Emerging markets across the world are enduring pressures which have prompted a review of GDP forecasts.
The ‘Africa Rising’ narrative has run into scepticism, with claims of growth statistics being inflated – while, in the Middle East, regional tensions are causing concern.
So, should investors still consider Africa and the Middle East sources of positive returns for the future?
Absolutely. Global pressures may have a marginal impact, but in the long term Africa is set to outperform.
In the Middle East, the long-term growth outlook for the oil-rich Gulf Co-operation Council (GCC) states is also positive. The region is expected to be one of the world’s fastest-growing in the next few years, with GDP expanding by an average of 4.1 per cent a year. Social and political challenges in the wider Levant and North Africa should not detract from this.
Demographics boosting growth
Although Africa and the Middle East are very different, the regions share two key drivers when it comes to future economic potential: demographics and the rapid expansion of trade along new corridors.
Africa has the fastest-growing middle class, and over 60 per cent of its population is under 25. In just two decades, Africa will have the largest workforce in the world, with Nigeria expected to be the fourth most populous country globally.
Although formal-sector job creation remains a challenge, this demographic profile should help boost Africa’s growth, driving consumer spending and asset prices, as well as boosting pension savings for further investment.
“Trade remains a valuable source of income for both regions”
As a region, Middle East and North Africa has the second-youngest population after Africa. The International Monetary Fund predicts that in just five years, it’s expected to rise to 720 million, up from 445 million in 2000.
Trade remains a valuable source of income for both regions. Africa’s trade with Asia is growing particularly fast, with Asia expected to overtake Europe as the continent’s largest trading partner, according to Thomson Reuters’ Datastream.
The Middle East is also playing a more integral role in world trade, with Dubai providing a conduit for some of the fastest growing trade routes.
“Gulf States facilitate a number of trade partnerships between Africa and India”
Interestingly, non-oil exports from the Middle East to Africa form the bulk of this trade, as African nations import more capital goods and manufactured products. Gulf States also facilitate a number of trade partnerships between Africa and India, resulting in trade worth USD200 billion in 2013 but is expected to jump to USD2.7 trillion by 2030, according to our economists.
Although Africa’s exports remain dominated by commodities, rising levels of domestic consumption have been far more important recently than net exports in driving overall economic growth.
Developments could prove transformational
The ongoing war against the Islamic State across the Middle East, and Africa’s sporadic terror attacks and political turmoil in some markets, may instil concern in some potential investors. However, governments are increasingly recognising that economic and political security go hand in hand. This has paved way for stronger regionalisation and collaboration.
Despite complex challenges, developments are happening across both regions, which could prove transformational for their economies.
Take Africa’s rapidly evolving capital markets: in just three years, 12 Sub-Saharan African sovereigns have accessed the Eurobond market, bringing over USD17 billion of development capital into the continent. Loan tenures are increasing, and more local banks are now participating in syndications, which used to be dominated by foreign banks.
“Dubai is committed to being the global hub of Islamic Finance”
In the Middle East, the appetite for enhanced Islamic Banking products is encouraging an innovative response from banks and financial institutions. Growth potential in this specialised segment is high, given the rapid expansion of the Muslim population worldwide, and the fact that only 1 per cent of the global market for financial services is Sharia-compliant. Dubai is committed to being the global hub of Islamic Finance.
While each market within these regions is different and demands a tailored approach by businesses that invest and trade in them, Africa and the Middle East share fundamental drivers of future economic growth.
Financial institutions who work across the two regions will play a meaningful role in converting the sizeable economic potential of these dynamic neighbours into reality.