The past year has been difficult for many markets in Sub-Saharan Africa (SSA). Dramatic currency fluctuations, depressed prices on commodities such as oil and copper, and sluggish demand from China and Europe (Africa’s largest trade partners) have put pressure on the region’s economies. While SSA was predicted to grow above 5% year-over-year in 2015 at the beginning of the year, actual GDP growth is more likely to come in at around 3–4% year-over-year. Growth in 2016 is unlikely to be much higher.
As a result of these pressures, 2015 performance has been disappointing, leading some Western multinationals to reduce their exposure to the region, and a few are even considering leaving. Nestlé announced plans to cut its staff in some central African countries, while Barclays’s new CEO is considering selling off the bank’s Africa assets.
However, although some of our clients have been facing difficulties resulting from the current environment, primarily because of currency pressures, many others are continuing to see strong growth, even in troubled markets such as South Africa and Angola. For example, despite subdued consumer demand, new clothing retailers are moving into South Africa to tap the country’s underserved middle class. And despite government revenues having been hit hard in Angola, medical device companies are still selling expensive equipment to the ministry of health.
The continent’s long-term potential remains attractive, but a company’s success in the current environment will depend on its strategy. Businesses will have to adapt to withstand slower and more variable growth across SSA.
To understand which markets will be more successful in weathering economic challenges and providing sustainable growth to multinational companies, my company, Frontier Strategy Group, developed a Sub-Saharan Africa Resilience to External Shocks Index (RESI). It assesses SSA markets’ socioeconomic fundamentals and internal strength by looking at measures of political stability, trade exposure, economic diversification, wealth, and productivity.
In our index, countries receive a score from 0 to 100, with 100 indicating highest relative resilience. Resilience is tied to a country’s ability to maintain economic and political stability despite external shocks, due to stronger fundamentals, internal buffers, and self-sufficiency. By incorporating both quantitative and qualitative analysis that looks at historical developments and our analysts’ projections, the RESI allows for a nuanced understanding of market resilience.
Relatively mature democracies Mauritius, Botswana, Namibia, and South Africa rank highly as a result of their comparatively sound political environments and strong human capital. East African markets perform well because their dependence on commodities is low and, as oil importers, they benefit from the low price of fuel. Francophone West African markets rank well because regional currencies are less volatile, as they are pegged to the Euro.
Even though Nigeria is the region’s largest oil exporter, it emerges as resilient because its economy is far more diversified than commonly assumed. The services, retail, transport, and construction sectors make up a large share of GDP, and the country’s vast film industry, Nollywood, is good for commercial activity in the country outside oil and gas.
However, Angola, the other large oil exporter in the region, ranks close to the bottom because its economy is not diversified. Other markets ranking at the bottom do so mostly because of political volatility, poor governance, and overreliance on commodity exports.
Resilience Needs to Be Paired with Opportunity
Companies should also consider market size and growth relevant to particular industries when assessing the region. Markets that offer a combination of high resilience and growth will offer the most sustainable opportunities over the next several years.
The chart below shows the resilience index (x-axis) paired with three-year average GDP growth (y-axis), while the size of the bubbles represent our projections for the size of these economies in 2018.
For example, the chart shows East African markets, such as Ethiopia, Kenya, and Tanzania, in the upper right quadrant. They display robust growth across sectors and are benefiting from good governance, sound political reforms, and improving business environments. East African markets Kenya, Uganda, and Tanzania also enjoy strong trade integration with each other, which gives the region additional scale, as it allows businesses to easily operate across borders.
And despite subdued growth rates compared to historical levels, Nigeria remains by far the largest market across different industries and one of the most resilient markets. Companies operating in SSA cannot ignore the country, even though it will suffer substantially from the impact of low oil prices on the currency and business activity. On the other hand, while South Africa, one of the region’s more well-known markets, remains resilient, growth will disappoint over the next few years as a result of poor governance, subdued demand for its exports, and a decaying power infrastructure.
Businesses Have to Adapt Their Strategies to the New Normal
This new normal will require companies to adjust their execution strategies. Firms have to assess market resilience and opportunity with their products and industry in mind. Opportunity will look very different for a company selling medical devices and a consumer goods company selling chewing gum. The medical devices firm may decide to focus on South Africa, despite the low-growth environment, because the budget spent on health care is still considerably large there. The chewing gum company may instead want to focus on low-income but populous and fast-growing Ethiopia.
Companies that already have a presence in the region will have to focus their strategies rather than retrench altogether. In high-opportunity and resilient markets, companies should find ways to improve the efficiency of their local operations. Doing so includes investing in distributor relationships, diversifying their product portfolio, and getting a thorough understanding of customer needs, preferences, and affordability.
In less-resilient markets, companies need to determine whether they could increase growth by expanding their customer reach, or whether it’s the right time to make critical investments. For example, because local businesses face financial pressure in less-resilient markets, there are attractive M&A opportunities for companies willing to take on greater risk. However, if these investments are unlikely to yield the desired result, reallocating resources to other, more attractive opportunities may be a better option.
Smaller, less-attractive markets should be consolidated into clusters to cut costs and resources. A Francophone West African cluster could be managed out of Côte d’Ivoire, while a cluster based on historic ties combining Zambia, Zimbabwe, and Malawi could be managed out of South Africa. When clustering markets, grouping only countries that can be effectively managed as one cluster is critical, and strong distributor relationships and oversight are essential.
2016 will not be an easy year for most emerging markets across the world, but it will certainly shape the future trajectory of many countries across Sub-Saharan Africa. Companies that want to benefit from the positive development path of some markets will have to adjust their strategies accordingly. These businesses will also have to factor in setbacks and disruptions and accept that succeeding in the region will take time, effort, and plenty of financial resources.
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