For years Western business owners have avoided African markets for fear of instability, corruption, and conflict. But the winds are changing as favorable economic trends unearth brilliant opportunities for investors. 

In fact, Africa’s emerging markets are some of the last unclaimed frontiers, often boasting returns that are 65-70 percent higher than in Asian markets.^[1] To be sure, the continent still has major obstacles to overcome and wise investors should not disregard the many risks. At the same time, they should not overlook the continent’s remarkable promise.

With such opportunity, investors would do well to consider Africa as part of their portfolio. As a largely unexplored market, Africa presents tremendous opportunity to achieve strong market leadership and claim significant returns—both financial and humanitarian. Of course, early movers can expect to face challenges as they navigate such an environment, but encouragement should be found in the significant progress being made to lessen risks that have traditionally deterred foreign investment.

The following sections provide a glimpse into recent economic trends in Africa’s emerging and frontier markets and illustrate why pioneering entrepreneurs and investors have turned their gaze toward Africa. And while economic situations vary across the continent, Rwanda is one country that has become a beacon of economic opportunity. 

A Beacon of Progress

Rwanda, “The Land of a Thousand Hills”, has been hailed by Foreign Policy as the “world’s best-kept secret for business.”^[2] Overcoming incredible odds, Rwanda is emerging as a leading model for economic development in Africa. Rwandan President Paul Kagame’s commitment to stabilizing Rwanda’s politics, developing its economy, and strengthening its civil society is creating impressive results. In 2009, government-led efforts to improve business conditions enabled Rwanda to surge 76 spots up the World Bank’s Doing Business ranking. Moreover, this small, landlocked, and densely populated country has sustained economic growth levels around 7 percent from 1999 to 2009.

Rwanda’s earnest commitment to market-oriented political reforms and its recent economic track record make it a brilliant opportunity for investment. Today, Rwanda’s zero-corruption policy and streamlined bureaucracy is attracting foreign investment from large corporations such as Starbucks, Google, and Costco.  

Chicago financier Dan Cooper affirmed the opportunities in Rwanda when he told Fortune magazine in 2007,

“[Rwanda] is the most ‘undervalued’ stock on the continent and maybe in the world. Here’s an African nation that’s reaching out, not to governments so much, but to corporate America. They want to work. They want U.S. business to bring innovation to their country.”^[3]

Yet challenges still remain for Rwanda’s economic development, notably in the areas of infrastructure and human resource development. Nevertheless, as partnerships between African leaders and American entrepreneurs expand, Rwanda will continue to rise to a promising future.

Rwanda’s performance has been exceptional, but similar trends have taken hold across the continent.

Reforms

Political and economic stability has increased across the sub-Sahara. According to economist Paul Collier, Africa’s situation began to change in 1995 when, “macroeconomic reforms tamed inflation and opened economies to international trade”. ^[4] 

Nigeria’s former finance minister Ngozi Okonjo-Iweala echoed Collier’s assessment in a Ted Talk, saying that there is a clear upward trend in governance in 28 African countries and that the number of civil conflicts has declined from the 1990s, dropping from 12 to three or four. ^[5]

Like Rwanda, Nigeria is emerging as one of Africa’s top reformers. Prior to 2003, a single Nigerian telecom firm was able to develop only 4,500 landlines during its entire existence, but after liberalizing reforms were implemented the number of GSM landlines jumped to 32 million. Today, Nigeria’s telecom market is the second fastest growing in the world, next to China, and is attracting $1 billion a year in telecom investments.^[6]

Nigeria has made headway with its fiscal policy as well. Since 2003 the country detached its budget from the volatile oil prices and, as a result, Nigeria increased its monetary reserves. In fact, the country was able to save $27 billion. Moreover, the Nigerians have since reduced their inflation rate from 28 percent to 11 percent.^[7]

In Rwanda, Kagame has been implementing reforms driven by his 2020 Vision, a report that targets government efficiency, development of human resources, infrastructure, private sector, entrepreneurship and modernization.^[8] These reforms have contributed to Rwanda’s sustained economic growth, making the country increasingly attractive to investor appetites.

