1  

 

 

 

This  paper  has  been  prepared  by:  

 

 

 

Ivano  Gioia,  SACE  

Abstract  

 

After  the  negative  record  registered  in  2016,  the  economic  growth  of  Sub-­‐‑Saharan  Africa  is  expected  to   strengthen   at   2.6%   in   2017   and   3.4%   in   2018.   These   aggregate   numbers   hide   a   wider  heterogeneity  within   the   region,  with   some   countries   on   the   eastern   and  western   African   coasts  growing  at  rates  well  above  the  average.  Italian  exports  were  affected  by  the  decreasing  demand  in  capital  goods    by  the  main  African  economies  in  2015  and  2016,  but  the  partial  data  of  2017  seem  to  reveal  a  reprisal  trend,  with  a  performance  even  higher  than  that,  already  largely  positive,  registered  worldwide.  Starting  from  2018,  business  opportunities  will  raise   in  different  Sub-­‐‑Saharan  African  markets,  in  particular  where  the  domestic  economic  structure  is  less  dependent  on  the  exploitation  of   energy   and  mineral   raw  materials.   In   this   sense,   Kenya   represents   a   strategic  market   for   the  internationalization  strategies  of  Italian  companies  in  the  region,  both  as  final  target  market  and  as  a  hub   for   the  other  countries   in  Eastern  Africa.  After   the  electoral  standstill   in   the  second  half  of  2017,   the   expected   resumption  of  public   investment  plans   in   large   infrastructural  works  and   the  strengthening  of  local  private  entrepreneurial  activity  will  open  new  spaces  for  the  consolidation  of  commercial  relations  and  investment  strategies  of  Italian  companies  active  in  various  sectors,  from  energy   to   construction,   from   metallurgy   to   electrical   appliances,   from   transport   to   food   and  beverages.  This  positive  development   is  not   to  be   taken  as  granted,  however,  whereas   it  depends  largely  on  the  fiscal  consolidation  policies  that  Kenya  will  need  to  implement  in  the  near  future.  More  generally,  the  complexity  and  volatility  in  the  political,  economic  and  business  environments  suggest  a  cautious  approach  in  business  activity  in  Sub-­‐‑Saharan  Africa,  keeping  in  mind  the  importance  of  an  in-­‐‑depth  knowledge  of  the  country’s  peculiarities  and  the  adoption  of  a  prudent  risk  mitigation  strategy.    

 

Sub-­‐‑Saharan  Africa  and  Kenya:  risks  and  opportunities  

                     

 

  2  

 Sub-­‐‑Saharan  Africa:  general  context  

The   economic   performance   in   Sub-­‐‑Saharan  Africa   is   recovering   after   the   slowdown   in  2015-­‐‑16.   The   region's   growth   is   expected   to  increase  from  1.4%  in  2016  to  2.6%  in  2017,  further  accelerating  to  3.4%  in  2018  (Figure  1).  Excluding  the   two  main  economies  of   the  region,   Nigeria   and   South   Africa,   which   are  still   held   back   by   internal   economic   and  political  difficulties,  the  average  growth  of  the  region  increases  to  4.4%  in  2017  and  to  5.1%  in   2018.   Aggregate   numbers   related   to   49  countries,   in   fact,  hide  a  wider  heterogeneity  in   the   Sub-­‐‑Saharan   region,   where   some  economies  have  continued  to  grow  steadily  at  rates   above   5%   during   the   last   decade.   The  progressive  increase  in  international  prices  of  oil  and  gas  and  other  mining  commodities  and  the  better  than  expected  economic  dynamic  of  advanced   and   emerging   economies   (in  particular  Euro-­‐‑area  and  China)  play  a  driving  role   in   the   ongoing   Sub-­‐‑Saharan   economic  recovery.  In  several  cases,  however,  economic  growth   continues   to   be   stimulated   mainly  through  public  sector  spending,  leading  to  an  increase  of  public  debt  to  unsustainable  levels  in   the   medium-­‐‑long   term   and   the   crowding  out   of   the   private   sector.   A   greater  involvement   of   the   International   Financial  Institutions   in   the   region,   with   programs   of  financial   support,   policies   formulation   and  surveillance   activity,   could   represent   a  mitigation   factor,   as   evidenced   by   the  approval   of   financial   support   programs  supported   by   the   International   Monetary  Fund  in  the  last  period.  

 

 

Fig.  1  -­‐‑  Real  GDP  average  growth  (%,  yoy)  

The   commercial   involvement   of   Italian  companies   in   Sub-­‐‑Saharan   African   markets  recorded  a   steady  growth   in   the   last  decade.  Italian   exports   to   the   region   nearly   doubled  between   2000   and   2014   (Figure   2).   After   a  slowdown  in  the  last  two  years,  2017  looks  to  be   the   year   of   a   re-­‐‑start:   Italian   exports  increased  by  11%  yoy  in  the  first  nine  months  of  2017,  better  than  the  performance  recorded  in  the  same  period  at  world  level    (+7.3%).  

