Africas star continues to rise

Investec Asset Management's Africa Fund Managers, Roelof Horne and Chris Derksen look ahead to a bright economic start to 2007 for the dark continent.

The sustainability of the current strong growth that we investors see across the African continent is an issue that consistently occupies our minds. Is it a cyclical story or is there a meaningful structural change underlying the fact that Africas growth has outpaced the world since 2001?

Our observation (and belief) that Africa is making great progress in the political and economic arenas continues to be supported by positive news flow, such as the recent successful elections in the Democratic Republic of Congo and Zambia. While some may attribute the robust GDP and earnings growth on the African continent to the cyclical commodity boom of the last 3 years, we see a number of other reasons to believe in a more sustainable trend. These include the spread of multiparty democracy in sub-Saharan Africa, as well as the boom in many "non-commodity" countries - a case in point being Kenya, which is being driven by strong growth in the tourism and agribusiness sectors of the economy. Commodity windfalls are also helping to drive further non-commodity related growth as they are used to pay off sovereign debt and improve infrastructure. Significant debt write-offs are giving the poor countries of Africa an opportunity for a "fresh start".

The events of the last 10 years seem to be creating a momentum which we think is going to outweigh cyclical forces.

So what is happening around the continent?

We are watching Nigeria very closely. Consensus amongst Nigerians with whom we have contact predicts a lot of disturbing noise over the next few months, but only very remote chances of events that would seriously disrupt life for citizens and businesses. In the meantime, the market is saying that business is good! The Nigerian market was up 24% for the third quarter this year. Again, investors will be forgiven for suspecting that the Nigerian market is being driven by the high oil price: In fact, oil producers are generally not listed in Nigeria and the Nigerian markets benefit only indirectly. The latest non-oil GDP growth number of 12.5% (for the first half of 2006) indicates a very strong performance from the rest of the economy.

Zimbabwean economics certainly deserves our notice. Make no mistake; the architects of this house of cards are very smart people. In the chaos of 1000%+ inflation, dual exchange rates, and fuel, foreign currency and consumer goods shortages, there is ample opportunity for the unscrupulous to gather and externalise huge wealth. A case of fiddling while Harare is burning?
 
Meanwhile, Zimbabwes neighbour is looking better. Malawi has long been one of the laggards in economic terms, but the tide seems to be turning - and to help them on their way, the country has just become the twentieth in Africa to qualify for a debt write-off. The total write-off amounts to $2.5bn, which constitutes 90% of Malawi's external debt and is close to the size of their annual GDP! The kwacha is strengthening for the first time in years, and GDP growth is expected to reach 5.5% for the year.