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Copyright ® 2004 Global Insight, Inc.

The Changing Economic Landscape of Africa: Enter China

October 8, 2007

Karanta Kalley

Regional Managing Director, Africa Group

10/11/2007 2Copyright ® 2004 Global Insight, Inc.

Highlights

Recent developments and Outlook

Changes in the Economic Landscape

China’s Economic Engagement with Africa and its impact

Conclusion


Real GDP growth remained robust at 5.5% in 2006 after posting a high of 5.1% in 2004 and 5.4% in 2005.

High commodity prices and improvement in macroeconomic management are the underlying factors.

All but one country in Africa recorded a positive growth rate in 2006.

Recent Developments:Growth


Sub-regional variations exist

North Africa leads the pack on the back of higher oil prices.

Southern Africa performed well due largely to economic recovery in Malawi and Lesotho and sustained good performance in other parts of the region.

In East Africa, weather conditions and commodity export prices remained favorable despite some drought conditions in the Horn of Africa.

Growth in Central Africa was driven by higher oil prices.

West Africa recorded the largest deceleration due to a decline in growth in Nigeria, a result of social unrest in the Niger Delta.


Excessive dependence on export of primary commodities is a common feature in the region

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

y/y %

chan

ge

20

36

51

67

82

98

113

129

144

160

Index

(200

0=10

0)

Africa real GDP GrowthCRB Commodity price Index (2000=100)

Sources: IMF WEO, April 2007. CRB


Oil Producing vs. Non-Oil Producing GDP Growth

5.9%

4.1%

6.1%

4.6%

6.1%

5.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

y/y %

Cha

nge

2004 2005 2006

Oil Producers Non-oil Producers Source: UN


CPI inflation decelerated for the fourth straight year in 2006 on the back of prudent macroeconomic management and good harvest.

About three-quarters of the countries in sub-Saharan Africa saw inflation decline between 2005 and 2006.

On average, CPI inflation remains lowest in CFA-zone countries.

Zimbabwe at 7000% remains the outlier.

Recent Developments:Inflation


Inflation: CPI Recent Developments

0.0

2.0

4.0

6.0

8.0

10.0

12.0

AFRICA 8.3 7.8 5.9 6.1SUB-SAHARAN AFRICA 11.9 9.3 7.5 7.0

2003 2004 2005 2006


Recent Developments:CPI Inflation (%)

0.0

5.0

10.0

15.0

20.0

25.0

2000 2001 2002 2003 2004 2005 2006

Sub-Saharan Africa Africa (North plus Sub-Saharan) North Africa


FDI flows to Africa surged to record high levels in 2006.

Africa has seen an improvement in its share of world FDI flows.

New Entrants, China and India, have shown increased investment in Africa.

Recent Developments:Investment


Recent Developments:FDI – Africa (billions US$)

13.018.5 17.2

30.7

38.8

0.0

10.0

20.0

30.0

40.0

50.0

2002 2003 2004 2005 2006e

Source: UNCTAD FDI Database


Recent Developments:Sub-Saharan Africa External Environment

Global commodity demand helped strengthen external balances.

External debt continued to decline in 2006.

Sixteen countries plus Nigeria received substantial debt relief.

Eight more could qualify for MDRI once they reach the HIPC completion point.


Outlook:Real GDP Growth (%) - Sub-Saharan Africa

Growth prospects for the medium term remain upbeat.

Net oil exporters will outperform net oil importers.

Robust demand for non-oil commodities will allow for steady growth in oil importing countries.


Growth: Real GDP Growth Projections

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2003 2004 2005 2006 2007 2008 2009 2010

Year

Afric

a

AFRICA SUB-SAHARAN AFRICA


Outlook:Inflation – Sub-Saharan Africa

Excluding Zimbabwe, inflation in the region will remain in single digits.

Improved food situation and prudent macroeconomic policy will be the underlying factors.

The CFA-zone will register the region’s lowest inflation rate.


Inflation: CPI Projections

0.0

2.0

4.0

6.0

8.0

10.0

12.0

AFRICA 8.3 7.8 5.9 6.1 7.0 5.8 5.3 5.1

SUB-SAHARAN AFRICA 11.9 9.3 7.5 7.0 8.5 7.1 6.4 5.9

2003 2004 2005 2006 2007 2008 2009 2010


Outlook:External Environment – Sub-Saharan Africa

External balances will come under pressure in the medium term.

