Trends, opportunities shaping business in Africa - Standard Bank

The integration of emerging markets, including Africa, into the world system (that is, the shift from G7/G8 to G20 countries driving the global financial architecture) is setting the stage for long term economic growth and development. South Africa, as a member of the G20, has sought to advance Africa's interests on the world stage, as well as reinforce economic links with the developing world.

Growth in BRIC countries

Multilateral meetings between South Africa and Brazil, Russia, India and China (BRICs) have become a feature of summitry in recent years and the extensive growth in the BRIC countries, in particular, China and India, has had a major impact on Africa. BRIC-Africa trade, as a proportion of total Africa trade, has increased from 4.6% in 1993, to over 19% in 2008. Bilateral BRIC trade has increased from US$22.3bn in 2000 to US$166bn in 2008. Much of this remains China-Africa trade, followed by India and Brazil. In 2008, Africa had a surplus of US$20.2bn with the BRICs (unlike with the developed world).

In the past 10 years South Africa has remained a major economy, but there has been shift of economic power to sub-Saharan Africa and North Africa as well as a shift from aid towards investment and self-development. Investors are making more confident commitments to the continent as shown by changes in foreign direct investment figures as compared to donor flows.

Changing demographics predicts that a bell-shaped population curve will occur in Africa by 2050. With better governance and policies in place, Africa will reap the economic benefits of having a greater proportion of the population falling in the economically active sector.

Leapfrogging technology

Technological advances are allowing Africa in some instances to leapfrog to "best of breed" and to get around some of the shortfalls in hard infrastructure - eg. cell phones allow business people in Lagos to conduct business more efficiently by phone, rather than face-to-face - to the benefit of the economy and traffic congestion. With India and China joining the world economy, long gone are the practices of sending antiquated factory machinery to Africa.

Capital goods manufacturers fight to sell equipment worldwide, including into Africa. This is helping to raise the quality of goods produced on the continent. New technology/techniques are also helping unlock Africa's natural resources, for example, vertical deepwater drilling is increasing recoverable oil reserves in West Africa. An improved policy climate, higher FDI flows, demographic advantages, commodity resources, and a faster growth rate mean that Africa's technology stock will grow rapidly, and in turn boost growth.

Finally there is a shift in Africa from relying on food aid to focusing on food security. Land productivity on the continent is low by global standards, and a decrease in real spending on agricultural extension has not helped. Furthermore, approximately 40% of the world's reserve agricultural land (land that could be cultivated but is not) is in Africa.

Focus on Africa's arable land

Higher food prices around the world have pushed the focus onto the use of Africa's fallow arable land. This global focus combined with policy shifts and the increased involvement of multinationals companies in agribusiness bodes well for agriculture on the continent. In addition non-governmental organisations (NGOs) and the donor community are working with African governments towards food security, poverty alleviation, and the sustainable development of the continent.

These trends, which are changing the continents landscape, are creating opportunities for African agriculture. These opportunities include expanding agricultural production by making use of Africa's abundant arable land and water. Africa's per capita water resource is 4,600m³, versus 3,000m³ and 164m³ in Asia and the Middle East respectively.

Furthermore, only 15% of Africa's arable land is used, versus Asia's 60% and 140% in the Middle East. The shift from food aid to food security is driving policy changes and there are significant donor efforts to catalyse investment in both commercial and small scale farming. Rising per capita incomes across Africa are lifting domestic food demand, and attracting a wall of money from donors as well as private investors.

Complex and lucrative supply chains

The development of more complex and lucrative supply chains from farmers to urban markets is benefitting Africa's farmers. Many big Western branded food companies are in a race to build a presence in emerging markets. Companies, including Unilever, Nestle, Diagio and SAB Miller, are buying locally to ensure higher quality and a lower cost of supply and are major supporters of small scale farmers, providing both inputs and working capital.

Primary processors such as poultry producers and millers are seeking greater vertical integration, to secure inputs or markets or add greater value to their product. All participants see greater scalability and opportunity in building viable, large scale commercial agricultural enterprises at the fragmented upstream level of the value chain.

Private-public partnerships grow

The number of private-public partnerships in the agricultural sector continues to grow. The Agricultural Guarantee Fund Scheme, which is a partnership between Standard Bank, the Alliance for a Green Revolution in Africa (AGRA), OPEC Fund for International Development (OFID), Kilimo Trust, Millennium Challenge Account (MCA) and Millennium Development Authority (MiDA) that is operating in Ghana, Uganda, Tanzania and Mozambique, is an example of such a private-public partnership.

The lending structure makes use of a co-operative mechanism that includes linkages to formal markets that provide minimum price guarantees (thus mitigating price risk), includes weather index insurance (to mitigate climate risk) as well as training and mentorship. The co-operative structure allows farmers to consolidate their bargaining power which reduces input costs and contributes to economies of scale in terms of output and market access. Partnerships such as these may provide just the right catalyst for Africa to capitalise on the trends shaping the continent.

With so many positive factors coming together, the time is now for Africa to fulfil its agricultural potential, says Standard Bank.