Bright future – the key factors driving economic growth in sub-Saharan Africa

The African market will continue to thrive thanks to increased availability of capital and investment in natural resources, power and infrastructure.

Since 2008 the world economy has undergone significant strain, which has had an effect on growth across all regions. However, in the face of these global headwinds, domestic supply shocks and civil conflict, Africa has been resilient. Of the 10 fastest-growing global economies in 2012, seven are in sub-Saharan Africa (SSA).

Natural resources
Persistently high commodity prices elsewhere in the world in recent years have resulted in renewed demand for Africa's abundant natural resources. This demand is evidenced by the increased foreign investment in the oil and gas sector in several SSA countries such as Kenya, Uganda and Mozambique, with relative success thus far.

Tullow drilling wells onshore in Turkana, Kenya have exhibited good results and declared commerciality with a circa 5,200 barrels-per-day flow rate; Mozambique has been the subject of a natural gas discovery of 100 trillion cubic feet (mainly in the offshore Rovuma Basin); and oil and gas exploration activities in Uganda have had an unprecedented 90% drilling success rate, with 58 of the 64 exploration and appraisal wells drilled in the country to date encountering oil and/or gas.

Accessibility to funding
The increased availability of capital for small and medium-sized enterprises has contributed to economic development in SSA by stimulating sectors that have traditionally been the backbone of growth in countries that do not rely on natural resources. For example, historically SSA's agricultural sector has struggled to access the financing required to sustain growth, with the cost of extending traditional banking infrastructures in rural areas deterring many banks and financial institutions from providing financing for the sector.
However, this gap has been filled, to a large extent, in recent years through private equity funding. This has become more available in SSA as governments move to relax or suspend laws that restrict repatriation of funds or impose currency controls. According to the Emerging Markets Private Equity Association, total private equity capital raised for SSA in 2012 was $1.4bn (£830.3m), with agribusiness proving one of the primary draws.

Infrastructure and power
Power and infrastructure has also become a key investment sector, and is both an opportunity for foreign investors and an essential ingredient in the continued development of many African countries. Interest in infrastructure investments seems only likely to grow, with recent figures from the Commonwealth Business Council showing an average 15%-20% return on investments in SSA infrastructure projects across all sectors.

Successful implementation of the Nigerian power sector privatisation – seen by many as one of the boldest privatisation initiatives in the global power industry over the last decade – may create further investment opportunities in SSA. Other countries may follow the lead of Nigeria and accept that, under certain circumstances, there is no continuing case for retention of infrastructure in public hands and that the constant need for state-owned enterprises to take into account non-commercial and political considerations will ultimately hinder the efficient provision of much-needed power and infrastructure, with consequential long-term detrimental impacts to the interests of consumers and taxpayers.

If continuous efforts to tackle poverty, corruption, inadequate infrastructures and political instability are successful in SSA, the region can expect to see continued economic growth.

This article was written by Gavin Davies, Partner, London and Aleem Tharani, Senior Associate, Kenya.

For further information, please contact Gavin Davies, Aleem Tharani or your usual Herbert Smith Freehills contact.