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Thu 9 Nov 2017 02:41 PM

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The importance of Africa to the UAE growth story

Why the UAE-Africa trade relationship is growing so fast, and how it could link the continent to the rest of the world

The importance of Africa to the UAE growth story

The Dubai Chamber of Commerce and Industry had an announcement to make at the Global Business Forum on Africa, the largest event of its kind hosted outside of the continent, held in Dubai at the beginning of November.

The government body said it will invest AED100m ($27m) to raise awareness of trade and investment opportunities in Africa, and promote Dubai as an attractive business hub for companies on the continent.

While that is a comparatively small sum of money, the market potential is anything but trivial. According to a report by fDI Intelligence, the UAE was the second largest investor country in Africa in 2016, with a capital investment of $11bn, giving it a 12 percent market share.

That’s a lot more than the third biggest (Italy, at $4bn) though still way behind China’s $36.1bn. The report showed that UAE-led FDI rose 161 percent from 2015, when it pumped $4.2bn of capital expenditure into African projects.

The Global Business Forum on Africa aims to help businesses and government leaders identify opportunities and develop ties between Africa and Dubai

With six out of the world’s top ten fastest growing economies in close proximity to the Gulf, the UAE has become a partner for African businesses seeking an overseas satellite office, and a gateway for multinational companies looking to do business in Africa. Airlines, port operators, construction companies, and state-run investment funds are just some of the industries leading the charge, as Gulf investment attempts to branch out to south and west Africa.

Dubai Chamber of Commerce has already invested $27.2m in the last five years, as part of its expansion strategy in Africa, and the latest announcement will double this spending in the coming years. It has opened four offices in the region so far, and plans to open two more, with one in central Africa.

Its president and CEO Hamad Buamim says their efforts have given a major boost to UAE-Africa trade ties by facilitating cooperation between businesses and investors on both sides.

However, as Afshin Molavi, co-director of UAE based think-tank emerge85 says, more can be done to exploit this strategic position, and it goes way beyond the numbers.

Dubai Chamber CEO Hamad Buamim

“While the UAE is clearly a nexus state on the Southern Silk Road, it also has emerged as a global nexus state of trade. It has become a node of connectivity linking Europe and the Americas to Asia and Africa, and vice-versa. That’s why UAE-Africa ties matter so much to the continent. It could have a meaningful impact in connecting Africa to a wider world, while also playing a modest role in investing in the infrastructure needed for Africa’s growth.”

Courting consumers

That growth will be driven by many factors, but leading it all will be sheer demographics. Africa has the world’s most rapid urbanisation rate and, by 2034, is set to have a larger working-age population than both India and China. In the next eight years, consumer spending in Africa is set to rise by $1 trillion as emerging middle classes move into the cities, and their demand for consumer products and infrastructure grows.

At the conference, chief economist at the Africa's largest financial services provider Standard Bank, Goolam Ballim, explains that “Africa houses approximately 16 percent of humanity, more than 1.2 billion people, and that will surpass 2 billion over the next 60 years.”

Afshin Molavi, co-director of Emerge85

He points to the variety of Dubai and Abu Dhabi entities that are active from a private equity point of view in aiding this growth, including Abraaj Group, which he says has been ongoing for several years. “Admittedly it is smaller than the Sino-Africa relationship, but the Middle east-Africa embrace – with an emphasis on Dubai – is rapidly increasing.”

Speaking to Arabian Business, Abraaj Group CEO Arif Naqvi says their turn to Africa has focussed on consumer-driven economies. “As people emerge into the middle classes and move into cities, they’re going to want more product, more infrastructure,” he says.

All about infrastructure

A poll conducted during the two-day Next Generation Africa forum revealed that 48 percent of delegates considered trade to be the most promising sector for investment, followed by financial services (24 percent), while 14 percent said logistics and tourism sectors had the most potential.

However, one of the biggest challenges to investing in the continent, the surveyed delegates said, was infrastructure. Gulf companies and governments invested more than $30bn in infrastructure development in Africa from 2004 to 2014, according to data from Dubai Chamber of Commerce and Industry, released at the event.

Standard Bank economist Goolam Ballim

Yet the continent requires much greater investment to develop its logistics and infrastructure, according to Sim Tshabalala, group CEO at South Africa’s Standard Bank.

“East Africa remains an important recipient of investments from the UAE, but there has been a shift to the south as well, trying to get diversity, and also to west African countries like Nigeria and Ghana,” Tshabalala says.

Dubai Chamber says it is hoping to further expand Gulf investment in west Africa, but logistics remain a challenge. “East Africa has a natural advantage because of its proximity to the UAE. But west Africa is growing and we’re trying to encourage it. Jebel Ali Free-zone (JAFZA) UAE is doing very well in Senegal in west Africa,” says Omar Alkhan, head of Dubai Chamber’s international offices. “DP World and JAFZA are there, and they have a free zone.”

