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What are the challenges stifling growth in African markets?

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Africa was sold to a number of institutional investors as a high-growth story. While GDP growth rates have been impressive, this has not translated into positive returns in the public equity markets. But what are some of the challenges facing businesses in Africa, and how is this stifling growth?

A number of impediments have hindered the growth of what could be very successful companies in Africa, according to Karl Tonna, CIO at FMG Group, speaking at Fund Forum Africa 2016 in London. These include an inability to access bank financing; high business set-up costs; corruption; and energy costs.

Sub-Saharan Africa – when compared to other emerging and frontier economies – fares badly with bureaucracy adding prohibitive costs to start-ups. A failure to nurture and nourish a friendly business regime will mean fewer companies succeed, and less foreign fund managers invest. This ultimately undermines growth.

Reliable energy is also a constraint on business. Tonna said there were 700 hours of power cuts in Sub-Saharan Africa, making it the worst in the world for reliable energy. Poor infrastructure is predominantly the cause, and a failure to address this problem will only result in long-term challenges.

But there is some good news. Corruption is receding, and this will encourage once apprehensive investors to have a rethink about their Africa exposure. Furthermore, African economies dominate in terms of rate of GDP growth. As such, a number of fund managers are retaining their African exposure and highlighting to clients that they should pursue a long-term approach towards the continent.

Short-term woes are going to dominate. The continent has faced a number of challenges over the last 24 months. Commodity prices have plummeted which has hurt many oil exporters, most notably Nigeria which introduced exchange controls to mitigate further slumps in the Naira.

However, oil importing countries are enjoying the reduced prices. China’s market volatility has also presented an issue, given its dominance in Africa. Nonetheless, this is leading to African economies looking to diversify. This can only be a good thing for domestic business.

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