Let Africa enter its Belle Epoque

8/1/2018 - Report
ic_blogtagAfricaEthiopiaMoroccoSouth AfricaChinaDays Sales Outstanding (DSO)Financial ConditionPublic debtBank deposits


• Africa’s attractiveness is strong since the continent’s growth is driven by capital intensive needs, particularly infrastructure. Therefore financing (both levels and sources) is among the key questions that need to be answered in order to properly channel funds to the right projects. Let’s make it work through a mix of formal solutions (FDI, fiscal resources) and innovative ones (mobile banking). Some of the important highlights from this report include:

•    Because of the large current account deficits that many African countries currently face, even an uptick in FDI would not necessarily solve all issues related to improving infrastructure. For example, Ethiopia attracted USD 3.2 billion (bn) in FDI in 2017 but this only covered 32% of its current account deficit.

•    Debt and equity will surpass Foreign Direct Investment (FDI) in 2018, as FDI continues to weaken, particular in Central and Southern Africa. Eurobond issuance saw its best start to year in 2018, with roughly USD 22bn in issuance across the continent. While Eurobond issuance is a welcome antidote to countries with low import covers, it is not the best way to finance infrastructure or social spending.

•    This decrease in FDI is noteworthy since there are still strong infrastructure gaps to fill-in, particularly when it comes to electricity. The 15 main African economies would need to spend roughly USD 1000bn to 2030 in order to close their power generation gap. Considering governance structures and debt sustainability levels, about USD 330bn is likely (e.g. USD 70bn in Nigeria).

•    Chinese investment on the continent is expected to continue, but there are concerns, particularly with regards to whether China will extend the maturity of some of its loans, as may be desperately needed in some commodity exporters (Angola, Republic of Congo, Mozambique).

•    Increasing taxes along with increasing spending is a recondition in many countries that could decrease the odds sustainability problems associated with quick growth.
•    Increasing the amount of Days Sales Outstanding (DSO) by an extra 30 days would allow African nations to focus on supporting growth. A 30 day lengthening of payment terms would result in freeing up about USD 33bn in 2018 (USD 45bn in 2020) throughout the continent.

•    Financial depth and literacy need to improve on the continent as a means to access credit, with less than 30% of the Sub-Saharan adult population owning a bank account. Mobile banking may be a solution to these issues, particularly with the proliferation of mobile phones on the continent.

•    This report thus concludes that while there are reasons for optimism with many African economies, there are also number of roadblocks and pitfalls that are preventing the continent from reaching its true potential.

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