The Lightly Reported African story

The economic growth from the continent of Africa will be the big news over the next two decades. Unfortunately, last year the Ebola epidemic on the western side of Africa and terrorism in Nigeria and other parts of Africa continuing this year have dominated the news. While tragic, as is typical with the news cycles, these tragedies dominated the stories being told about this large continent. Let me tell you another story about Africa, because Africa is bigger than you think.

African assets have quietly been receiving strong interest by business leaders in the developed economies. Foreign investments hit a record $80 billion in 2014 with emerging market countries continuing to show a strong interest in African assets. Chinese investors alone held nearly $28 billion in assets which will likely continue as Chinese labor gets more expensive for manufacturers. Investors from the U.S., the United Kingdom and France hold the biggest share of African investments totaling $178 billion in 2012, the latest data available.

No. 30; American view of Africa from 1839While currently the majority of the investments goes to six African nations which represent 33% of the population of the continent, over time the additional 48 countries should begin to see additional investments. The two largest destinations for investors are the countries of South Africa and Nigeria which have the two largest economies. Nigeria just completed a peaceful election last week which will hopefully help them combat the threat of Boko Haram.

The good news for the continent is that, although a lot of the investments so far have focused on the resource-rich African states, a report completed last summer by the African Development Bank, the US development program and the Organization of the Economic Cooperation and Development noted that even more manufacturing and service projects are represented in the development mix.

The manufacturing jobs that are in Africa are coming from China, of all places. Just as the emerging market countries, such as China, were the low-cost producer for many large international conglomerates in the 1980s, more of them have begun to explore setting up shop in Africa. China alone is expected to export 80 million manufacturing jobs according to Justin Lin Yifu, a former bank chief economist who teaches economics at Peking University.

The global recession has prompted many manufacturers to look for even lower cost producers. The African nations of Ethiopia, Kenya, Rwanda and Tanzania are all trying to attract these jobs for their citizens. There is a bifurcation in the manufacturing with Ethiopia handling the bottom end and South Africa handling the higher-end products highlighting the enormous size of this continent.

These African countries will have to deal with the same issues that other emerging market countries dealt with in the 1980s. Namely providing training to their workforce, establishing reliable energy supplies and upgrading the necessary infrastructure to support the transportation of the manufactured goods. The benefits to these citizens will help ensure that these improvements are implemented.

The international monetary fund predicts the sub-Saharan growth will be 5.8% in 2015, up from an estimated 5.1% for last year. Some of the challenge which is being worked to overcome is getting reliable data about the economic activity in these various countries. It seems that the methods that have been used to capture the gross domestic product of these countries have been widely under-reporting the actual growth that is occurring.

Last year, Nigeria became the largest economy in Africa after its economy was reevaluated for the first time since 1990 in a process called “rebasing” – a recalculation of its gross domestic product. In that time the amount of technological improvements explored including going from almost no one having no cell phones in the country to having one of the largest user populations of cell phones in the world.

For now, the only two African countries included in the emerging markets fund that we use are Egypt and South Africa. Several other African countries are now part of what is known as the frontier markets. Over time several of these countries will likely move into the emerging markets, with Nigeria probably being the first addition.

This long-term transition will occur over time to allow even further diversification for individuals, as well as have an ever-expanding human population engaged in global capitalism which can only be good for all of us. As the citizens of this enormous continent are able to access capitalism through participation in global workforce, their standard of living will increase as will their consumption of goods and services provided by both local companies as well as large multinational companies. The long-term outlook is bright for Africa.

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About Dan Crimmins

Dan Crimmins, co-founder of Crimmins Wealth Management, is a financial coach and fee only financial planner. Have a financial question? ASK DAN

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