Fig.   2   -­‐‑   Italian   exports   to   Sub-­‐‑Saharan  Africa,  by  value  (€  billion)  

Mechanical  engineering  confirms  itself  as  the  first   export   sector   in   the   region,   while    transportation   is   the  driving  sector  of   Italian  sales’   growth   in   Sub-­‐‑Saharan   countries   (+  75%  the  partial  figure  in  the  first  eight  months  of   2017).   The   performance   in   the   other  sectoral   sectors   are   also   positive,   especially  metals,  refined  petroleum  products,  food  and  beverages  and  chemical  products  (Figure  3).    

                     

 

  3  

 

Fig.   3   -­‐‑   Italian   exports   to   Sub-­‐‑Saharan  Africa,   by   sector   (cumulative   Jan-­‐‑Aug  2017)  

   Kenya:  a  strategic  market  for  Italian  companies    

Kenya   ranks   as   the   fifth   economy   in   Sub-­‐‑Saharan   Africa,   with   a   GDP   (in   purchasing  power  parity)  of  about  $  163  billion  estimated  in  2017.  Compared  to  some  larger  economies,  such   as   Nigeria,   Angola   and   Ethiopia,   Kenya  has   a   more   diversified   economic   structure,  with   a   positive   contribution   coming   from  agriculture,  industry,  manufacturing,  banking  and  services,  subsiding  therefore  the  risks  of  commodity  prices  volatility.    

Kenya   experienced   a   difficult   electoral  standstill   in  2017,  starting  with  the  Supreme  Court's   annulment   of   the   presidential  elections   in   August   and   ending   with   the  reappointment   of   President   Kenyatta   at   the  end  of  October.  The   institutional  uncertainty  curtailed  the  country's  economic  performance  in   the   short   term:   GDP   growth   in   2017  was  revised   downwards   from   5.5%   to   5%.  However,   in  broader  terms,  Kenya  remains  a  solid   and   vibrant   economy,   supported   by  robust   domestic   demand   and   foreign  investment,   particularly   focused   in   the  infrastructure   and   construction   sectors.   The  country   shows   a   high   public   deficit   (around  

7%  of  GDP,  despite  positive  developments  on  the  side  of  tax  revenues)  and  a  recent  increase  in  public  debt   (equal   to  55%  of  GDP   in  mid-­‐‑2017),   both   linked   to   the   massive   public  infrastructure   investment   plans   in  strengthening  transport  and  energy  networks.  Foreign  debt  remains  sustainable  for  the  time  being  (the  risk  of  debt  distress  is  classified  as  low   in   the   Debt   Sustainability   Analysis  elaborated   by   the   International   Monetary  Fund   and   the  World   Bank),   also   considering  that  a  huge  portion  of  this  debt  has  been  taken  under   concessional   terms.   International  reserves  stand  at  comfort  levels,  around  $  7.6  billion   (over   5   months   of   import   coverage),  ensuring  an  adequate  buffer  against  eventual  shocks  in  the  balance  of  payments.  Moreover,  Kenya   signed   two   precautionary  arrangements   with   the   International  Monetary   Fund   in   March   2016   (Stand-­‐‑by  Arrangement   and   Stand-­‐‑by   Credit   Facility,  both  with  a  validity  of   two  years),   for  a   total  value  of  about  $  1.5  billion.  All  the  three  major  rating   agencies   attribute   a   B+   rating   to  Kenya's   sovereign   creditworthiness;   the  outlook   is   stable   for   Standard   and   Poor's,  while  Fitch  attributes  a  negative  outlook  and  Moody's  is  currently  reviewing  the  rating    for  a   possible   downgrade.  Kenya  was   confirmed  in  the  current  OECD  country  risk  category,  the  6th,  in  the  June  2017  periodic  review.  

The  positive  economic  landscape  of  Kenya  has  favored   the   consolidation   of   trade   relations  with   Italy   and   contributed   to   a   widespread  presence   of   Italian   operators   in   the   country,  both  large  companies  and  small  and  medium  enterprises,   in   the   sectors   of   infrastructure  and   construction,   energy,   manufacturing,  agriculture  and  agro-­‐‑processing,  ITC,  tourism  and  restaurants.  The  main  supplier  countries  of   Kenya   remain   China,   India,   United   Arab  Emirates,   Saudi   Arabia   and   Japan   (which  together   account   for   about   62%   of   total  

                     

 

  4  

Kenyan  imports).  Italy’s  market  share  is  in  line  with  the  main  European  peers  (Figure  4).    

 Fig.  4  –  Export  Market  share  of  Italy  and  its  peers  (%)      

In   2016,   Kenya   rose   from   seventh   to   sixth  position   among   the   Sub-­‐‑Saharan   African  markets  for  Italian  companies.  Italian  exports  amounted  to  €  211  million,  4%  up  in  respect  of  the  previous  year  (Figure  5).  Main  sectors  include  mechanical  engineering  (37%  of  total  exports),   food   and   beverages   (15%),  transportation   (8%)   and   chemicals   (8%).  Italian   imports   from   Kenya,   which   mainly  consist   of   textiles   and   food   products,  amounted   to   €   52  million   in   2016,   down   by  42%.   In   2017,   the   political   and   institutional  uncertainty   slowed   somewhat   the   steady  growth  recorded  by   Italian  exports   in   recent  years.  Nevertheless,   reflecting   the  dynamism  of  Kenyan  economy,   Italian  exports   to  Kenya  are   forecasted   to   increase   beyond   6%  on   an  annual  average  in  the  period  2018-­‐‑2020.    

