Posted by: Martin | June 26, 2010

Lions on the move

Consulting firm McKinsey has just come out with a pretty positive report on African economies and their potential, called Lions on the Move.

Some of the points of the report that caught my eye include:

Africa’s growth acceleration was widespread, with 27 of its 30 largest economies expanding more rapidly after 2000. All sectors contributed, including resources, finance, retail, agriculture, transportation and telecommunications. Natural resources directly accounted for just 24 percent of the continent’s GDP growth from 2000 through 2008. Key to Africa’s growth surge were improved political and macroeconomic stability and microeconomic reforms.

Today the rate of return on foreign investment in Africa is higher than in any other developing region. Early entry into African economies provides opportunities to create markets, establish brands, shape industry structure, influence customer preferences, and establish long-term relationships. Business can help build the Africa of the future.

The rise of the African urban consumer also will fuel long-term growth. Today, 40 percent of Africans live in urban areas, a portion close to China’s and continuing to expand. The number of households with discretionary income is projected to rise by 50 percent over the next 10 years, reaching 128 million. By 2030, the continents’ top 18 cities could have a combined spending power of $1.3 trillion.

So, in other words the economic growth is accelerating and does not depend too much on a natural resource boom, and growth is boosted by long term trends such as urbanisation, a growing population and the emergence of middle class consumers.

And  the rate of return on foreign investment is higher than elsewhere. Sounds great – but how high is it? Fortunately the report has plenty of informative but complex (we are talking a consulting firm here) graphs that not only answer this question, but tell a whole story in themselves:

Rate of return on foreign investment:

Ok, almost 12%. That looks like a good benchmark. On the house and two shops in the well off Cocody municipality of Abidjan I have so far had a return of 12% not including appreciation.  The newly constructed six unit building in the less well off Yopougon municipality should provide a return of above 20% if nothing goes terribly wrong.

African consumption compared to BRIC countries:

African consumption split by sector:

So, it’s the $101 billion that I and anyone else investing in new African residential real estate is aiming for. It’s good to see that the share of spending on non-food items is expected to increase. It should mean that there will be more people having money to spend on other than the basic necessities of life.

African household spending:

Indeed food is what the lowest income bracket (labelled “destitute” by McKinsey) spend almost all their money on.  Interestingly, this lowest income bracket spend very little on housing. I assume it’s partially because those in urban areas live in slum or slum-like dwellings where no rent is paid as discussed in the No Grunge post.

The $2,000 – $5,000 annual income bracket is probably where tenants of the Yopougon apartments are at the moment. I guess they earn somewhere around 100,000 CFA Franc (152 EUR) per month (as of 2010, non PPP adjusted, making it really hard to convert into bracket figures) and the rent is 15,000 CFA (23 EUR), making the share spent on housing 15%, so it’s in the ballpark of the table above.

African household spending in 2020:

Looking into the future, if McKinsey are right, it looks like people are going to move up on the income bracket ladder, which is great news.  And I will not need to worry about my Yopougon apartments becoming empty due to tenants moving out to find something better;  the 2,000 – 5,000 bracket is projected to stay at around a 30% share of the total number of households, and the total number of households will go up  along with the population.

Looking at these graphs, it seems to be a good business, in terms of future demand, to offer housing to all the top four income brackets, and maybe most so to the top one which is projected to increase most.

Africa’s workforce by 2040:

This graph is quite an eye-opener. Working age population arguably matters more to the economy than total population, and using this metric Africa’s weight in the world will get more and more important.

Growing African cities:

Ok, so Abidjan is a “middle-tier city” that “is also rising and will present growth opportunities”!  Gotta love consulting speak!

Urbanisation:

Urbanisation is likely to continue to have a really big effect on Abidjan and other African cities going forward. The projected income bracket moves above should probably be adjusted for urbanisation, I’d say the moves should be even greater in cities and less so on the countryside.

Africa’s economic growth:

Ivory Coast’s economic growth may look wobbly, but the graph above shows relatively robust growth for the African continent as a whole, although it’s not per capita adjusted and the y-axis scale used seems to emphasize growth in the 2000s.

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Responses

  1. Very interesting. What are the risks? Where could it flounder?

  2. Well, a chain-reaction default or massive inflation in the developed world would have a big negative impact on Africa. But my guess is that it would only be a multi-year temporary setback for Africa, and not a decade-long problem.

    Worse would be if the slow trend towards liberalisation of the economy, better rule of law and more accountability for rulers would start to reverse. Say if Hugo Chavez or Robert Mugabe types came to power in one or more key countries such as Egypt, South Africa, Morocco or Nigeria.

  3. […] and economic activity, both of which are projected to increase according to the McKinsey study Lions on the Move I blogged about earlier.  I’d love to see this same picture 10, 50 or 100 years into the […]

  4. […] McKinsey Quarterly – What’s Driving Africa’s Growth and the previously mentioned Lions on the Move report Boston Consulting Group – The African Challengers Wall Street Journal – […]


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