Daniel Mminele: Underpinnings of sustainable growth in Africa
Address by Mr Daniel Mminele, Deputy Governor of the South African Reserve Bank, at the
IIF Africa Financial Summit, Sandton, 11 November 2013.
* * *
Mr Tim Adams, President and CEO, Institute of International Finance (IIF),
Mike Brown, Chief Executive, Nedbank,
and honoured guests,
allow me to express my gratitude for the honour and privilege to present the opening keynote
address of the 2nd Africa Financial Summit.
1. Introduction
In May 2000, the Economist magazine labelled Africa the "Hopeless Continent", claiming that
natural disasters, mass murders, a string of wars, institutional constraints and a lack of
commitment to democratic practices meant that the new millennium had brought disaster
rather than hope to Africa.1 In March 2013, the Economist had a complete change of mind
declaring that Africa is "a Hopeful Continent" since "African lives have greatly improved over
the past decade...and the next ten years will be even better"2. It is heartening to note that
negative perceptions about African economic prospects, which were the norm at the turn of
the millennium, are less of an issue today. While many challenges persist, Africa has shown
that there is a high level of commitment and potential to achieving economic success.
In this address, I would like to take stock of some of the economic successes that African
countries have achieved, highlight some of the underpinnings for sustainable growth
outcomes and prospects in Africa, and then look at some of the challenges facing monetary
authorities.
2. Africa's economic successes
Africa's average growth rates have exceeded 5 per cent since 2000, double the pace of the
1980s and 1990s. Over the past decade, six of the world's ten fastest-growing countries
were from the African continent. Equatorial Guinea recorded an average growth rate of 17
per cent while the Angolan economy expanded by 11 per cent per annum between 2000 and
2009. In addition, seven other countries on the continent recorded in excess of 7 per cent per
annum growth during this period.3
With the outbreak of the financial crisis in 2008, there was justifiable concern that African
economies were under threat. For example, the International Monetary Fund (IMF) kept
revising downwards the growth forecasts for sub- Saharan Africa (SSA) for 2009, from 5 per
cent in October 2008, to 3,5 per cent in January 2009, to 1,7 per cent in April 2009 and
1,3 per cent by October. However, SSA recorded a growth rate of 2,6 per cent in 2009 which
was twice the pace predicted by the IMF. In addition, the pickup in economic activity in the
post crisis period also exceeded forecasts with growth averaging 5,3 per cent between 2010
and 2012.
Part of the explanation for Africa's resilience to the financial crisis was related to the rise in
commodity prices. In fact, the boom in commodity prices during the 2000s provided a
significant boost to export revenues given that mineral exports account for over half of the
continent's total exports. Statistics from the United Nations Conference on Trade and
Development (UNCTAD) show that there was almost a fourfold increase in Africa's exports
from USD149 billion in 2000 to USD595 billion in 2011.
The slowdown in the traditional export markets in the advanced countries as a result of the
global financial crisis was countered by the rise of emerging countries in the world economy.
This facilitated the diversification of export markets which served to sustain the demand for
Africa's commodity exports. For example, the share of exports destined to the European
Union (EU) and United States (US) declined from 47 per cent in 2000 to 33 per cent in 2011
while the share to the BRIC (Brazil, Russia, India and China) nations increased from around
8 per cent to approximately 23 per cent during the same period.
However, there was more to it than just commodity prices. Africa has been increasingly
better managed, with the improvements in governance helping to promote an overall
conducive environment to growth and development. There has been a steady rise in the
contribution of domestic demand to gross domestic product (GDP). Part of the explanation
here is the fast-growing middle class in many African countries. Estimates by the African
Development Bank (ADB) show that consumer spending by the middle class reached
US$680 billion and accounted for 25 per cent of Africa's GDP in 2008. This figure is
projected to reach US$2,2 trillion by 2030. On the supply side, the rise of the services sector
has been one of the defining characteristics of the structural change in African economies.
Telecommunications, banking, and the retail sector have been flourishing in many countries.
This has contributed to the improvement in Africa's growth prospects, which in turn, has
attracted the attention of foreign investors.
The concerted efforts of policymakers to address some of the major binding growth
constraints, which were previously neglected, have also played a significant role in Africa's
enhanced growth performance over the last decade. Research from the McKinsey Global
Institute (MGI) show that natural resources and activities directly related to the primary sector
accounted for only about a third of Africa's growth.