 

Fig.  5  -­‐‑  Italian  exports  to  Kenya  (€,  %  change)  

In   Kenya   there   are   representative   offices   of  various   Italian   companies,   including   CMC,  Leonardo,   Pirelli,   ICM,   ENI,   ENEL   Green  Power.   Several   Italian   companies   are   also  active   in   the   manufacturing   sectors  (production   of   cement   and   brick   products),  agriculture   (coffee,   vegetables,   flowers,  livestock),   catering,   retail   and   large-­‐‑scale  distribution.   Many   Italians   manage   tourist  activities  in  the  coastal  region  near  Mombasa,  in  the  districts  of  Malindi  and  Watamu.    Conclusion  

The  recent  recovery  in  commodity  prices  and  the   acceleration   of   growth   in   advanced   and  emerging  countries  fuel  positive  prospects  for  a  new  rise  of  the  Sub-­‐‑Saharan  continent.  While  the  main  two  economies  of  the  region,  Nigeria  and   South   Africa,   are   still   struggling   with  financial   vulnerabilities   and   political  uncertainties,   several   other   countries   may  represent   interesting   markets   of  opportunities  for  Italian  companies.    

                     

 

  5  

Kenya  is  a  strategic  market  for  the  strategies  of  internationalization  of  Italian  companies  in  the   region.   A   stable   institutional   framework  and   an   attracting   and   non-­‐‑discriminatory  business   environment   are   some   of   the  strengths   that   characterize   Kenya,   including  moreover:  a  market  that  is  both  a  final  target  and   a   hub   for   other   countries.   in   Eastern  Africa;   widespread   manufacturing   industry;  skilled   labour   force;   adequate   transport   and  energy   infrastructure;   well-­‐‑established   and  dynamic   private   sector;   developed   and  regionalized   banking   system;   and   good  regulatory  system.  

The   interest   of   Italian   companies   in   Sub-­‐‑Saharan   countries   has   increased   in   recent  years,  and  ranges  in  different  sectors,  such  as  infrastructure,   construction,   production   and  transmission  of  energy  (even  from  renewable  sources),  agriculture  and  agro-­‐‑processing  and  manufacturing   industry.   Most   certainly,   the  positive   developments   expected   in   Sub-­‐‑Saharan   Africa   will   open   new   business  opportunities  in  the  next  years.  However,  this  optimistic   evolution   is   not   to   be   taken   for  granted.   The   complexity   of   country   risk  highlights   the   need   for   companies   to  implement   a   cautious   approach   in   operating  abroad.  Three  suggestions  can  be  useful:  

1.   make   use   of   advisory   services.   A  thorough   knowledge   of   the   foreign  market   and   counterparts   is   essential,  both  to  grasp  the  strategic  nature  of  a  project   (thus   avoiding   to   waste   time  on  commercial  transactions  that  could  become  unsustainable   in  the  event  of  economic   difficulty   of   the   purchaser)  and   to   evaluate   the   impact   of  operational  difficulties  in  the  area  (for  example   in   logistics   or   distribution  network,   where   most   of   the   African  countries  are  often  deficient).  Last  but  not   the   least,   an  advisory   service   can  

help   to   create   the   conditions   for   a  "supply   chain"   action   abroad,  overcoming  the  unattractive  approach  of   offering   small   and   disconnected  transactions   for   those   buyers   who  want   for   example   a   unique   and  integrated  plant,  

2.   make   the   commercial   proposal   along  with  a   financial  offer   that   can   lighten  the   burden   of   repayment   for   the  foreign  customer.  In  the  recent  period,  several   African   countries   have  increased  the  cost  of  money  in  order  to  curb   inflation   and   attract   foreign  capital,   but   at   the   same   time   these  measures   have   made   it   more  burdensome  for  businesses  to  borrow  money   to   pay   for   supplies   from  abroad.   Offering   a   deferment   of  payment   in   some   years   is   a   way   to  "finance"   the   foreign   customer   at  cheaper  conditions  than  those  existing  on  his  country,  

3.   adopt   mitigation   or   hedging  instruments  against  the  non-­‐‑payment  risk   The   slowdown   of   domestic  economies   creates   inevitable  consequences  on  the  solvency  in  both  public   and   private   sectors.   Even   the  shortage   of   foreign   currency   or   the  adoption   of   currency   restrictions   by  local   authorities   can   compromise  access  to  the  foreign  currency  to  repay  the  foreign  supplies  by  companies  and  banks,   thus   leading   to   a   missed-­‐‑payment  for  the  Italian  company.  Last  but   not   the   least,   do   not   forget   the  opportunity  of  coverage  from  risks  of  a   purely   political   nature,   such   as  expropriation   or   political   violence,  events   that   still   remain   likely   in  several  countries  of  the  African  region.