Relatively lower commodity prices will be the primary reason.

Impact will vary between net oil exporters and net oil importers.


Changes in the Economic Landscape: A Summary

Strong growth, initially driven by external demand, but infrastructure investment is becoming a major driver.Sound macroeconomic management has led to price stability in many countries in the region.External and fiscal accounts have improved substantially. Countries in the region have pilled up a sizeable amount of FX reserves and external debt declined as a result of MDRI debt relief.


Enter China: China’s economic relations with Africa have accelerated since 2000:

Imports

Exports

Infrastructure investment

Debt relief


Enter China: While EU’s share of Africa’s trade remains dominant, China’s share rose to 12.8% in 2006 from 0.6% in 1990.


Enter China: Trade with Africa accelerated in 2000. Africa’s exports to China rose to $28.8b in 2006 from $4.8b in 2001.


Enter China: Africa’s exports to China dominated by fuels.

Africa's Exports to China

62%13%

8%

17%

FuelCrude materials (excluding fuel)Manufactured goodsOther


Enter China: Imports from China are dominated by manufactured goods and equipment.

Africa's Imports from China

45%

31%

24%

Manufactured goodsMachinery and transport equipmentOther


Enter China: China’s Imports by Source


Enter China: China’s Export by Destination


Enter China: While Only 3% of SINOSURE’s short-term insurance was for Africa in 2006…………


Enter China: SINOSURE’s insurance for medium and long term for Africa rose to 29%, only second to Asia


Enter China: Summary of Economic relationship

Summary of Africa-China Economic Relations: Trade, Aid, and FDI, 2006(Billions of US dollars)__________________________________

Total Trade1 55.5African exports 28.8African imports 26.7

ODA and debt relief 2.3ODA2 1.0Debt relief3 1.3

Foreign direct investment4 0.9

Contracted projects 9.5__________________________________

¹China Customs Statistics²2005, IMF estimate³2005, based on debt relief announced by the Chinese government in November 200642004, ECOWAS-SWAC/OECD


Enter China: Highlights of economic relationship

Focus of economic relationship:

Trade and investment

Increasingly dominated by commercial ties than aid considerations

China’s private sector becoming a major player


Enter China: What is driving China’s recent engagement with Africa?

Chinese government policies

Growing markets for each other’s exports

Africa’s demand for infrastructure

Changes in China’s approach to financing


Enter China: Some common concerns

Not paying much attention to human rights issues

Fear that Africa may be underselling itself

Africa may be gearing for another debt crisis

China may be dumping cheap goods on Africa


Enter China: Some upside developments

China’s emergence as a global economic power seen as a plus for Africa’s exports

Great opportunity for development of Africa’s infrastructure

Chance to help correct “chronic undervaluation of Africa by investors”.


Is China’s entry the panacea for Africa’s problems?

Positive developments:Acceleration of growthInfrastructure growth in the right directionSlowing CPIDeclining external debtImproving fiscal and external balancesStrong commodity pricesImproved political environment



Risks:Poor infrastructure, though improving, is still weakGrowth, though increasing, still remains insufficientExcessive reliance on primary commodity exportsExternal debt still remains high and private capital flows are insufficientDisbursements of external development financing fall short of commitmentsDomestic savings as a percent of GDP remains lowGrowing risk of global slowdownPolitical risk, though declining, remains high



Significant downside risks remain

However, some major developments point to a positive direction

A favorable global environment, prudent economic policies, good governance and political stability will bode well for the rebound

Outcome will largely depend on the way both sides manage the relationship


Data Sources

IMF: Direction of tradeIMF: International Financial StatisticsUNcomtradeChina Exim BankNational Bureau of Statistics of ChinaAnnual Report of the Export-Import Bank of China, 2003 – 2006SINOSURE Annual Report, 2006


References

Broadman, Harry G., 2007, Africa’s Silk Road: China and India’s New Economic Frontier (Washington: World Bank). Alden, Chris, 2005, “China in Africa,” Survival, Vol. 47 (No. 3), pp. 147–64.Center for Chinese Study [CFCS], 2006, China’s Interest and Activity in Africa’sConstruction and Infrastructure Sectors (South Africa: Stellenbosch University). He, Wenping, 2006, “China-Africa Relations Moving into an Era of Rapid Development,” in:Africa Institute of South Africa, Inside AISA, Oct./Dec., pp. 3–6.

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