Alkhan adds that the UAE, thanks to its own recent experience in rapid development, can aid this process thanks to it understanding the African culture more than western economies do. “We can be that intermediary between these two worlds,” he says.

Abraaj Group CEO Arif Naqvi

Capitalising on a strategic location

The UAE is playing an increasingly important role in bridging this infrastructure gap by using its proximity, along with its infrastructure and logistics services and experience, to support the trade of commodities such as oil, coffee, tea and gold, Alkhan tells Arabian Business on the sidelines of the conference.

Since 2012, Dubai’s Dubai Multi Commodities Centre’s (DMCC) Tea unit, which originally launched in 2005, has emerged as the world’s largest re-exporter of tea with a 60 percent share of the market and 750,000 kg annually passing through the UAE, valued at $48m per annum, DMCC data shows.

“DMCC has one of the largest tea trading, blending and packaging facilities in the world. So if you have your own tea and want to blend it, you take it to a taster, they’ll blend it, package it and put your face on it,” Alkhan says.

Sim Tshabalala, group CEO of Standard Bank

It’s a facility that, in the short term at least, saves African tea growers the capital and time of building their own facilities, he adds.

Dwarfing the trade in tea is the role that diamonds play in trade between the UAE and Africa. Dubai Diamond Exchange has the second-largest diamond centre in the world, with trade soaring from $3.03bn in 2008 to $25.5bn in 2015.

65 percent of those diamonds come from Africa and are then shipped to DMCC’s basement labs for washing and sorting, before being re-exported further east to factories in Surat, a city in western India, where over 90 percent of the world’s rough diamonds are cut and polished, according to statistics from the Kimberley Process office in Dubai.

In the last 15 years, rapid economic growth has seen Africa emerge from being a backwater to offering enormous economic opportunities. From Kenya in the east to Nigeria in the west, where incremental reforms have been implemented, to South Africa and Mozambique, Ballim from Standard Bank says that opportunities abound.

The World Bank said Kenya’s economic growth is projected to rebound to 5.8 percent in 2018

Dubai is one of the few places able to facilitate business and logistics for the Africa’s emerging middle class, especially for those in Kenya, Nigeria, and South Africa, he says. “Maybe not the whole continent, but various African countries are in rapid catch-up phase and Dubai can be that gateway into those opportunities, and I suspect the Dubai chamber has realised it,” he says.

The bumpy road to success

While growth has sped up about half of Africa’s economies, it has slowed the rest, raising fears among some observers that the continent is running out of steam. Mckinsey’s ‘Lions on the move II: Realising the potential of Africa’s economies’ report, released in September 2016, found that between 2010 and 2015, Africa’s overall GDP growth averaged just 3.3 percent, down from the 4.9 percent a year between 2000 and 2008.

This was due, in part, to the decline in oil prices and Arab Spring turmoil in Egypt, Libya, and Tunisia. However growth for the top half countries accelerated to 4.4 percent in 2010 to 2015. Governments and companies, especially in the Gulf, will need to work together to keep all of the region’s economies moving forward, experts warn, rather than cherry-picking the success stories.

With approximately 184 million people, Nigeria accounts for 47 percent of West Africa’s population

“A clear GCC strategy is critical for a new era of trade between the Arabian Peninsula and Africa,” says Joseph Dana, editor-in-chief of economics lab emerge85, in a recent research paper, ‘Bridging the Red Sea: How to Build an Africa-Gulf Partnership.’ “Trade infrastructure is being built but a unified vision remains elusive.”

The GCC as a whole still lacks a coherent vision, but if the member states work together they are uniquely positioned to develop a joint Africa strategy, Dana says. “Executed properly, it could be a model example of South-South co-operation.”

That may be forthcoming, as Gulf companies plan to build commercial hubs in the Red Sea area that seek to capitalise on the construction of new trade infrastructure in the Suez Canal Zone, being built by the Egyptian government.

Omar Alkhan, head at Dubai Chamber

A new deal between UAE port operator DP World and the Suez Canal Zone to develop an economic zone connected to the Al Sokhna Port in the Suez region was signed last week. Further down the Gulf of Suez, adjacent to the Red Sea and the Gulf of Aqaba, Saudi Arabia recently announced plans to build Neom, a $500bn business zone extending across its borders into Jordan and Egypt that will have an airport and port.

Saudi Crown Prince, Mohammed bin Salman told Bloomberg news agency the zone would not be in competition with other hubs like Dubai, but would provide the trade infrastructure to link the region’s logistical supply chain.

And with the International Monetary Fund projecting that Africa will be the world’s second-fastest-growing region in the period to 2020, that sort of cooperation seems like a very good idea. The opportunities have never been better.

Joseph Dana, editor-in-chief of Emerge85

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