1. The African Economic Outlook 2008 the Pulse of Africa Javier Santiso Chief Development Economist, OECD Director, OECD Development Centre 31 st January 2008 Exane BNP Paribas Geneva

2. The challenge of diversifying growth drivers 1 A new investment frontier? 2 Introduction Rising Suns: China and India 3 Conclusion: Africa and Global Decentering

3. Comparative, up-to-date and forward- looking tool Monitoring progress towards MDGs of African countries: 31 countries in 2007 and 35 in 2008! Analysing crucial themes for Africa development Previous years: privatisation, energy, SME financing, transport, water AEO 2008: Technical Skills Development in Africa Deeply rooted in African realities Network of local experts, constant dialogue with stakeholders Quality peer review involving AfDB country and sector economists Sound Statistical analysis and data computation Original indicators (political troubles, diversification) and macro forecasts New background research: Working papers on political indicators, privatisation, etc. AEO A unique macro monitoring tool 3

4. AEO From first-mover to regional reference From 2001: A groundbreaking collaboration UNECA 2008: The reference on African economies 4

5. AEO 2008 Sao Tome et principe Mauritius Comores Cape verde Benin New in 2008: Cape Verde Liberia Libya Equatorial Guinea AEO Coverage 2008: 35 African countries 91% of GDP 86% of population 5

6. The challenge of diversifying growth drivers 1 A new investment frontier? 2 Introduction Rising Suns: China and India 3 Conclusion: Africa and Global Decentering

7. Growth Africa continues steady growth Real GDP growth expected to exceed 5% for the fifth consecutive year in 2008 African growth is becoming more broad-based: 2006: 23 countries over 5 % 2007: 30 countries over 5% 2006: 15 countries between 3-5% 2007: 12 countries between 3-5% Total OECD Africa Source: OECD Development Centre / African Development Bank, 2007 7

8. Commodities Commodity price inflation : a recent phenomenon? Global commodity prices 1900-2000 Source: OECD Development Centre, / Oxford Latin American History Database, 2008 *US$ nominal index 1970=1000 8

9. Commodities The commodity boom: a key driver for Africa Global commodity prices 2001-2009 Source: OECD Development Centre / World Bank, 2008 9

10. Growth Oil exporters and importers diverging paths? Source: OECD Development Centre / African Development Bank, 2007 Net Oil exporters: Algeria, Angola, Cameroon, Chad, Congo, Côte d'Ivoire, Congo DRC, Egypt, Equatorial Guinea, Gabon, Libya, Nigeria, Sudan 10

11. ANGOLA World growth champion 2003-2007... Source: OECD Development Centre / African Development Bank, ERS/USDA Macroeconomic Dataset, 2008 Broadening investment: Non-oil sectors, construction, agriculture, manufacturing, services… Decreasing dollarization : Strong & stable Kwanza increases local-currency deposits from 41 to 49 % 2006 – 2007 Luanda Stock Exchange: Due to open first quarter 2008 Reconstruction: Fresh commitments from China (USD 7 billion credit), Paris Club repayments 2007: Real GDP growth: +19 % Oil production: +20% 2008 outlook: real GDP growth: +11.5% 11

12. ANGOLA …but slowing as production reaches capacity Source: OECD Development Centre / African Development Bank, 2008 Slowing growth prospects: OPEC quota: Limiting oil production to 1.9 m b/d. Impact on growth and government revenue from 2008 Poor diversification: Specialisation in extractive industry, difficult business environment Limited spillovers : 25 % unemployment and 68% poverty; weak governance. 12

13. Positive factors: Sustained growth due to favourable international environment Good macro management: repayment of external debt (4.8% of GDP) Investment: Up 7.2%; increasing FDI tonon-oil sectors ALGERIA Below par in light of assets Source: OECD Development Centre / African Development Bank, 2008 Threats: Increasing export specialisation Strongly Underexploited potential of non-oil sectors Youth unemployment over 30% Low absorption capacity Poor governance Outlook for 2007: +3.1% 13

14. EGYPT Africas foreign investment darling Threats: High budget deficits Subsidy system still accounts for 27% of govt. spending. Inflation (+8.5%) and food prices putting pressure on households Youth unemployment remains high Central Banks inflation targeting will lead to hikes in interest rates Source: OECD Development Centre / African Development Bank, 2008 Positive factors: Top FDI recipient in Africa ($11.1bln 2007 ) Very strong export sector (+19.3% at $222bln 06/07) Investment up: Dom. +34.2%; Public +47%; Private +62% Sustained reforms: new VAT & real estate tax laws, tariff reductions, improved business environment. Important new gas resources discovered in Upper Egypt 14

