Emerging market for investors

AFRICA could be the next big emerging market for investors but not solely because of its rich resources. The African consumer will also be an important catalyst. Many analysts argue that Africa’s rich exposure to resources is purely “extractive” and the money made does not trickle down to the continent’s domestic consumers. At the same time, there are concerns that a downturn in China’s property market will curb Chinese demand for African resources. Sub-Saharan African economic growth is actually being driven by domestic factors, and not just foreign mining companies extracting African minerals.

Since 2000, the service and manufacturing sectors have regained the momentum lost during the 1980s and 1990s, which were two lost decades for Africa.

Most SSA countries are facing substantial fiscal deficits and the effort of financing these deficits is likely to pose obstacles to the region in 2011. However, the unfreezing of international capital markets will provide some relief. Countries that had postponed their Eurobond issuances in 2010 are scheduled to tap into the international debt markets in 2011. A positive response to Nigeria’s January 2011 Eurobond issuance may encourage a second issuance from Ghana, as well as bring Kenya’s plans for an initial offering to fruition. Tighter global credit conditions from bouts of risk aversion could reduce funds needed to maintain the pipeline of projects. Some SSA countries are raising funds at home in local debt, reducing exchange rate risk and the need to go to international creditors. The shallowness of frontier markets will impair access to credit, with the saving grace that the less open markets of the region have been less affected by global selloffs.

Over the next several years, substantial growth is expected in the domestic sectors of Sub-Saharan economies. In most of sub-Saharan Africa, there’s a high level of entrepreneurial energy, and basic infrastructure in terms of communications and banking is now in place. The majority of frontier Africa investors tend to target the region’s evolving consumer middle class that is expected to increase its spending from $860-billion in 2008 to $1.4-trillion in 2020. The US-based behemoth last year bid $2.3billion to acquire 51% of South Africa’s Massmart, a deal expected to be approved by local regulators shortly. The buy will instantly make WalMart the third biggest retailer in South Africa and give it a toehold in 13 other sub-Saharan African countries.

South Africa is in a relatively strong economic position. The economy has been recovering at a fairly modest pace Strong commodity prices, low interest rates and faster global growth have been the main forces behind the economic recovery. GDP growth was projected at 3.4% this year, rising to 4.1% in 2012 and 4.4% in 2013, after the economy shrunk by 1.7 per cent in 2009. Consumer inflation is expected to come in at around 5.3 this year, down from 8.9 per cent in 2008. The country’s unemployment rate dropped slightly in the final quarter of 2010, from 25.3 in last year’s third quarter to 24 per cent – 2.2 percentage points higher than at the end of 2008.

While consumer inflation is rising, it remains well within the Reserve Bank’s 3—6 per cent target band. In the first half of 2011, consumer inflation is expected to remain well contained while price pressures are set to build in the second half, with CPI expected to end 2011 just below the six percent mark, giving a CPI average for 2011 of 4.7 per cent.. In 2012, CPI is forecast to average 5.7. The adverse consequences of the higher oil price have already been felt – the local petrol price has increased by 92c/litre since September 2010, with another hefty rise of around 30c/litre on the cards for March. Food price pressure is set to build through 2011.