Investment: Over-exuberance in Africa

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Investors are probably being too bullish about the size and buying power of Africa’s middle class.

It has become commonplace to hear wonderful things about the rise of Africa’s middle class. Ever since the African Development Bank put the population of this group at 313 million in a 2011 report, apparently on a par with India or China, the 300-million-plus figure has become ubiquitous shorthand for the argument that it is time to start investing in Africa in earnest. Deloitte, for example, has projected that the African middle class will grow to 1.1 billion by 2060, which, combined with Africa having seven of the 10 fastest-growing economies in the world, makes for a compelling proposition.

But it is important to look at these numbers a little more closely. In February, Liberia’s Nobel Prize-winning president, Ellen Johnson Sirleaf, took questions from Euromoney and others in an address to London’s Africa Investment Summit. Chiefly, she warned about the grave risks of economic growth without sustainability. "The path we have pursued towards economic growth will push us towards catastrophic threats and tipping points," she said. She also took specific issue with the 300-million figure. The vast majority of the growth, she pointed out, was in the part of the AfDB-defined middle class that earns between $2 and $4 a day – just the thinnest rung above the poverty line and a long way from what most investors would consider middle-class purchasing power.

Smarter economists are also distancing themselves from the bigger claims about the African affluent population. Renaissance Capital recently put together a study of Nigeria’s middle class, which on the AfDB’s numbers constituted 34.5 million people, 23% of the country’s population, based on 2008 population. This, again, is based on a figure of $2 a day to spend on consumption. "I’m happier with the upper-middle-class definition, which is $10 to $20 a day, or $300 to $600 a month – which is not a coffee each day, but a cheap iPad each month," says Charles Robertson, RenCap’s chief economist. On that metric, Nigeria’s middle class is 3.8% of the population (5.7 million people).

He extrapolates similar data for the rest of Africa. "I’d say roughly 4% of the sub-Saharan African population is what most people may say is middle class," he says. North African figures would be higher, but probably the total figure in Africa is between 60 million and 80 million people, so a quarter to one-fifth of the popularly cited statistic.

None of this is to deny the real, important, transformational demographic changes taking place in Africa. But there is simply too much exuberance being built into rhetoric about the continent’s investment potential today. One sees it in portfolio flows, with the 15 times oversubscription of Zambia’s inaugural international bond in September, or the foreign flows into local Nigerian debt that have knocked four percentage points off yields in a few months. Africa has vast potential, but investor sentiment today is pricing in a level of progress towards it that is not yet backed up by facts.