Africa Looks East and West for Foreign Direct Investment

Africa Looks East and West for Foreign Direct Investment

September 10, 2018

As Africa strives to pull itself out of extreme poverty – 28 of the poorest countries in the world are in Africa – the continent is opening its doors to foreign direct investment across major industries.

By Kumar S

The demography will play a crucial role in the way investments are made in the continent and how countries grow over a period. Consider this – the continent is expected to grow at an average of 5 percent annually for the next 20 years according to a recent report by Franklin Templeton. The continent which is currently home to one billion people will account for 3.2 billion people by 2100. The working population is expected to reach 2.1 billion by that time.

Africa offers a large consumer base to manufacturing and services sectors.

Tourism itself is a major investment opportunity which will have a cascading effect across most sectors. Many countries are on the cusp of a banking and financial services revolution as mobile banking become more commonplace with an ever-expanding growing subscriber base and ease of transactions leading the boom.

The report further says users of the mobile banking system have grown exponentially to 28.6 million registered customers since its founding in 2007.

The mobile revolution has also created avenues for investors in sectors such as retail, education and health care, leapfrogging the need for traditional brick-and-mortar assets and linking to the burgeoning population in emerging markets.

The continent is replete with natural resources which remains untapped and offers 60 percent of the uncultivated arable land. Almost all of Africa could play a key role as global demand for hard and soft commodities grow.

Shifting focus

Anti-colonial activist-politician and former Kenyan Prime Minister Jomo Kenyatta once said, “Our children may learn about the heroes of the past. Our task is to make ourselves the architects of the future”. Over the years, several African nations have shown a considerable willingness and risk appetite to reduce reliance on commodity-based revenue streams. They have opened their economies to investments and not shied away from making policy changes to enable ease of doing business and building the infrastructure needed to support the same.

This is yielding results leading to a more diversified income stream backed by business friendly and predictable policies.

Many African countries have traditionally depended upon oil exports to run their economies until they faced challenges from a significant drop in crude oil prices in the past couple of years. Not to say this came without hard lessons learnt. The crude oil prices plummeted for a sustained period since 2014 before showing signs of recovery only this year. This led to distress in an already ailing African economy. Some nations have since adopted prudent fiscal discipline measures, budget cuts and multiple currency devaluations.

Investment Destinations

A report by eturbonews.com in December published findings of Rand Merchant Bank’s (RMB) seventh edition of ‘Where to Invest in Africa’.

The report based its findings on the market opportunities, government policies and ease of doing business and country’s own willingness to shift from just a commodity-based economy to a more diversified one.

The report puts Egypt ahead of South Africa at the first place. Morocco occupies a third position while Ethiopia and Ghana are placed at fourth and fifth spots respectively. Kenya, Tanzania, Rwanda, Tunisia and Uganda follow suit in decreasing priority.

People who have been following the African economy know Egypt’s numero uno position is not a coincidence. Egypt’s own economic activity and sluggishness in South Africa’s economy have been the main reasons. However, South Africa’s currency, equity and capital markets and better liquidity make it a top investment destination.

Ethiopia has also seen rapid economic growth, displacing Ghana to take fourth spot, having brushed past Kenya as the largest economy in East Africa. Ghana’s slide to fifth position was mostly due to perceptions of worsening corruption situation and weaker economic freedoms.

Kenya is another economy which has attracted investments because of its diverse economic structure pro-market policies and a sizeable consumer spending growth. Tanzania’s endeavour to curb corruption coupled with a host of business-friendly reforms has helped it climb two places at seventh spot.

At number nine, Tunisia has made great strides in advancing political transition while an improved business climate has been achieved by structural reforms, greater security and social stability. Rwanda reoccupied the tenth spot having spent two years on the periphery after registering a high growth rate, the report says.

Kenya’s economy is expected to accelerate in 2018 and 2019 to 5.8% and 6.1% respectively, with the adoption of prudent macroeconomic policies and strengthening consumption despite several headwinds.

And despite challenges over 100 African companies have manage to register revenues more than USD 1 billion. African markets have the potential for strong economic growth and a favourable environment for corporate profitability and earnings growth.

Who is Investing

China has been a major player as far as investments in Africa goes and is capitalizing on its first mover advantage among all its Asian peers. China is creating infrastructure by building roads, ports and airports. The Chinese are becoming local partners with African businesses. While Africa’s commodities are of interest to China, many business owners are staying in Africa to set up their own retail outlets.

The Chinese Wu Yi Construction Company is building its Narok-Sekenani road and has employed hundreds of locals, improving the domestic economy through China’s One-Belt One-Road (OBOR) initiative, which aims to transform Chinese economic and diplomatic interests. In 2014, China established a special, multi-billion-dollar fund to finance a variety of infrastructure projects along the OBOR routes.

UAE and Saudi Arabia are other countries which have taken a keen interest in Africa. While the former was the second largest investor in Africa with USD 11 billion in 2016, according to a report in Khaleej Times, the latter invested USD 3.8 billion occupying the fifth spot among top investor countries.

While the investments by governments of developed economies have not been an encouraging sight, multi-national companies from United States, United Kingdom and France have been a top FDI source in Africa. Among the developing economies Chinese companies have been at the helm followed by Singapore, India and Hong Kong (China).

Individual investors like Mark Zuckeberg, Bill & Melinda & Gates Foundation, International Finance Corporation of World Bank Group, Helios Investment Partners, Norfund and Omidyar Network have invested in Africa too.

Headwind on the Horizon

There is still some skepticism towards FDI in Africa owing to risks related to stock market fluctuations, performance of individual companies or sectors overall and economic and political instability. Robust legal framework on the business front is another important concern among the investing fraternity.

Traditionally, the most preferred African country – South Africa – faces mounting concerns over issues of institutional strength and governance. Ethiopia is dogged by socio-political instability.

Nigeria has slipped out of the top ten destinations in Africa for investments overtaken by recessionary conditions. Uganda has been facing market related troubles in the last couple of years. High lending rates and drought is not helping it either.

According to UNCTAD’s World Investment Report 2018, foreign direct investment (FDI) flows to Africa fell significantly by 21% to USD 42 billion in 2017 as compared to 2016 numbers.

Countries like Botswana, Mauritius and Namibia have good potential for investment, but their smaller markets size could be a spoiler according to the report.

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