15. South Africa Gearing up for 2010 World cup Source: OECD Development Centre / African Development Bank, 2008 Positive factors: Sound macro management, credible institutions Good policy mix : budget surplus +0.7 % in 2007/08, inflation within target 3-6 % over 2004-07 Investment up (+12 %) to address capacity constraints (mining, manufacturing and construction) Reduced external vulnerabilty : due to reserve accumulation and raising investor confidence. Limited impact of U.S subprime Well-developed financial sector: 10% of GDP. Growth 2004-07: +5% Outlook: 2007 +4.9% 2008 +4.6%. Threats: Very high current account deficit: 2006 -6.5%, 2007 -7% (Russia +9,7%; Brazil +1,2%; China +9,5%) Lack of competition in key sectors: monopolies in transport (Transnet), telecom (Telcom), energy (Eskom) Energy shortages: Cost of power cuts: Rand 2.9 - 8.6 billion. No new capacity on grid until 2012 Inadequate transport infrastructure: mining penalised by deficiencies in freight supply chains Poverty and inequality : High crime; 44.4 % poor; Gini coefficient 0.68 in 2006 15

16. Fiscal Policy The rewards of good macro management Public finance management is generally good and improving Greater macroeconomic stability attained : Fiscal balance is positive Inflation is stable Africa: inflation and fiscal balance ( 2000-2006) Source: OECD Development Centre / African Development Bank, 2007 16

17. Reserves Lower debt, higher reserves Source: Avendaño, Reisen and Santiso, The Macro Management of Asian Driver Related Commodity Booms, OECD Development Centre Working Paper, forthcoming 2008. Reducing vulnerability via the Greenspan-Guidotti rule. Ratio of Reserves to Short-term Debt*: Note: Logarithmic scale defined as the scale of measurement using the logarithm of the defined ratio. 17

18. Instability Long-term decline in political risk Regime Hardening (LHS) 18 Qualitative data obtained from Marchés Tropicaux et Méditerranéens. Data is used to construct two indicators referring to: Political instability: occurrence of strikes, demonstrations, violence and coup détat. Hardening of the political regime : incarcerations of opponents, measures threatening democracy such as dissolution of political parties, violence perpetrated by the police and the banning of demonstrations or public debates. Source: OECD Development Centre Moving towards political stability? Monitoring political instability, governments response and economic performance in African countries forthcoming article, April 2008.

19. Instability Zimbabwe political mess has little regional impact Zimbabwe & its neighbours growth: No contagion of political instability: * Botswana, Mozambique and Zambia ** * Source: OECD Development Centre, 2007 19

20. Kenya Infrastructure bottlenecks may compound instability Kampala/Lake Victoria - Mombasa rail line is the main export channel for landlocked Central Africa High growth rates in East Africa risk being strangled by crumbling infrastructure Uganda, Rwanda, Burundi, Eastern Congo and South Sudan all rely on the port of Mombasa: Imports: fuel, aid, diverse supplies Exports: 25% and 33% of Ugandan and Burundi GDP transit through Kenya Tanzanias port of Dar es Salaam, is at full capacity, and unable to handle extra Central African spillover High cost of a fragile infrastructure Source: OECD Development Centre, African Economic Outlook 2008 20

21. Aid Over the « hump » of debt relief Source: OECD Development Centre / African Development Banks, 2008 21

22. MDGs Slow progress, despite growth Source: OECD Development Centre / African Development Bank, 2007 22

23. Outlook Oil exporter & importers: divergent paths? Oil and Mineral exporters Challenges: Capitalise on windfall gains Maximise spillover to rest of the economy Avoid Dutch Disease Trade Balance Inflation Growth Fiscal Balance Oil importers Challenges: Contain inflationary pressure Finance widening trade deficit Streamline spending to prioritise poverty reduction Source: OECD Development Centre, African Economic Outlook, 2007 23

24. Trade African economies safe from U.S downturn? Source: OECD Development Centre / UN Comtrade, 2008. (data on Nigeria corresponds to last available year, 2003) African Exports by Destination - 2006 Due to a low share of external trade with the U.S, Africa is less vulnerable to effects of U.S subprime woes Note: The Others category includes Latin America, Middle East. East Asia and South Asia. 24

25. Trade Concentrated U.S / Africa trade Source: OECD Development Centre / UN Comtrade, 2008. 25

26. Trade Concentrated U.S / Africa trade Source: OECD Development Centre / UN Comtrade, 2008. Main African Exports to the U.S 26

27. Trade Moderate growth across sectors Source: OECD Development Centre / UN Comtrade, 2008. 27

28. Trade Two very different export profiles Source: OECD Development Centre / Comtrade, 2008 (Data on Nigeria correspond to the last available year, 2003) Diversified exporters African Exports by Product - 2006 Fuel exporters 28

29. The challenge of diversifying growth drivers 1 A new investment frontier? 2 Introduction Rising Suns: China and India 3 Conclusion: Africa and Global Decentering 29

30. Investment Africa, the new investment frontier? Source: OECD Development Centre / UNCTAD, 2007 A rapidly evolving investment destination: Lower external debt: from 183% of gdp in 2002, to 69% in 2006 South-South lending: South Africa exporting capital China investing & providing loans, direct entry into African banking sector (2007: $5bln in deals struck) Today private capital = 80% of total flows (50% in mid-80s) Decoupling: Africas low correlation with other asset classes has made it an important in portfolio diversification Real lending rates still very high: SSA 13% other LIC/MIC: 8%, Developed countries: 3.5% (04). Savings rate still very low: SSA: 10% (SSA LIC: 5%, other SSA: 12%) BICTS*: 28% average savings Allocation puzzle: the poorest countries have become net exporters of capital over recent years *BICTS: Brazil, India, China, Thailand & South Africa 30

