East Africa middle class not big enough for investors

Businesses that have recently ventured into East Africa hoping to cash in on a steadily expanding middle class may have to revise their expectations because the expansion was grossly exaggerated, warns a report.

More people across the region have poor household incomes compared with other regions, according to a report by Standard Bank, making the business plans of realtors, retailers, luxury brands and wealth managers a touch ambitious.

“The bulk (at least in terms of the number of households) of Africa’s consumer opportunity, particularly for fast-moving consumer goods firms looking towards the continent, resides within the base of the pyramid market,” said the report, Understanding Africa’s Middle Class.

It shows that of the approximately 110 million households studied across 11 countries, 94 million (or 86 per cent) of them were located in the low-income category, suggesting poverty levels are as much as two times the figures shown in official records.

Afrika Investment Bank chief executive Paul Mwai said the informal nature of Africa’s economies presented a big headache over the accuracy of available data but said businesses should draw comfort from demographics.

“The middle class may be smaller or bigger than previous estimates, but it is growing rapidly due to a relatively young population that is driving consumption levels. Some of the key sectors that are being driven by a growing middle class are housing, clothing and automobiles,” Mr Mwai said.

READ: Africa’s consumer business is the sector to watch in coming years

The 11 African countries under study — Angola, Ethiopia, Ghana, Kenya, Mozambique, Nigeria, South Sudan, Sudan, Tanzania, Uganda and Zambia — were found to have only 15 million middle-class households, up from 4.6 million in 2000 and 2.4 million in 1990.

The report is intended to provide a rough idea of the scale, growth and prospects of income growth across some of the continent’s most alluring economies, giving multinational corporations the context for engaging with frontier African opportunities.

The report showed that poverty was reducing at a slower pace in countries in East Africa in the past quarter century compared with other countries like Angola, Nigeria and Ghana.

What could further dampen global investor appetite for the previously thought to be fast growing middle class in the region is the fact that as many as nine in 10, or 126 million of the 140 million East Africans live below the poverty line.

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“There has been little change in the composition of Uganda’s population in income terms in the past decade. Today, 90 per cent of the population lives on or below the poverty line – down from 95 per cent of the population in 2000,” the report says.

In Kenya, the rate of household transition out of poverty has remained sluggish since 1990, when 21.2 million Kenyans (91 per cent of the population then) lived on or below the poverty line.

“Today, 38 million Kenyans (83 per cent of the population) reside in this band,” the report says, placing 94 per cent of Tanzania’s population below the poverty line as well.

The report classifies household incomes into four groups using the Living Standard Measure, which uses the level of spending rather than income as a measure of affluence.

Low-income people are listed as those spending less than $5,500 in a year or $15 per day while the lower middle class spend up to $8,500 annually, or $23 per day.

The middle class spends as much as $42,000 per year or $115 per day and the upper middle class spends more than $42,000 a year.

The report is in sharp contrast to a 2011 African Development Bank’s (AfDB) study — “The Middle of the Pyramid: Dynamics of the Middle Class in Africa” — which placed people earning between $4 and $20 a day in the middle class, effectively putting a third of Africa’s population (more than 300 million) in the segment, which by virtue of its disposable income drives growth.

In April last year, the joint World Bank and International Monetary Fund Global Monitoring Report 2013 put the poor in Kenya at 43.37 per cent of the population and in Uganda at 38.01 per cent based on a poverty line of $1.25 per person.

The line would have left 67.87 per cent of Tanzanians in the poor category as well as 63.17 per cent of Rwandans and 81.32 per cent of Burundians.

The Standard Bank report projects a sluggish drift out of the poverty trap, with three-quarters of the 160 million households across the 11 countries expected to be still in the low income bracket by 2030.

“In the past, the conventional wisdom was that as many as 300 million Africans are categorised as middle class. The report points out that investors using an unquantifiable assumption may find individuals they had thought were middle class were in fact highly likely to lose that status in any economic shock,” Standard Bank’s senior political economist Simon Freemantle said.

While efforts by East African economies to improve living standards of their households have stagnated over the years, the countries have also fared poorly in the growth of the middle class.

Based on LSM categories, the number of Kenya’s middle income households has grown threefold in the past 25 years to 400,000 or four per cent of the population, up from 130,000 in 1990 and 190,000 in 2000. By 2030, when Kenya hopes to have attained middle income status, it is expected the country will be home to 1.1 million middle-class households or eight per cent of the population then.

READ: Kenya called a ‘laggard’ in fight against poverty

Uganda’s middle class, on the other hand, is classified as “relatively immature” and contains 150,000 households, up from 37,000 in 2000.

The number is expected to increase fourfold to around 615,000 households or 5 per cent of the households by 2030, when the population is expected to be 60 million. The report suggests that despite relatively robust economic growth, Uganda seems mostly unable to provide the income support to accommodate its swiftly growing population.

Tanzania has over 100,000 households in the middle class, translating into just 1 per cent of the population up from fewer than 20,000 middle-class households in the year 2000.

By 2030, it is expected that 400,000 households in Tanzania will join the middle class against the projected population of 80 million people.

Mr Freemantle, who wrote the report, however said investors should be optimistic given the greater scope for future growth and movement of low income households into the middle income status.

“The report forecasts acceleration in the accumulation of middle-class households in Africa,” he said.