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June 2017


Africa - likely to remain one of the fastest growing regions, over the coming five yearsWith an estimated GDP growth (average) of approximately 4.2% between 2016 and 2021, the African continent is likely to grow ahead of the global economy (3.05%), for the same period. Within sub-Saharan Africa, Kenya, Djibouti, Tanzania, Rwanda, Senegal, Ethiopia and Côte d'Ivoire are projected to be the largest growth pockets.


Mining, FDI and trade to support economic growth; reduce poverty levels

Between 2002 and 2012, African economies grew at an average rate of 5.5%, primarily supported by growth in the prices of commodities like gold, platinum, copper, oil and natural gas. Economies in Africa also gained from foreign direct investment flows that grew at a CAGR of around 12% to USD46 bn in 2012 from just about USD15bn in 2002. Additionally, increasing levels of trading activity with China also helped in supporting the overall economic growth. Africa’s trade with China increased at a CAGR of 31.2% to reach the levels of USD 166bn in 2012 from just USD11bn as of 2002. Overall, higher FDI inflows, increasing trade levels and stable economic growth helped in reducing the poverty levels in the continent. As of 2012, only 39% of the African population was below poverty levels (earning less than USD2/day), as compared to 51% as of 2002 (African Development Bank).


Going forward, growth of African continent is expected to continue to benefit from these factors. As per the World Bank estimates, by 2020, about 42 out of total 47 African countries are expected to be involved in some type of mineral exploration activity. However, after over a decade of steady growth, foreign direct investment inflows into Africa saw a dramatic downturn in 2015 as a cooling of the Chinese economy saw a drastic reduction (some 32%) in exports from Africa to China. This hit Africa’s largest economies hardest, particularly China’s main trading partners, Angola, South Africa, Republic of Congo, Equatorial Guinea and Zambia. Yet, while Africa’s trade with China is expected to continue to be a vital component of the continent’s growth over the next five years, it is likely that the balance of trade will remain asymmetrically weighted towards Chinese imports.


One of the key drivers of sub-Saharan growth, therefore will be the domestic and regional market: African nations have various regional and multilateral trade agreements within the region including East African Community (EAC), Common Market for Eastern and Southern Africa (COMESA) and South African Development Community (SADC). These trade agreements are expected to continue to reduce the regional tariff complexities and promote trade within the region.


Rising GDP per capita, higher proportion of youthful population, growing levels of urbanisation to support growth

Rising levels of GDP per capita, anticipated stable growth in the population, a higher proportion of young population and growing levels of urbanization will drive economic development. As per IMF data, between 2002 and 2012, Africa’s GDP per capita grew at a higher CAGR of 11.2%, about 4.6 percentage points higher than 6.6% growth in global GDP per capita. This growth is likely to be sustained – despite the 2015 downturn and sluggish 2016 growth – as Africa’s population is expected to increase at a CAGR of only 2.5% to 987 million in 2018 and 1.34 billion in 2020 as compared to 851 million in 2012. 


By 2020, the African Development Bank expects that nearly 47% of the total African population will fall in the working age group of between 20 years and 59 years. Similarly, in 2011, 39.6% of the African population was urbanized but this proportion is expected to increase to 47.7% by 2030. Over the long-term, therefore, a higher proportion of working population and increasing levels of urbanisation will further boost affordability levels and support growth in sectors like retail and construction. Higher levels of urbanisation will also help to accelerate the pace of infrastructural development.

Yet, inadequate infrastructure, political instability, food security and water resources to continue to dent the growth story

Despite being one of the fastest growing continents, inadequate infrastructural facilities and political instability continues to dent the Africa growth story. As per the African Infrastructure Investment Managers (AIIM)’s presentation on Africa, the gap between the required and the actual capital expenditure on infrastructure remains quite large. At present, Sub-Saharan African region spends USD45bn towards the development of infrastructure, significantly lower (about 107% lower) than the actual requirement of USD93bn, per year. Although, this offers investment opportunities for foreign investors and private sector participants, lack of proper planning related project execution, delays in commencement and completion continue to remain a pain point. Lack of participation of foreign investors/private players has led to funding issues. While the African governments are encouraging participation of private players through public private partnerships (PPP’s), the benefits are likely to come through only over the long term. Secondly, despite significant reduction in the in civil wars and other internecine conflict, former worn-torn nations like Angola, Chad, Eritrea, Liberia, Sierra Leone, Congo, Somalia and Sudan continue to face challenges related to extreme poverty and political instability.


Apart from infrastructural challenges and political instability, growing large population base may have severe implications on food security and adequacy of water resources in the continent. On the other hand, level of agricultural activity is expected to reduce due to smaller farm sizes (nearly 80% of farms in Africa are less than 2 hectares, as per the Population Reference Bureau (PRB) and migration of people to urban areas. The issue related to food security is likely to be more prevalent in the horn of Africa (Djibouti, Eritrea, Somalia and Sudan) that is more prone to droughts. Large population base is likely to accentuate the problem related to water scarcity due to increase in food energy and industrial demands.

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About the author(s)

Harold Alby is a managing director and chief operating officer at Inova Capital. Justin Inniss is a managing director at Inova Capital.For more details on our insights please get in touch with us at Inova Capital AG on +41 415616905. Inquire about our ideas and nowcasting capabilities.

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