https://hbr.org/2016/02/sub-saharan-africas-most-and-least-resilient-economies?referral=00210&cm_mmc=email-_-newsletter-_-strategy-_-strategy_date&utm_source=newsletter_strategy&utm_medium=email&utm_campaign=strategy_date
Emerging markets Sub-Saharan Africa’s Most and Least Resilient Economies
- Anna Rosenberg
February 05, 2016
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
<
http://frontierstrategygroup.com/slowing-growth-intensified-mnc-risk-in-2016/>
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 <
http://www.ft.com/cms/s/0/de2aa98e-1360-11e5-ad26-00144feabdc0.html>
in some central African countries, while Barclays’s new CEO is considering
selling off the bank’s Africa assets
<
http://www.ft.com/cms/s/0/ebc2ff20-a356-11e5-bc70-7ff6d4fd203a.html#axzz3xD96qiIn>
.
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.
[image: W160128_ROSENBERG_HOWRESILIENT_640]
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.
[image: W160128_ROSENBERG_MOSTATTRACTIVE]
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.
------------------------------
Anna Rosenberg <
https://hbr.org/search?term=anna+rosenberg> is Practice
Leader for Sub-Saharan Africa at Frontier Strategy Group
<
http://www.frontierstrategygroup.com/> (FSG), the leading information and
advisory services partner to senior executives in emerging markets.
Download her recent white paper, Seven Myths About Doing Business in Africa
<
http://frontierstrategygroup.com/seven-myths-about-doing-business-in-africa/>
.
Received on Sun Feb 21 2016 - 21:34:12 EST