The World Economic Forum estimates that more than half of Africa's enhanced growth
performance can be attributed to improvements in infrastructure.4 Policymakers have
devoted significant attention to addressing the growth constraints on the continent, the
dividends of which have been reflected in the growth outcomes of the past decade. However,
having said that, infrastructure bottlenecks still persist and further attention is needed in this
area to enhance Africa's growth prospects.
The 2013 "Doing Business Report" published by the World Bank earlier this year highlights
that 66 per cent of countries in Africa enacted at least one business- enhancing reform in
2012 - this is double the number of countries in 2005. The report acknowledges that nine
African countries rank among the top 20 most improved in terms of business regulations
since 2009. These include Benin, Burundi, Cote d'Ivoire, Ghana, Guinea-Bissau, Liberia,
Rwanda, Sierra Leone, and Togo. These countries are bound to reap the benefits of these
business-friendly reform measures.
Foreign investors have taken note of these changes. Over the past decade Africa has
increasingly been earmarked as a profitable investment destination by international
investors. Foreign Direct Investment (FDI) to Africa increased from approximately
US$10 billion per year in 2000 to more than US$50 billion in 2012. While the commodity
price boom has played some part, the institutional and political changes coupled with the
continent's enhanced growth potential have been the main factors underpinning investor
confidence in Africa5. According to UNCTAD, greenfield investment into Africa constituted
approximately 10 per cent of global greenfield investment between 2006 and 2012,
compared to two per cent of global mergers and acquisitions that was directed to Africa. An
increasing share of the greenfield FDI flows into the continent were destined for sectors,
such as metals, renewable energy, automotive equipment and financial services.
Africa is also seen as an attractive FDI destination by those multinational investor groups that
are keen to benefit from the intra-Africa trade opportunities that currently exist. In addition,
other investors that already have operations in Africa are looking to expand their footprint on
the continent, to ensure that they are well positioned to benefit from the favourable growth
prospects that prevail in many countries. Investors from developing economies, particularly
those from China, have significantly increased their ventures into the continent. In the post
crisis period, China accounted for more than half of the greenfield FDI to Africa.
It is also worth noting that intra-continent FDI has been growing at a healthy pace. In fact, the
share of African countries in total FDI in the continent more than doubled between 2003 and
2012; whereas in 2003 some 8 per cent of FDI into African countries came from other African
countries and 92 per cent from other continents, by 2012 the intra-African share had risen to
18 per cent.
As expected, multinationals from South Africa have seized the opportunity to expand their
production networks across the continent. The number of projects in Africa originating from
South Africa has increased by over 500 per cent in the past decade. Between 2010 and
2013, South African multinationals made FDI investments into 18 African countries. In 2012,
South Africa invested in more new FDI projects in Africa than any other country in the world.
According to Ernst & Young's 2013 Attractiveness Survey, South African FDI into Africa has
created almost 46 000 jobs in Africa since 2003.
The financial crisis has shown that the conventional view of a positive relationship between
finance and growth cannot be taken for granted. In fact, the shallowness of Africa's banking
system has helped to insulate many African countries from the adverse effects of the
financial crisis. However, financial innovation and development over the past decade has
helped to significantly increase the share of the population with access to basic formal
financial services and technology in many African countries.
We know that capital markets can be a significant driver of economic growth. While many
countries in Africa have capital markets that are small and illiquid, some steady progress has
been made towards developing financial markets in Africa. Increasingly African countries are
accessing international capital markets, and their ability and success in doing so has
contributed towards the funding of massive infrastructure projects, which I will touch on later.
The ability to issue in international markets has been made possible by an increasing
number of African countries obtaining sovereign credit ratings and because of heightened
interest by international investors in the so-called frontier markets, in an environment of low
global interest rates. Many of the debut dollar denominated sovereign bonds issued have
been done so at relatively attractive yields, which have declined over time. Nigeria for
example paid a 7 per cent yield on its debut two years ago with a 10-year dollar-denominated
note, while the 2013 10-year bond issue was priced to yield 6.375 per cent. Nigeria's most
recent bond issues were four times oversubscribed compared with 2.5 times in 2011.
