Despite a decline in economic growth experienced throughout the African continent, smaller economies are promising great investment potential in Africa.
2016 economic growth of sub-Saharan Africa was the worst since 2000. In fact, larger African economies, such as in Algeria, Egypt and South Africa are on the decline, with some losing out on investment opportunities as a result. The five biggest African economies have been greatly affected by the drop in oil prices. Economic growth has been stunted, largely a result of political instability or issues of institutional strength. However, not all African countries are declining in economic growth. There has been a trend of smaller African economies growing at a faster rate than the large economies on the continent, predicted to continue over the next few years. For investors, a smart move would be to turn attention to these smaller economies with greater investment potential in Africa.
Rand Merchant Bank’s (RMB) seventh edition of Where to Invest in Africa, which balances economic activity against the relative ease of doing business, illustrates how subdued levels of economic activity have diluted several scores on the index when compared to last year, resulting in some interesting movements within the top 10. South Africa has traditionally held the top spot on this list, but was recently knocked out of first place by Egypt. Notable omissions from the top 10 this year are Nigeria and Algeria, which have fallen from numbers six and 10 to numbers 13 and 15 respectively. Ethiopia and Rwanda, on the other hand, have climbed three and four places respectively.
The IMF’s Regional Economic Outlook for Sub-Saharan Africa says that “Growth momentum in sub-Saharan Africa remains fragile, marking a break from the rapid expansion witnessed since the turn of the millennium. 2016 was a difficult year for many countries, with regional growth dipping to 1.4 percent—the lowest level of growth in more than two decades…While sub-Saharan Africa remains a region with tremendous growth potential, the deterioration in the overall outlook partly reflects insufficient policy adjustment. In that context, and to reap this potential, strong and sound domestic policy measures are needed to restart the growth engine.” However, the IMF predicts mass growth for Sub-Saharan Africa in 2018.
Investment potential in Africa for smaller economies
Despite the lack of economic growth experienced in some African countries, there were 31 countries that grew by at least 3% in 2016, most of whom have a small economy with a gross domestic product (GDP) of less than US$50bn. Countries such as Ethiopia, Côte d’Ivoire, Tanzania, Senegal and Guinea topped the list of fastest growing African economies in 2016, beating out heavyweights like South Africa and Morocco. They grew by 8%, 7.7%, 7%, 6.7% and 6.6% respectively. Only Ethiopia and Tanzania have a GDP above $50bn and are estimated to reach $79.7bn and $51.6bn in 2017, respectively. The GDP of Côte d’Ivoire, Senegal and Guinea will reach $39.9bn, $16.1bn and $9.2bn in 2017, respectively. The IMF predicts that these countries will continue to grow above 5% until 2022. As such, these smaller economies are proving to have strong investment potential.
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