McKinsey consultant reflects on new trends in a diversified African economy

Nuance is the new magic word in Africa; a trend that has been reiterated by Senior Partner at McKinsey Africa Acha Leke. In an interview with the African Business Magazine, Leke explains how the African economy has evolved since ten years ago, and the implications that this has on the outlook for 2018.

In many ways, economies across Africa have developed in harmony over the last few decades. Certain trends can be observed in a majority of the countries, including a high dependence on commodities, some degree of political instability, and a young median population.

As a result, analysts over the last two decades, in particular, have examined the African economy as a singular entity, often making economic forecasts and drawing conclusions at a macro level. According to Acha Leke, while such an approach made sense a decade ago, the situation on the continent has now changed.

Leke is a Senior Partner in the Johannesburg office of global management consultancy McKinsey & Company, and is particularly well-versed with the macro-economic scenario in Africa, given his specialisation in growth and development across the continent, and his work to that end with the public, private, and social sectors. He has conducted business in 20 African countries, and is the co-founder of the African Leadership Academy and the African Leadership Network. 

“Ten years ago, all 30 top economies in Africa were growing and 27 of the 30 had accelerated growth. In this last five-year period only 13 have shown accelerated growth – so it’s much more complex,” says Leke, drawing attention to the uneven nature of growth in the region.

On the one hand, the gap is growing between the relatively prosperous countries and the ones that are still in the early stages of development. The oil-dependent countries in North Africa, and the large, diversified economies of South Africa and Nigeria have raced ahead of the rest to become the richest countries on the continent.

On the other hand, according to Leke, these top economies are the ones that have now slowed down. For the oil-dependent North African countries, the slowdown has been brought about by a fall in the prices of oil, similar to what the dip in the price of precious metals did to the South African economy.

In essence, what is segreggating the growth figures for economies in Africa is the variation in the commodities and services they offer, which is growing in intensity. As a result, Leke asserts that international firms that were previously looking to capitalise on the opportunities in the African economy as a whole, now have to customise their entry strategies based on individual country-trends rather than continental trends.

In light of this new approach, Leke highlights a few new factors that firms will now be considering. Firstly, the regional focus itself is expected to shift. For instance, while investment has traditionally been focussed in the Northern and Southern regions, East Africa is now the fastest growing region in terms of consumer spending, currently accounting for 12-15% of all consumer spending on the continent. Investors will have noted this trend.

Secondly, investment can now extend beyond basic consumer goods to luxury goods, as economic prosperity has brought about the emergence of affluent households. Leke’s third observation takes us even further in terms of nuance. He explains how 50% of the expenditure in Africa takes place across only 75 cities, which means that, when devising nuanced strategies, firms need to pick the best cities to expand into rather than the best countries.

Overall, Leke is optimistic about the economic future of the continent: "The good news is that we have gone through the bottom of the barrel. Nigerian oil production has gone back up; it’s the biggest economy on the continent and it’s out of a recession. South Africa, for the first time, has recorded 2% growth in the last quarter so you’re starting to see promising signs. The Nigerian stock exchange has gone up by 50% in the last six months, so you’re starting to see a recovery.”

A recent study from McKinsey & Company also revealed how the banking sector on the continent is performing exceptionally well, in direct contrast with the rest of the world. However, the biggest challenges according to Leke reside in the large volume of public-debt in a number of African countries, as well as in the weakness of their passports, even for movement within the continent.