Tapping into the growth markets of Sub-Saharan Africa appears to be a promising way of expanding business but a closer look reveals that doing business in these countries comes with a few challenges.
According to the World Economic Forum (WEF) Global Competitiveness Report, Sub-Saharan economies continued to register impressive growth rates of close to 5% in 2013 and the forecasts over the next two years are even better. The latest research report by Dr. Thomas Höppli, Economic Research Analyst for the South African Institute of Professional Accountants (SAIPA) confirms these findings and also highlights the challenges in these Sub-Saharan African countries.
“Much of the growth is due to natural resources such as oil and gas. The increase in oil and gas production has caused other related sectors to grow too but consistent high growth has not yet trickled down to all segments of the population,” says Höppli. “As the WEF highlights, most economic activity in Sub-Saharan Africa still happens in the informal sector, which accounts for more than 50% of GDP and employs more than 80% of the population. The main challenge in the years to come will be to turn growth into inclusive growth,” Höppli adds.
Consumer purchasing power
Despite this challenge, the growth has resulted in increased spending, particularly on consumer goods such as mobile telephony, soft drinks and other small luxuries as consumer purchasing power increases. “There has been a marked upswing in growth of businesses in the consumer goods, communication, and construction and supply chain sectors,” Höppli remarks. “One could therefore consider investing in these types of businesses or establishing your own in these markets.”
Import and export markets
Furthermore, Höppli notes: “Another way for South African businesses of tapping into these growth markets – instead of physically establishing a business in one of these countries – is through trade. The high economic growth, which has been spurred by export activities and related investment, suggests that demand for imported products as well as purchasing power is increasing rapidly and that they could thus be interesting export markets and foreign direct investment destinations.”
Ease of doing business
“The major challenges facing the ease of doing business in Sub-Saharan Africa include bureaucratic red tape, infrastructure issues like poor roads and unstable power supplies, a low availability of skilled and suitably trained staff, cultural differences, language barriers and corruption. These problems, although not insurmountable, add to the cost and effort needed to do business,” Höppli warns.
The ease of doing business index implies that the majority of the Sub-Saharan countries are among the more difficult countries in the world to do business in. While countries in which doing business is easier have not seen higher average growth rates since 2008, there is a correlation between how easy it is to do business and the income level achieved in these countries. GDP per capita, based on purchasing-power-parity (PPP) per capita GDP, tends to be higher the better the country is ranked in the Ease of Doing Business Index.
The higher GPD per capita in countries where it is easier to do business suggests that over time, a more conducive business environment has contributed to achieving a higher level of GDP per capita. For South African companies it is also an indication that potential customers in these ‘easier-to-do-business’ countries tend to have a higher purchasing power.
Business in Africa not for the fainthearted
“Doing business in Sub-Saharan Africa is a challenge, but those who are undeterred by a business environment that may not be as easy as it may be in other countries could reap high rewards,” Höppli concludes.
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