Africa must raise its domestic savings level to keep the growth momentum

Opinion and Analysis

Razia Khan. Illustration by Stanslaus Manthi 

By CLIFF ONSERIO

In Summary

• Standard Chartered economist Razia Khan discusses challenges for commodity-reliant continent and where the money is set to flow.

The World Economic Forum (WEF–Africa) held its annual meeting in Rwanda’s capital Kigali early this month amid major shifts in the global economic landscape that has left many commodity-reliant African economies such as South Africa and Nigeria in difficult circumstances.

Razia Khan, the resident economist in charge of Africa at Standard Chartered Bank’s London headquarters, was in Kigali and spoke to Business Daily’s Cliff Onserio on a broad range of issues, including sovereign borrowing and investment flows. Excerpts.

What are your sentiments, now that Africa has finally caught the world’s attention?

These are interesting times for WEF to be meeting on Africa. In many of the previous years we all know the story. It was about Africa rising, about how many of the world’s fastest growing economies were in Africa.

We were in a commodity super cycle and nobody needed to think too deeply about growth, all of that seems to have drifted. The very fact that within Africa, the two largest economies in sub-saharan Africa are experiencing sub-trend growth has changed quite a lot for the region.

We know that commodity markets have reflected fears over what may be happening in China and its implications for Africa. There has also been a general tightening of financial conditions.

Countries like Kenya, which sometimes back could go to international capital markets and issue outsized Eurobonds, are now very aware that sentiments towards emerging markets has broadly changed.

So it does not matter whether a country is hugely leveraged or not, a commodity producer or not, external conditions are more difficult.

How should we interpret this and what does it portend for the African economies?

What this means is that the growth in Africa is not going to be happening on auto pilot, not that it ever did. This particular WEF is leading to a lot more conversations about the nitty gritty, if you like, of what needs to be done to ensure that a growth environment is sustained. 

Staying with the growth environment, in terms of having that support system to attract investment, is Africa ready?

This is a very important question. A point that has been made in many instances in the past, it is not always about foreign investment. We know the economic case of Africa needing that foreign investment.

The amount of domestic savings within Africa is just not high enough, it is not sufficient to meet Africa’s own investment needs. This means (typically) that many countries with current account deficits need their investment spend to be financed from elsewhere.

A good starting place, plus one we need to revisit in the current context, given how global markets are operating, is what can be done to raise the domestic savings, because in years where there is going to be perhaps a retreat of foreign investment, you don’t want the momentum to fall away entirely. 

You have alluded to the case brought up by the World Bank’s Country Economic Update — where they look at the savings culture in Kenya. We are not there yet.Where a country relies a lot on a commodity-related boost to growth, it feels there is a lot more liquidity when commodity prices are doing well but when that goes, everything seems to be more cyclical.

What you need for more stable development outcomes is a sustained level of growth. Kenya is very interesting in this context because it is not traditionally commodity-dependent.

Kenya has been the world’s leader in mobile money, so we know Kenya has experimented with more innovative ways of tapping into this but at its root we still need to look at the savings culture. As part of the growth we have been seeing in recent years.

The Kenyan government has been spending more on infrastructure and we started to see deficits that are much greater than what we have traditionally been used to.

There may have been a good reason for that, there was absolutely a need to upgrade infrastructure but if we are not seeing that level of government savings, are we seeing much more in the way of private sector savings to compensate for it?

What is going to raise the overall national rate of savings to ensure there is greater consistency to how investment can be financed to the future.

What we are saying, looking at the recent past, this probably hasn’t been the pressing concern for Kenya. Its growth has been noted internationally, the foreign investment has poured in.

If there are going to be more difficult times, these are micro-level reforms that  need to be looked at more closely. 

Your role at StanChart in London means you look at the entire African continent. Where do you see where the money is going. If you could profile the three regions, what gives each a competitive edge?

Much as we say that Africa is not a single country, well even at the sub-regional level, it is very different. Right now East Africa looks good simply because it has less of commodity dependence than the other regions.

If you look at Southern and Western Africa, those regional blocs are dominated by the big economies such as Nigeria and South Africa.  The fact that those economies are performing much less than has been their recent trends, has wide implications for those regions.

East Africa in this respect has been seen as the relative star. It is where growth rates of at least six per cent or higher are being sustained. There is a promise of future hydrocarbons output, which is still driving investment to some extent.

What more can be done to sustain this growth in East Africa?

It should not be left to just the fact that the rest of Africa is not doing well, that East Africa shines. East Africa should be shining because of structural reforms that are going to guarantee robust growth, even in the event that commodity prices come back.

Or even if they don’t, but investor sentiments towards Africa remain very difficult. There has been a definite stepping up of spending on infrastructure but more can be done to ensure that there is a robust growth momentum that remains in place.

Please give us your take on what makes the different regions tick.

We have seen instances of countries reaching seven per cent growth in the past 10 years in East Africa, Southern Africa and West Africa.

What our experience is especially at Standard Chartered Bank and what we have seen in other developing regions, tell us; a little bit of growth just for a few years is not good enough, what is needed is sustained growth at a sort of seven per cent level for several decades to reach the kind of development outcomes that we would like to see. 

You advise investors and governments. I’d like for you to sit on the other side of the table. Imagine you are an investor and you have the entire content, which country or region will you invest in, and in what sectors will you put your money? 

We think that ultimately the growth story in Africa is really about what is happening at the consumer level, so the FMCG sector still (fast moving consumer goods).

If there is going to be growth in Africa, we are going to be seeing incomes rising and we are going to be seeing people spending more.

If we are looking at the long-term drivers of growth, urbanisation, people moving out of rural areas, into taking on more urban economic functions, a higher value added, greater productivity gains, the adoption of technology, that immediately throws out the sectors that are going to be benefiting from this growth.

The banking sector, because it happens to leverage off everything that is happening to GDP growth. The technology sector, where enormous strides can be made. There is huge potential not just for catch-up, but for Africa innovating on its own.

And of course the FMCG because if you have a growing population which is a key strength for Africa, and if that population is getting wealthier over time, that is going to be reflected in consumer trends.