According to Moody's6, primary issuance by African sovereigns in 2013 has already reached
its highest level ever of US$8 billion. Furthermore, Moody's is positive on sustained investor
interest in the region, citing a strong macroeconomic growth outlook. Six countries in Sub-
Saharan Africa are expected to issue inaugural bonds in the international markets within the
next few years, including Angola, Cameroon, Kenya, Tanzania, Uganda and Mozambique
and given expectation that the issuance sizes could be in the region of US$500 million, may
make them eligible to be included in the JP Morgan Emerging Markets Bond Index. This of
course helps to raise visibility, and provides access to a larger pool of investors, while also
setting a benchmark for local corporates.
As financial innovation and deepening evolves on the continent, it is imperative that the
regulation of the financial system keeps pace with these developments. Here the emphasis
should fall on appropriate regulation - that is, striking the right balance between guiding
financial markets and protecting financial systems (some of which may still be at a nascent
stage) on the one side, while not stifling innovation and progress on the other.. Too much
regulation would entail increased costs which could hinder further development of the
financial sector. But if due regulatory attention was not given to financial innovation and
development then countries could be exposed to financial sector vulnerabilities which could
pose a threat to sustainable economic outcomes.
3. Regional integration
There are concerted efforts to foster greater financial integration at the regional level. For
example, in the area of payment systems, the SADC Integrated Regional Electronic
Settlement System (SIRESS) was launched on 22 July 2013 as a pilot. There are currently
21 participants (4 CMA central banks and 17 commercial banks). This system enhances and
harmonises the legal and regulatory frameworks in the region and provides an integrated
regional cross-border payment settlement infrastructure, allowing inter-country payments to
be effected quickly, efficiently and safely.
In fact, the benefits are already starting to manifest themselves. SIRESS processed 1 780
settlement instructions to the value of R15 billion during August 2013 which was the first full
month in which the system was in operation. The settlement amounts will increase quite
significantly with roll-out to four more countries by April 2014 and eventually more broadly in
SADC. Further developments are also envisaged. For example, the SADC Banking
Association and a work group from the Committee of SADC Stock Exchanges (COSSE) are
working on the business model and related agreements for the settlement of the cash leg of
securities trades.
Rising intra-regional trade has been a defining characteristic of globalisation over the last two
decades. However, it has long been recognised that Africa is highly fragmented with poor
institutional arrangements and insufficient coordination at national and sub-regional levels.
These factors have undermined the role of intra-regional trade in fostering economic growth
on the continent. While Africa's intra-regional trade share has doubled from 6 per cent to
12 per cent between 1990 and 2011, this remains remarkably low in a global context,
considering the spatial proximity of African countries to one another.
The Treaties establishing the Common Market for Eastern and Southern Africa (COMESA),
the East African Community (EAC), and the South African Development Community (SADC)
provide for the establishment of a Monetary Union in each bloc. However, overlapping
memberships, the slow ratification and implementation of protocols coupled with the
socioeconomic policy divergences have proven to be a serious obstacle to the process of regional
and continental integration. Significant progress on economic integration has been achieved
in some quarters, the most notable being the long track record of the Southern African
Customs Union (SACU) and Common Monetary Area (CMA). One needs to warn against
overly rapid monetary union formation, however, and emphasise the importance of the
context and sequencing of economic integration initiatives. As the European experience has
demonstrated, a monetary union without significant elements of a fiscal union could amplify
tension rather than bring harmony.
In June 2011, African Heads of State and Government committed themselves to the
Tripartite Free Trade Area (TFTA) which aims to remove trade barriers, develop regional
value chains and create jobs in COMESA, EAC and SADC. Negotiations towards the
creation of the Tripartite Grand Free Trade Area between COMESA, EAC and SADC
commenced in May 2013, with the objective to conclude these negotiations by December
2014, and the Agreement entering into force at the beginning of 2015. Last month, the
African Development Bank approved a grant of US$7,5 million to finance a capacity building
programme in support of the TFTA.
4. Challenges for policymakers on the African continent
Let me now briefly highlight some of the current challenges confronting monetary
policymakers on the continent. Although our continent is diverse with differing experiences
and challenges, it is possible to make some general comments.
While Africa's growth performance has been impressive in a comparative context, this has
not translated into an adequate, widely spread improvement in living standards. This is
evident in the continent's progress in terms of attaining the Millennium Development Goals
(MDG). Despite 15 of the 20 countries which made the greatest progress on the MDGs in
2012 being from Africa, according to the "2013 MDG Report" Africa's rate of poverty
reduction would not be sufficient to reach the target of halving extreme poverty by 2015.