31. FDI Record investment inflows for 2007 Source: OECD Development Centre / UNCTAD, 2008 Africa FDI 2007 : $36 billion Highest figure on record +20% on 2006; +200% on 2004 FDI outflows - $8 billion 2006 Largely due to surging extractive industry investment: South Africa and oil producing countries are still receiving the bulk of direct investment to Africa Previously off-limit sectors opening to foreign investment: Banking: Congo, Egypt, Nigeria Telecoms: Botswana, Burkina Faso, Cape Verde, Ghana, Namibia Land ownership: Morocco FDI inflows likely to remain strong, but unevenly distributed by sector and destination. 31

32. FDI Africa still last, despite fast rising investment Source: OECD Development Centre / World Bank, 2008 Source: OECD Development Centre based on UN Comtrade, 2008 19992000200120022003200420052006 World31173199155244684642745951050917569 Developed economies253423801496436683156457195647173 Developing economies 5838195591016327020244769721 Africa527695208095691849360746 Latin America373--67166--125 Asia158503914125361751168850 Distribution of cross-border M&A purchases in Africa by home region, 1999-2006 (US$ million) Source: OECD Development Centre based on UNCTAD cross-border M&A database, 2008 32

33. Investment Rising investment, unchanged allocations Global Emerging Market Equity & Bond funds: Total investments and regional allocations Source: OECD Development Centre / EPFR, 2008 33

34. Equities S outh A frica: dominating the investment landscape Source: OECD Development Centre / EPFR, 2008 Global equity fund allocation remains stable: 10% total funds EM funds have grown considerably, especially since 2003 In turnover, the SA stock exchange is worth 100 times that of Africas second market: Nigeria. Africa still lagging behind in investment compared to other emerging regions (Asia especially). Over 2001-2006 period, South Africa received as much portfolio equity investment as the entire rest of SSA, 46 times over… South Africa: received 147 times Botswanas total equity investment over same period 34

35. Private Equity Ideally adapted to African constraints? Total emerging world private equity funds raised: $21.5 billion raised in first half of 2007 Sub-Saharan Africa 2006: $2.3 billion raised (+198%) Average deal size 2005 $1.2 million, trending towards larger deals South Africa: 81% of investments, Nigeria 50% of remainder(2005) Top sectors: Transport, consumer-related investments, telecommunications/IT (2005) Later stage funds : 75% of all in-country investments 2005 In-country investments: 96% total. Outbound (intra- African) investments nonetheless in strong progression. Emerging Capital Partners: first $1 billion pan-African fund (2006) 2003200420052006 $3.4 bln$6.4 bln$25 bln$33 bln *OECD Development Centre / African Venture Capital Association, 2007 * * * * * Source: OECD Development Centre / Emerging Markets Private Equity Association, 2008 35

36. The challenge of diversifying growth drivers 1 A new investment frontier? 2 Introduction Rising Suns: China and India 3 Conclusion: Africa and Global Decentering

37. Asia Deepening bilateral trade relationships Source: OECD Development Centre based on UN Comtrade, 2008 37

38. Asia The challenge of China and Indias rise Source: OECD Development Centre, based on Comtrade data, 2008 Note: Herfindahl-Hirschmann index calculated as, where represents the market share of good j on the exports of country i in its total exports. The risks of excessive specialisation: 38

39. Asia Higher specialisation in export markets? Source: OECD Development Centre, based on Comtrade data, 2008. Note: Herfindahl-Hirschmann index calculated as, where represents the market share of country j on the exports of country i in its total exports. Herfindahl-Hirschmann Index by Destination 39

40. China Growing yet concentrated African exports Partnering with the Asian drivers: opportunities and risks of further specialization in raw commodities Source: OECD Development Centre / UN Comtrade, 2008 40

41. China High value-added imports from Asia: Source: OECD Development Centre / UN Comtrade, 2008 Partnering with the Asian drivers: opportunities / risk of raising the bar for competing in labor intensive industries 41

42. China Net Exports with Asia: growing deficit Source: UNComtrade/OECD 42

43. China A new and exciting paradigm shift Source: UNComtrade/OECD Source: OECD Development Centre / IMF, 2007. 43

44. Investment Attractive investments with low correlations Source: OECD Development Centre, based on Thomson Datastream, 2008 44

45. The challenge of diversifying growth drivers 1 A new investment frontier? 2 Introduction Rising Suns: China and India 3 Conclusion: Africa and Global Decentering

46. Conclusions Global Decentering and Africas XXI st century Commodities are only part of the story. African countries are growing whether they be exporters or importers of raw materials Africa is increasingly opening up to new actors, interests and sources of capital to watch: private equity and sovereign wealth funds China and India have already shifted the state of play Africa is at the forefront of a global decentering 1 2 3 4 46

47. Thank you More information: www.oecd.org/dev/aeo