What Are Lion Economies?

What Are the Lion Economies?

Lion economies are a nickname for Africa's growing economies, which had a collective Gross Domestic Product (GDP) of roughly $1 trillion in 2021. These economies often include:

• Ethiopia
• Ghana
• Kenya
• Mozambique
• Nigeria
• South Africa

Key sectors contributing to Africa's collective GDP growth include natural resources, retail, agriculture, finance, transportation, and telecommunications. Improvements in political stability and economic reforms have aided growth but globalization, previously a boon to the continent, has recently had a negative impact.

Understanding Lion Economies

The International Monetary Fund (IMF) estimates that the lion economies of sub-Saharan Africa will grow by 3.8% in 2022 and 4% in 2023, better than they fared in previous decades but still well below the expected growth rates of emerging market economies overall.

Among the countries with the highest expected growth rates for the next two years are Ethiopia, Ghana, Tanzania, Uganda, and Kenya, according to the IMF—though different investors and think tanks list different countries as "lions."

Nigeria, Africa’s largest economy with a GDP of $376 billion, grew only 1.5% in 2021 after suffering a recession in 2016 and the lingering effects of COVID-19 in the years following. It is projected to grow at about 2.9% a year over the next two years, well off forecasts of 7% annual growth through 2030 by McKinsey & Co. just five years ago.

The use of the moniker "lion economies" is analogous to the "tiger economies" used to describe several booming economies in Southeast Asia. The Asian tiger economies typically include Singapore, Hong Kong, South Korea, and Taiwan.

Headwinds for Lion Economies

Nigeria, the largest oil producer on the African continent, is the most glaring example of how the lion economies are struggling to avoid financial crises. Once seen as one of the more dynamic areas of economic growth in developing markets, which include both emerging and frontier economies, sub-Saharan Africa has been hurt recently by falling commodity prices, a slowing Chinese economy, and the rising cost of external debt.

Commodity exports are the lifeblood of African countries and have yet to recover from the oil price shocks of 2015 and 2016 that signaled the end of the commodity super-cycle. The commodity price slump has caused African currencies to weaken, inflation to rise, equity markets to decline and bond spreads to widen, raising the cost of borrowing and reducing some countries’ access to the sovereign bond market. A slowing Chinese economy has caused much of this commodity weakness as its demand for primary goods such as industrial metals mined in Africa has slackened.

Investing in the Lions

Given the economic malaise overhanging many of the lion economies, Africa has moved from a growth investment to a turnaround story.

Investors seeking exposure to the lion economies have just one continent-wide ETF to consider, the GDP-weighted Market Vectors Africa ETF (AFK) invests in South Africa (29%), Morocco (12%), Kenya (8%), Nigeria (8%) and Egypt (8%), with the remainder in developed and emerging market companies operating in Africa. The largest African ETF is the iShares MSCI South Africa ETF (EZA), while smaller ETFs target Nigeria (NGE) and Egypt (EGPT).

China in Africa

While much of the West had ignored Africa as an important economic center, China has committed to establishing a strong foothold there. Since the 1970s and accelerating through the 2000s, China has been investing in Africa, often through direct investment in infrastructure and energy projects. Indeed, over the past two decades, the Chinese have built more than 6,250 miles of roads and 3,700 miles of railroads across the continent. That is roughly 20% of all of Africa's highways and 10% of its railways.

For China, they benefit from establishing trade relations to import raw materials, and also help to grow a larger consumer class to purchase Chinese-made goods. At the same time, African economies become dependent on Chinese imports and financing while owing a growing amount of debt to China. China accounted for nearly one-fifth of Africa’s overall international trade in 2020. China was also the source of $153 billion in cumulative loans to African countries between 2000 and 2019.