Sub- Saharan Africa and Kenya: risks and opportunities

Transcription

1 Sub- Saharan Africa and Kenya: risks and opportunities This paper has been prepared by: Ivano Gioia, SACE Abstract After the negative record registered in 2016, the economic growth of Sub- Saharan Africa is expected to strengthen at 2.6% in 2017 and 3.4% in These aggregate numbers hide a wider heterogeneity within the region, with some countries on the eastern and western African coasts growing at rates well above the average. Italian exports were affected by the decreasing demand in capital goods by the main African economies in 2015 and 2016, but the partial data of 2017 seem to reveal a reprisal trend, with a performance even higher than that, already largely positive, registered worldwide. Starting from 2018, business opportunities will raise in different Sub- Saharan African markets, in particular where the domestic economic structure is less dependent on the exploitation of energy and mineral raw materials. In this sense, Kenya represents a strategic market for the internationalization strategies of Italian companies in the region, both as final target market and as a hub for the other countries in Eastern Africa. After the electoral standstill in the second half of 2017, the expected resumption of public investment plans in large infrastructural works and the strengthening of local private entrepreneurial activity will open new spaces for the consolidation of commercial relations and investment strategies of Italian companies active in various sectors, from energy to construction, from metallurgy to electrical appliances, from transport to food and beverages. This positive development is not to be taken as granted, however, whereas it depends largely on the fiscal consolidation policies that Kenya will need to implement in the near future. More generally, the complexity and volatility in the political, economic and business environments suggest a cautious approach in business activity in Sub- Saharan Africa, keeping in mind the importance of an in- depth knowledge of the country s peculiarities and the adoption of a prudent risk mitigation strategy. 1

2 Sub- Saharan Africa: general context The economic performance in Sub- Saharan Africa is recovering after the slowdown in The region's growth is expected to increase from 1.4% in 2016 to 2.6% in 2017, further accelerating to 3.4% in 2018 (Figure 1). Excluding the two main economies of the region, Nigeria and South Africa, which are still held back by internal economic and political difficulties, the average growth of the region increases to 4.4% in 2017 and to 5.1% in Aggregate numbers related to 49 countries, in fact, hide a wider heterogeneity in the Sub- Saharan region, where some economies have continued to grow steadily at rates above 5% during the last decade. The progressive increase in international prices of oil and gas and other mining commodities and the better than expected economic dynamic of advanced and emerging economies (in particular Euro- area and China) play a driving role in the ongoing Sub- Saharan economic recovery. In several cases, however, economic growth continues to be stimulated mainly through public sector spending, leading to an increase of public debt to unsustainable levels in the medium- long term and the crowding out of the private sector. A greater involvement of the International Financial Institutions in the region, with programs of financial support, policies formulation and surveillance activity, could represent a mitigation factor, as evidenced by the approval of financial support programs supported by the International Monetary Fund in the last period. Fig. 1 - Real GDP average growth (%, yoy) The commercial involvement of Italian companies in Sub- Saharan African markets recorded a steady growth in the last decade. Italian exports to the region nearly doubled between 2000 and 2014 (Figure 2). After a slowdown in the last two years, 2017 looks to be the year of a re- start: Italian exports increased by 11% yoy in the first nine months of 2017, better than the performance recorded in the same period at world level (+7.3%). Fig. 2 - Italian exports to Sub- Saharan Africa, by value ( billion) Mechanical engineering confirms itself as the first export sector in the region, while transportation is the driving sector of Italian sales growth in Sub- Saharan countries (+ 75% the partial figure in the first eight months of 2017). The performance in the other sectoral sectors are also positive, especially metals, refined petroleum products, food and beverages and chemical products (Figure 3). 2

3 Fig. 3 - Italian exports to Sub- Saharan Africa, by sector (cumulative Jan- Aug 2017) Kenya: a strategic market for Italian companies Kenya ranks as the fifth economy in Sub- Saharan Africa, with a GDP (in purchasing power parity) of about $ 163 billion estimated in Compared to some larger economies, such as Nigeria, Angola and Ethiopia, Kenya has a more diversified economic structure, with a positive contribution coming from agriculture, industry, manufacturing, banking and services, subsiding therefore the risks of commodity prices volatility. Kenya experienced a difficult electoral standstill in 2017, starting with the Supreme Court's annulment of the presidential elections in August and ending with the reappointment of President Kenyatta at the end of October. The institutional uncertainty curtailed the country's economic performance in the short term: GDP growth in 2017 was revised downwards from 5.5% to 5%. However, in broader terms, Kenya remains a solid and vibrant economy, supported by robust domestic demand and foreign investment, particularly focused in the infrastructure and construction sectors. The country shows a high public deficit (around 7% of GDP, despite positive developments on the side of tax revenues) and a recent increase in public debt (equal to 55% of GDP in mid- 2017), both linked to the massive public infrastructure investment plans in strengthening transport and energy networks. Foreign debt remains sustainable for the time being (the risk of debt distress is classified as low in the Debt Sustainability Analysis elaborated by the International Monetary Fund and the World Bank), also considering that a huge portion of this debt has been taken under concessional terms. International reserves stand at comfort levels, around $ 7.6 billion (over 5 months of import coverage), ensuring an adequate buffer against eventual shocks in the balance of payments. Moreover, Kenya signed two precautionary arrangements with the International Monetary Fund in March 2016 (Stand- by Arrangement and Stand- by Credit Facility, both with a validity of two years), for a total value of about $ 1.5 billion. All the three major rating agencies attribute a B+ rating to Kenya's sovereign creditworthiness; the outlook is stable for Standard and Poor's, while Fitch attributes a negative outlook and Moody's is currently reviewing the rating for a possible downgrade. Kenya was confirmed in the current OECD country risk category, the 6 th, in the June 2017 periodic review. The positive economic landscape of Kenya has favored the consolidation of trade relations with Italy and contributed to a widespread presence of Italian operators in the country, both large companies and small and medium enterprises, in the sectors of infrastructure and construction, energy, manufacturing, agriculture and agro- processing, ITC, tourism and restaurants. The main supplier countries of Kenya remain China, India, United Arab Emirates, Saudi Arabia and Japan (which together account for about 62% of total 3

