A few days ago, I posed some questions to the chief economist at one of Kenya’s largest banks. The questions were aimed at trying to determine what is behind Africa’s emergence and what follows are the some of the key drivers he highlighted as behind this exciting development for the Continent.
Africa’s economic emergence can be traced back to approximately 10 to 15 years ago. Interest rates in the United States and other developed economies were very low and the Federal Reserve was taking action described as accommodating.Money was looking for higher interest rates and found its way into the so-called emerging market economies of the BRICS and other high yield developing market economies.In these locations, money could be assured of greater returns.Coupled with this was a commodity boom and oil super cycle. China’s strong economy can be regarded as playing a singularly significant role as demand for raw materials was spurred by its powerful economy.
Africa also started to invest in infrastructure, which had been a significant bottleneck and still poses challenges. Capital began finding its way into energy, transport, ports and even political structures.The political side of the equation is significant as progressive constitutions were framed. South Africa took the lead but in 2010, Kenya’s constitution emerged and received praise for its reformist character.
Institutional structures were put in place to enable and ensure the proper management of public funds. Once again, while Kenya’s elections of 2007 were marred by serious violence and bloodshed, its 2010 elections were peaceful. The lesson had been learnt that political stability is a critical component of attracting foreign direct investment and thereby growing the economy. So too did investors realise that Africa’s institutions were maturing and able to deal with political stresses, including putting in place the structures to address a diversified population.
The demographics in Africa are a strength as approximately 50 percent of the populations are under 35 years of age. Education has improved and there is a vast talent pool to tap into. Thus the labour dynamics have changed, and in southern and east Africa the population is English speaking, mobile and more able to engage with the global economy.
In the case of Kenya, the economy is not dependent on mineral-based and oil commodities but is diversified and is increasingly driven by tourism, horticulture, tea, coffee and the growth of small, micro and medium enterprises. Kenya is therefore immune from commodity swings.
The government has a plan in place to enhance the capacity of Mombasa port and turn it into a far more efficient and effective hub basing it on the model of Dubai through deepening and expanding the port and employing mobile technology.
Kenya reportedly has vast untapped oil and gas resources but up until the recent past it has been far too costly to tap into these reserves and instead investments have been made in geothermal energy. Kenya has recently built the biggest geothermal plant in the world catapulting it to the seventh highest geothermal energy producer. This is going to have a significant impact on the economy with the reduction of energy costs reducing inflation and driving business. Generally, the costs of doing business in Kenya have fallen, which is driving foreign investment.
Kenya’s debut in foreign capital markets was a huge success. In 2014, the Government issued Eurobonds attracting 2 billion dollars, exceeding its target. Three-quarters were bought up by US investors and one quarter by European and Middle Eastern investors. This reduces the governments need to borrow domestically but is a huge spur to foreign investment and economic growth. This is just the start and Kenya will seek to borrow more money on the international market and explore other instruments to do so.
In respect of banking, Kenya has come a long way. Ten to fifteen years ago a bank account was a privilege and a status symbol and only 10 to 15 percent of the population had accounts. It was only when Equity bank, a local banking institution, arrived on the scene that things started changing. They re-modelled the banking environment and no longer were minimum balances required. So where just a decade ago very few people had access to banks today the picture is very different with 66 percent of the populations having access to savings products. This financial inclusion has driven growth.
Mobile phone penetration has soared and the country now boasts subscribers above 77, 2 percent of the population. Mobile technology is also driving entrepreneurship and Kenya boasts a number of success stories. One app that was developed assists farmers to have real time information on market prices for their products, buy inputs and find buyers. Mobile phones are having a real impact on people’s lives across the spectrum from driving innovation and entrepreneurship to assisting with education and importantly to paying bills.
Africa is making strides and, as the economist said, the next five years are going to be very exciting times for the Continent!