherent to each country. Consumer spending power is on the rise across the continent, and investors can capitalise on this by developing a keen sense of each demographic’s trends and preferences.

Companies have adapted everything from the sweetness of their food products to how their appliances manage power in order to stay competitive in Africa. More than 220 million basic-needs consumers were expected to enter the African market this year, according to McKinsey & Company, creating vast selling opportunities. But because many of those consumers have low incomes, companies must consider the unique economic conditions and offer relevant, affordable goods.

By tailoring products to African consumers, rather than bringing in only general products that have worked in other regions, investors stand to gain both market share and brand loyalty. This knowledge also helps mitigate risk in the more volatile frontier economies, such as Zambia, Angola, and Tanzania.

Despite Africa’s ongoing economic slowdown, sub-Saharan countries still offer ample investment opportunities. The struggling commodities industries will ultimately force governments to invest in other sectors, which will further increase Africa’s growing middle class. The time to invest in ICT, fintech, agriculture, and infrastructure is now. As the saying goes, “In the midst of chaos, there is also opportunity.”

Image by Andrew Smith via Flickr