What will the African economy look like in 2020? - The Finance Team

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What will the African economy look like in 2020?

This new year of 2015 marks the halfway point into the second decade of the century. It’s what has become known by many as the era of African growth. Over the last few years, the continent has known unprecedented economic growth and attracted more investment than ever before. So can we expect the same for the future? What will the African economy look like in 2020?

Firstly, it’s necessary to unbundle the so-called African economy. While worldwide people may comment on the African economy as a whole, the countries that contribute to the continent can be broken down into at least two broader areas: the sub-Saharan economy and the central African economy. These two economies behave very differently in terms of their drivers and their fundamentals.

Sub-Saharan African economy

Sub-Saharan Africa has traditionally been dominated by the economy of South Africa. The relevance of the country will probably not change by 2020, but there are other emerging economies in the sub-Saharan bloc that are seeing consistent and stable growth rates. Two examples are Botswana and Zambia. The diamond and copper-producing economies grew by 5.4% and 6.5% in 2013 respectively, in comparison with South Africa’s 1.9% growth rate.

The growth of the likes of Botswana and Zambia come off a much smaller base and represent much smaller economies, but they nevertheless pose a challenge to South Africa in terms of it being the primary growth driver in sub-Saharan Africa.

South Africa represents a more complex economy within the context of the African economy. While many countries within the African economy are commodity and mineral based (for example, about 1/3 of Botswana’s Gross Domestic Product is attributable to mining), South Africa enjoys a full, complex economy with characteristics such as multi markets marking its complexity (mining now only makes up about 5% of South Africa’s economic output).

As we move towards 2020, other countries in the sub-Saharan African economy will start to show signs of this complexity (Botswana’s mining-GDP component has in fact lessened from a high of 47% over the past decade and is showing a slow-down in its dependence on mining activity), although the shift will be a gradual one.

Over 2014, growth in sub-Saharan Africa has eased up somewhat. We can look forward to a sustained slow-down in growth leading up to 2020 in the region. The challenges faced by the South African economy (and others in the region) are no different to those faced by developed economies: the struggle to meet power requirements, low employment rates and low credit extension. These struggles will extend to other countries in the sub-Saharan region of the African economy in the medium term, and growth will remain in the lower end of the single digits.

Central African economy

In contrast, countries in the central African economy are currently less evolved. These economies tend to be more primary sector driven, with little indication that a shift is underway. Countries in central Africa are enjoying good growth rates as demand for raw material out of China remains fairly high. For this reason, it is expected that growth in the central African economy will continue at a solid rate into 2020. However, this will be largely contingent on Chinese demand.

The Eastern giant will, over time, need less and less primary resources. At that point, the central African economy will find itself with a raw commodity surplus. This may not happen by 2020, but by the following decade, the effects of this will be felt.

Countries in the central African economy face basic challenges that continue to hinder the evolution of their productive output. These difficulties include poor communication and transport networks. As signified by Woolworths’ repeated retreats from Nigeria, these challenges will continue to pose real hindrances to growth until they are broadly addressed.

If you are trying to determine where your company will be in 2020 and how it will fit into the broader context of the African economy, The Finance Team can provide you with insight. Our team of highly experienced, qualified financial professionals can give you contextual discernment into the direction of your company both now and in the future.

Image credit: theguardian.com

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