4 Kenyan imports). Italy s market share is in line with the main European peers (Figure 4). Fig. 4 Export Market share of Italy and its peers (%) In 2016, Kenya rose from seventh to sixth position among the Sub- Saharan African markets for Italian companies. Italian exports amounted to 211 million, 4% up in respect of the previous year (Figure 5). Main sectors include mechanical engineering (37% of total exports), food and beverages (15%), transportation (8%) and chemicals (8%). Italian imports from Kenya, which mainly consist of textiles and food products, amounted to 52 million in 2016, down by 42%. In 2017, the political and institutional uncertainty slowed somewhat the steady growth recorded by Italian exports in recent years. Nevertheless, reflecting the dynamism of Kenyan economy, Italian exports to Kenya are forecasted to increase beyond 6% on an annual average in the period Fig. 5 - Italian exports to Kenya (, % change) In Kenya there are representative offices of various Italian companies, including CMC, Leonardo, Pirelli, ICM, ENI, ENEL Green Power. Several Italian companies are also active in the manufacturing sectors (production of cement and brick products), agriculture (coffee, vegetables, flowers, livestock), catering, retail and large- scale distribution. Many Italians manage tourist activities in the coastal region near Mombasa, in the districts of Malindi and Watamu. Conclusion The recent recovery in commodity prices and the acceleration of growth in advanced and emerging countries fuel positive prospects for a new rise of the Sub- Saharan continent. While the main two economies of the region, Nigeria and South Africa, are still struggling with financial vulnerabilities and political uncertainties, several other countries may represent interesting markets of opportunities for Italian companies. 4

5 Kenya is a strategic market for the strategies of internationalization of Italian companies in the region. A stable institutional framework and an attracting and non- discriminatory business environment are some of the strengths that characterize Kenya, including moreover: a market that is both a final target and a hub for other countries. in Eastern Africa; widespread manufacturing industry; skilled labour force; adequate transport and energy infrastructure; well- established and dynamic private sector; developed and regionalized banking system; and good regulatory system. The interest of Italian companies in Sub- Saharan countries has increased in recent years, and ranges in different sectors, such as infrastructure, construction, production and transmission of energy (even from renewable sources), agriculture and agro- processing and manufacturing industry. Most certainly, the positive developments expected in Sub- Saharan Africa will open new business opportunities in the next years. However, this optimistic evolution is not to be taken for granted. The complexity of country risk highlights the need for companies to implement a cautious approach in operating abroad. Three suggestions can be useful: 1. make use of advisory services. A thorough knowledge of the foreign market and counterparts is essential, both to grasp the strategic nature of a project (thus avoiding to waste time on commercial transactions that could become unsustainable in the event of economic difficulty of the purchaser) and to evaluate the impact of operational difficulties in the area (for example in logistics or distribution network, where most of the African countries are often deficient). Last but not the least, an advisory service can help to create the conditions for a "supply chain" action abroad, overcoming the unattractive approach of offering small and disconnected transactions for those buyers who want for example a unique and integrated plant, 2. make the commercial proposal along with a financial offer that can lighten the burden of repayment for the foreign customer. In the recent period, several African countries have increased the cost of money in order to curb inflation and attract foreign capital, but at the same time these measures have made it more burdensome for businesses to borrow money to pay for supplies from abroad. Offering a deferment of payment in some years is a way to "finance" the foreign customer at cheaper conditions than those existing on his country, 3. adopt mitigation or hedging instruments against the non- payment risk The slowdown of domestic economies creates inevitable consequences on the solvency in both public and private sectors. Even the shortage of foreign currency or the adoption of currency restrictions by local authorities can compromise access to the foreign currency to repay the foreign supplies by companies and banks, thus leading to a missed- payment for the Italian company. Last but not the least, do not forget the opportunity of coverage from risks of a purely political nature, such as expropriation or political violence, events that still remain likely in several countries of the African region. 5