Economic Trends

Every corner of the world was impacted by the global recession of 2008-2009, but some regions were hit harder than others. The entire global economy reached a low point in 2009 when rates dropped to -2.2% worldwide. Europe and Central Asia were hit the hardest with rates contracting -6.6%. The OECD followed with -3.5%, while Latin America’s economy crunched -2%. 

At the same time, the Asian economies remained robust at 9.1%, and even sub-Saharan Africa’s economy dipped only slightly in 2009. Since, the global economy is recovering at a rate of 3.3% and is projected at 3.6% growth in 2012.

Africa not only fared well through the economic crisis but also currently boasts growth rates above the global average at nearly 5%, with projected increases in coming years.

In the 1990s, African governments began to implement responsible economic policies and introduce market-geared reforms.^[9] As a result, African GDP rose steadily before reaching a climax in 2008 when growth rates reached an impressive 5%. The subsequent recession slowed the African economy to 1.7% in 2009. Since then, global markets have begun to recover, and Africa’s growth rates have emerged at near pre-recession levels. GDP levels continue to rise with projections nearing 6% growth in the near future, and 10 years out are expected to top $2.6 trillion.^[10]

Nigeria and South Africa account for 56% of sub-Saharan Africa’s GDP and are growing at 7.1% and 3.5% respectively.

Fueled partially by these economic powerhouses, 28% of countries have achieved growth rates at or above 6%, with 60% holding rates of over 4%.^[11] Sub-Saharan Africa’s top performers include the Democratic Republic of Congo, Ethiopia, Botswana, Mozambique, Nigeria, Tanzania, Malawi, Ghana, Rwanda, Zambia, Uganda, and Seychelles. Regionally, West Africa has seen the highest growth rates, at 6.5% followed by East Africa at 6.4%.^[12] Such robust growth rates remain competitive with (and in some cases outperform) the BRICs (Brazil, Russia, India, China).

Looking forward, economists believe that Africa’s growth levels will continue to rise and rival even the Asian Tigers. However, in order to buttress the growth rates, Africans will have to continue to build infrastructure, implement responsible economic policies, foster political stability, and curb disease as well as poverty. Nevertheless, Africa’s recent economic growth has primed an environment that is now ripe for business.

Investment Opportunities

In a report by the McKinsey Company^[13], “International capital flows to the continent—FDI, bank lending, and investor purchases of equity and debt securities from African issuers—increased from $15 billion in 2000 to $87 billion in 2007. Surpassing both aid and remittances in scale!”^[14]  The report goes on to say, “More than 20 African countries received at least $500 billion each of foreign investment in 2008. Returns to FDI surpass any other region in the world.”

It should also be noted that Asia is the only foreign market ahead of Africa in terms of investor perceptions. Additionally, Africa is ranked parallel to Latin American and Eastern Europe for FDI. In 2000, FDI in all of Africa was at $9 billion but jumped to $62 billion in 2008 with 2010 levels reaching $84 billion.

These encouraging numbers should be approached with some caution, however. Each of Africa’s countries “have a unique value proposition—you can make money; you can lose money,” said Euvin Naidoo, president of South Africa’s Chamber of Commerce.^[15] Countries spanning the continent offer varying degrees of risk and opportunities, but there are three areas that investors are looking to in particular: consumer markets, resources, and infrastructure.

Consumer markets

Africa’s consumer market is on the move. In fact, Africa’s consumer market is growing two to three times faster than OECD consumer markets. Also, domestic demand contributed 5.4 percentage points to recent GDP growth. According to a report by Ernst & Young, 85 million African households earn at least $5,000—the income threshold for consumptive spending.^[16]  However, macroeconomic figures cannot adequately account for Africa’s large informal economy. In reality, Africans have more discretionary income than GDP or GDP per capita would indicate. A case in point is Nigeria’s telecom market. MTN, a South African telecom company, was the first to enter Nigeria’s telecom market. During a three-year period the company made $360 million in profit—that is, $360 million in a poor country with an average income of $500 per capita.^[17]