Seeing through the risks to unlock potential in Africa

Africa has been the centre of attention for many investors around the world in recent years. However, the pendulum appears to have swung from over-exuberance to uber-pessimism without, as Citibank’s Africa Economist David Bowan says, ‘anything much in between’.

This isn’t hugely surprising. The rewards many expect from the continent have always been paired with risks. As the World Economic Forum convened in Kigali, Rwanda this week, both the risks and the rewards are squarely in the spotlight.

In my view, it is critical that we fully understand the risks on the continent in order to unlock the huge potential. Here I take a look at three key risk areas which all affect different African economies by varying degrees: vulnerability to commodity price volatility; hampered infrastructure development; and a lack of regulation and poor cybersecurity in Africa’s booming tech sector.

1. Hot commodities

In The Global Risks Report 2016, many African countries saw common top risks. Amongst them was the risk of energy price shocks, which maps against a broader reliance on commodities trading across the continent.

Volatility in global commodities markets has been heating up, particularly in regards to energy. This has put a squeeze on developed markets, let alone in developing economies.

Two of Africa’s largest economies have already felt the pain of volatility in the oil market. Nigeria’s petroleum-dependent economy will be fortunate to attain growth of 3% of GDP - barely enough to keep up with its population expansion. In Kenya, the energy sector ‘bottleneck’ is a notable impediment to the growth it needs to match its peers, according to a report by the World Bank.

The threat of failing national governments and imminent violent conflict also looms large for companies. Recent attacks on a Nigerian Chevron Corp platform causing other oil companies to proceed with even more caution.

However, voices of optimism are not going unheard. Former deputy of Nigeria’s central bank, Kinglsey Moghalu, has spoken out arguing that rock bottom oil prices are the catalyst the country needs to diversify and become a manufacturing force. 

Diversifying from oil and providing vehicles for alternative economic models will be key in minimising this reliance and building resilience against future volatility.

2. Getting markets moving

The lack of dependable infrastructure is an enormous risk to stability in Africa, with serious knock-on effects. 

Poor infrastructure makes it harder for workers to reach jobs, perpetuating chronic unemployment and underemployment in Africa. It also diminishes governments’ abilities to provide for their citizens, fuelling social unrest and undermining national governance.

Some private sector companies see consolidation as the way forward. Just this week saw Nigeria’s two largest telecommunications – IHS and Helios Towers Nigeria – trade 1,200 mobile cellular towers, to keep up with Africans’ shift to mobile phones. 

And while larger companies focus on consolidating resources, small companies and entrepreneurs look to fill gaps. For example, M-Kopa is a company that sells individual solar-panel kits to villagers, paid in daily instalments, so that customers are guaranteed a regular electricity supply. 

Another solar solution is Tanzania-based Off Grid Electric, which is installing more than 10,000 solar units in homes. Founded by an American, the goal is to create 15,000 jobs across East Africa in the next three years. 

3. Silicon Savannah

The buzz around tech enterprise in sub-Saharan Africa has been thought to be growing so dynamically that it is being dubbed the Silicon Savannah. 

“Leapfrogging”, where African start-ups cut out traditional development patterns (synonymous with the term “disruption” in Western markets), is a popular term with Afro-enthusiasts. 

A key example is Africa’s world-leading adoption of mobile payment technology, enfranchising unbanked and rural Africans with access to the global and digital economy. The Kenyan M-Pesa is the heralded success story of leapfrogging technology, launched by telecom Safaricom back in 2007. 

However, the lack of regulation in many African economies poses serious risk. Cyberattacks, misuse of technology and data fraud all ranked highly in the Silicon Savannah countries’ risk concerns. The African Development Bank estimates that 55% of sub-saharan Africa’s economic activity is informal,meaning tending to these risks is highly complex. 

From my perspective, Africa still holds many opportunities for businesses but they must approach responsibly, with caution and a keen understanding of local issues. 

It has been heartening to hear the positive messages alongside the issues expressed at the World Economic Forum in Africa this week. Hopefully they shine light on more ways of unlocking this tremendous potential.