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Executives remain bullish on Africa’s commercial outlook

30 March 2017Herman Warren, The Economist Corporate Network
Herman Warren, Network Director for Africa at The Economist Corporate Network.

Herman Warren, Network Director for Africa at The Economist Corporate Network.

Nigeria on track to overtake South Africa as top market finds ECN’s 2017 African Business Survey:

• While 75% of responses indicate firms’ growth expectations in the region are realistic, 39% of survey respondents indicate their firms are not investing in Africa at the appropriate level to realise their organisations’ growth objectives
• 63% of companies surveyed plan to increase their levels of investment in Southern, East and West Africa
• 38% of companies indicate their operating profit margins are higher in Africa than in the other regions where they operate
• 54% of survey respondents cite their firms top-two challenges fall into the categories of currency (volatility and foreign exchange availability) and regulation (uncertainty, complexity, associated compliance costs)
• 52% of survey respondents indicate that their firms will invest significantly more on digitalisation of their Africa-based operations in the next 5 years

In 2016, Africa’s GDP growth is estimated at 1.4%?the first time in over a decade that economic growth was lower than the global average.

Executives, however, indicate that they expect the Africa-sourced share of their organisations’ total revenue is set to increase markedly over the next 5 years. Four percent of executives indicate that 21%-40% of their firms’ global revenue was sourced from Africa in 2016. However by 2022, 10% of executives expect 21%-40% of their firms’ revenue to come from the region.

This is the key finding of an authoritative survey by The Economist Corporate Network. The long view: Africa-based commercial performance and prospects” provides insights from over 150 senior executives responsible for their firms’ Africa-based commercial operations.

Profitable (and improving) performance

In 2016, the majority of executives reported that their firms operated profitably across various African regions. Interestingly, 63% of executives indicate that their firms’ Africa-based operations achieve the same or higher profit margins when compared to other regions where their firms operate. Encouragingly, the majority of executives also expect their firms’ profit margin to improve in 2017.

Top African economies

Executives indicate that three of Sub-Saharan Africa’s largest economies are their firms’ top markets: South Africa, Nigeria and Kenya.

By 2022 the highest number of executives indicate that they expect Nigeria to overtake South Africa as their firms’ largest market by revenue. This suggests that executives’ firms are looking beyond the current economic challenges to the medium-term potential of Nigeria: the country with Africa’s largest population and second largest economy.

Where is growth coming from?

Around 64% of executives indicate that two things will drive their firms’ revenue and profitability: the core business offering and the introduction of new products and services. For many of the businesses with head quarters outside of the region, the executives told ECN that products and services are not developed in Africa but adapted to cater to their Africa-based customers’ needs. While firms may be find success with this approach in the short term, in the medium-to-long term this approach y may leave open opportunities for those companies who design product and service offerings with an Africa-based customer in mind from the start.

Digitalisation

The importance of modern and appropriate technology to increase operational efficiencies, grow sales and serve customers better is recognised by firms with operations in Africa. Fifty-two percent of executives indicate that their firms will spend significantly more on digitalisation this over the next 5-year period. A further 26% of executives indicate that their firms will invest somewhat more to increase digitalisation across their Africa-based operations. Only 2% of executives indicated their firms would spend less over the next 5 years on digitalisation.

Challenges

The executives cite three main areas of challenge for their firms in the region: regulatory, currency-related and human capital. Fifty-six percent of executives cite the complexity, compliance cost and uncertainty of regulations as a challenge.

In South Africa, for example, the challenges associated with complying with indigenisation and select-population-group-empowerment regulations, impacting staff mix and equity-ownership structures, come into sharp focus. For many corporations, the latest set of broad-based black economic empowerment (BBBEE) regulations, taken at face value, are unworkable.

In addition, currency-related challenges? depreciation, volatility and lack of foreign exchange?made planning and operating much more difficult for executives’ firms. Over the past year, all but two African currencies?South Africa rand and Kenya shilling?depreciated against the US$. Moreover, in some countries, for example Nigeria and Ethiopia, access to foreign exchange was extremely limited, making paying for imported inputs and repatriating profits difficult. Even in instances where a currency may have appreciated against the US dollar, volatility serves to complicate pricing and margin management. For example, in 2016 the value of the South African rand vacillated between R16.8 to R13.4 to the US dollar?a 20% swing.

“Executives’ firms realise that Africa has many factors in its favour: young and growing population, increasing urbanisation, build-out of infrastructure, growing economies and disposable incomes,” says Herman Warren, Africa director at ECN.

In the short term market conditions are set to remain challenging in many countries in the region. However, many firms are generating worthwhile commercial returns and believe in the medium-to-long term Africa will play an increasingly important role in their firms’ overall fortunes,” adds Mr Warren.

Access the full report: http://ecn.st/2017AfBOS

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