Recent years have seen the international business community look to the promise of growth through doing business in Africa, the world’s last frontier for the development of new business opportunities. The previous focus on China as the place to be is now waning, and the new concentration on Africa is evident.
However, there are major risks for businesses in an emerging market environment such as the countries in sub-Saharan Africa. Two of the most significant are the fluctuations in the value of local currencies against international currencies like the US Dollar, and the dependency many states in Africa have traditionally had on commodities.
When commodity prices fall, currency volatility often also hits the country; this explains the instability of recent years in the currencies of countries like South Africa, Zambia, Ghana, Angola and Nigeria. But, when a country pegs its currency to an international currency, as is the case in some Francophone states in West Africa, which are pegged against the Euro, currency instability is less likely to arise.
Countries like Angola – worldwide, the state with the second least-diversified economy - and Nigeria have in recent years experienced the risk associated with a single focus in the economy, and their economies have not shown the growth experienced in earlier times. The International Monetary Fund (IMF), for instance, reported in early 2016 that oil-producing economies in Africa were likely to experience just 2¼% growth, a significant drop from the 6% growth experienced in 2014.
This comes as a result of the dramatic drop in the international oil price and slowing demand for oil – in fact, last year saw the lowest oil price in 20 years.
Many states in Africa are beginning to realise the value of moving away from a single focus in their economies. So, although it’s the region’s biggest oil exporter, Nigeria has significantly diversified its economy, with construction, film, services, transport and retail playing a big role in the country’s GDP.
As the IMF indicated in 2016, ‘medium-term growth prospects remain favourable’ in many parts of the continent, largely because the factors that facilitate growth, like the improved business environment, remain in place. Those more open to private sector involvement – such as in Rwanda, Kenya and Nigeria – have seen the growth of a wealthier middle class, and these are people with the means and the need to travel.
The value of local businesses partnering with global corporations must also be highlighted: the local partner’s understanding of the business environment and legal issues in the country will certainly assist the corporation to establish itself in the country. A significant issue for the hospitality sector is the huge size of the population on the continent, as well as in the growth of a middle class in some states.
So, while both currency fluctuations and a sustained low oil price are factors of concern, there are other signs that suggest economic growth potential, and consequently make countries attractive to international hospitality groups. The Harvard Business Review has highlighted the resilience of an economy as a gauge for international business investors. A range of factors point to a resilient economy: strong human capital; stable democratic systems; low dependence on commodities, as is the case in East Africa; and the strength of regional currencies that are pegged to an international currency. In addition, the huge size of the population on the continent suggests great potential for future business.
Marriott International takes a range of factors into account when planning its expansion on the continent – not low commodity prices or currency fluctuations only. It aims to have a presence in 18 sub-Saharan states by 2025, and these locations are mostly those identified as having resilient economies with GDP growth of over 3% per annum, and offering good potential for business going forward. Over the next five years, 65 new hotels will be built across countries like Nigeria, Ghana, South Africa, Uganda, Kenya, Madagascar, Mauritius, Senegal, Gabon and Rwanda.
So, despite some challenges for the business environment in Africa, the future remains positive, and the hotel industry is certainly poised for growth on the continent.
- By Danny Bryer, Area Director of Sales, Marketing and Revenue Management at Protea Hotels by Marriott®.