Structural reform across a wide range of areas has to be intensified in order to make the
progress which the continent needs. In this regard reference has already been made to a
number of key areas, such as infrastructure improvement and creation of a more
businessfriendly environment.
According to the 2013 World Economic Forum Africa Competitiveness Report, the quality of
infrastructure is one of the major impediments to developing trade and improving
competitiveness in Africa. The World Bank estimates that the continent's infrastructure
spending needs amount to approximately US$93 billion per year, half of which is funded by
the government. There is thus a huge infrastructure funding gap which in effect dictates that
efficiency gains in the use of the existing infrastructure network are essential.
An area that stands central to development has not been mentioned yet; namely, education
and training, where huge challenges must be faced and overcome if Africa is to blossom
further through inclusive growth and development. Labour markets in many countries are
characterised by frictions and strife. In this regard, there are two major challenges
confronting policymakers. Firstly, over the short-term there is an urgent need for the creation
of labour-intensive jobs to absorb the large number of people entering the labour market
each year. Secondly, over the longer term there is need to move up the value chain in
production in both the manufacturing and service sectors. This would require significant
investment in education both at the school and higher education levels. Programmes
directed at entrepreneurship development and other training initiatives that could provide the
technical skills required to support infrastructure development are key to the attainment of
sustainable growth on the continent.
Where do central banks fit into the sustainable growth picture? While most of the structural
reform imperatives fall outside the mandate of central banks, I believe that central banks, by
keeping inflation in check and creating an environment of financial stability, can make a
meaningful contribution. Economic prosperity is built on stable foundations provided by
central banks taking their mandate seriously. Thinking of the dozens of countries on the
African continent that had high double-digit rates of inflation 20 years ago and contrasting
that with the current situation, much progress has been made.
In general, while inflation rates have increased marginally over the last couple of years they
remain entrenched at single-digit levels in many countries. The rise in food and fuel prices
coupled with the impact of currency depreciations have been important sources of
inflationary pressures in many countries. The current uncertainties in the global financial
environment and their associated impact on currencies may continue to pose a major threat
to inflation outcomes in many countries.
Recently the issue of currency movements and its impact on competitiveness has received
much attention in the general press as well as in policy and academic circles. While it may be
difficult to determine the equilibrium exchange rate, it is well recognised that a significantly
misaligned exchange rate or excessively volatile exchange rate leads to a misallocation of
resources which eventually thwarts sustainable growth. In some countries like South Africa
for example, a special effort has been made to build up the level of foreign exchange
reserves - to some US$50 billion at present, from US$8 billion a decade ago - since
adequate reserves contribute to investor confidence and moderation in exchange rate
volatility. In some other countries the nature of the foreign exchange market and risk appetite
of the authorities does, at times, allow for central bank intervention in an attempt to moderate
episodes of abnormal depreciation or appreciation.
The shorter-term challenge to macroeconomic policymakers on the continent is to strike a
balance between controlling inflation and supporting economic growth. As pointed out earlier,
growth is driven from the supply side over the long-term. The trade-off between growth and
inflation can only be avoided with increases in potential output. Monetary policy can only play
a facilitating role in enhancing the productive capacity of the economy. Once inflation picks
up significantly and stays at elevated levels, nominal interest rates also have to rise to match
inflation so that saving is sustained and a macro-economic environment conducive to
sustainable growth is maintained. In this regard, countries with rising inflationary pressures
and limited fiscal space will be constrained in their use of expansionary macro policies to
stimulate the growth momentum. On the other hand, where inflationary pressures are
contained, further monetary stimulus could be provided.
5. Conclusion
In conclusion, the recent financial crisis has exposed the strains in the banking system in the
advanced world. While the banking systems in many African countries are not well
developed, they are stable. In general, African banks are well capitalized and have avoided
being overly exposed to the sub-prime and other financial crises that have affected the world
economy over the past two decades. The challenge confronting policymakers on the
continent is to ensure that the hard-fought economic gains achieved during the past decade
are not lost. In this regard, African central bankers are committed to ensuring that monetary
policy makes a significant contribution to sustainable economic outcomes by fostering price
and financial stability. But much more is required than what central banks can contribute: The
challenge to Africa in general is to not only plan but also implement the structural reforms
necessary to bolster the continent's sustainable growth rate.
Thank you.