Monday, 28 January 2013

AFRICA: ''Portfolio Investment'': A changing perspective

The past decade has witnessed marked changes in the volume and composition of financial flows to Africa. In the first decade of the twenty-first century, the level of foreign direct investment (FDI), portfolio investment and official development assistance surged almost fivefold, from US$27 billion in 2000 to about US$126 billion in 2010. It is the changing composition of these flows that shows Africa’s resolve to harness the opportunities provided by globalisation.

Since 2005, Africa has received more FDI than official development assistance. According to Ernst & Young’s 2012 Attractiveness Survey on Africa entitled ‘Building Bridges,’ the number of FDI projects rose by 27 per cent in 2011, with a total of 857 projects, a steep increase from 421 in 2007.

Investors and multinationals now see Africa – home to a dozen of the globe’s fastest-growing economies and the last major region on Earth still largely unexplored – as the next ‘big destination’ for global investment. Strong growth in new projects is expected from 2012 onwards, reaching US$150 billion by 2015. This investment in infrastructure and other long-term development projects will have positive ‘multiplier-effects’ upon the real economy, creating badly-needed jobs in manufacturing and enhancing activity in the extractive sector.

Social and demographic changes, such as urbanisation, an expanding workforce and a burgeoning middle class of consumers are creating new opportunities. Sustained, robust economic growth has led to a significant increase in the size of the African middle class, which the AfDB predicts will surge from 355 million in 2010 to 1.1 billion by 2060. This middle-class remains the key to future investments into non-extractive sectors. Consumer spending in Africa is predicted by the McKinsey Global Institute to reach US$1.4 trillion by 2020.

Despite the recession in the eurozone and growth slowdown in China, Africa continues to offer numerous opportunities. While minerals, particularly hydrocarbons, will probably attract the bulk of FDI over the medium term, new investment has arrived in non-resource sectors such as tourism, information and communications technologies, manufacturing, financial services, renewable energy, agro-production and construction.
 
Infrastructure: Sub-Saharan Africa can only achieve parity with other regions by developing strong basic infrastructure that connects capitals, ports, border crossings, secondary cities and rural areas with efficient transportation and communication networks. This is the key to increasing intra-African trade and achieving Millennium Development Goals. The continent also needs a decade or more of sizeable fixed investment – estimated by Professor Paul Collier of Oxford University at nearly US$500 billion. The two sub-sectors of electricity supply and transportation are essential for solid region-wide growth and improved business productivity. Thus, Africa needs 7,000 megawatts of new power generation capacity a year, according to The World Bank. The transport infrastructure required to rehabilitate ports and roads, maintain airports and get railways on track, will require an annual spend of US$18 billion.

Greener Energy: The continent boasts the capability to generate clean, renewable energy, which is pivotal in the global battle against climate change. Environmentally-friendly investors seek renewable sources of energy. Africa is well positioned for developing solar and hydropower, as well as producing biofuels. It has a similar water endowment to other continents, but captures much less for its own development. Thus, only 5-10 per cent of agricultural land is irrigated, whilst 90 per cent of hydropower potential remains untapped. As Lord Nicholas Stern, chair of the Grantham Research Institute on Climate Change and the Environment, explained: ‘Africa can, in coming decades, play a leading role in cutting global emissions.’

Agriculture: The growing demand for food, reflecting a booming global population, and fertile soil in much of Africa make the agricultural sector attractive for investors, especially state-owned entities from Asia and the Middle East, such as sovereign wealth funds and European private equity groups. The continent is endowed with almost 60 per cent of the world’s uncultivated arable land, and strategic investors have acquired over 134 million hectares of African land, during the last decade. Improved food processing and storage could help stabilise agricultural markets and encourage much-needed rural innovation. Investment in agricultural skills and infrastructure, for example, could prompt a green revolution. To make the agricultural system work efficiently (ie boost productivity), experts estimate that Africa requires additional annual investments of as much as US$50 billion.
 
Financial Services: According to US-based Bain & Co, Africa’s banking sector is growing rapidly at a projected compound annual growth rate of 15 per cent between 2009 and 2020. Financial services are expected to contribute about one fifth to Africa’s total gross domestic product by 2020. Lucrative opportunities remain, be it in financing trade, expanding current product offerings (basic savings and loan products), increasing product penetration, bringing the ‘unbanked’ into the mainstream financial system, or capitalising on the rise of a new consumer class by developing innovative services, such as leasing, credit/debit cards and home mortgages. The McKinsey Global Institute predicts household spending on banking to reach US$30 billion by 2020. Most of the African markets are unusually open to foreign banking. Standard Chartered (operating in 16 countries) aims to double its African revenues to US$2.5 billion within the next five years.

Information and Communications Technology: Africa has made great strides by becoming the world’s second most connected region after Asia in late 2011, with 616 million mobile subscribers, according to UK-based Informa Telecoms & Media. Broadband penetration has also increased in the past five years, thanks to the continent’s efforts to develop high-tech industry, and is projected to reach 99 per cent of the population by 2060 according to an IMF survey. However, the ability to take advantage of new technologies depends mainly on human capital: a skilled workforce is essential for the adoption of new technologies and for globally competitive production. The region now needs a second round of investments to upgrade the Information and Communications Technology sector, and to expand mobile banking and internet access.
Attracting FDI into diversified and higher ‘value-added’ sectors remains a challenge for most African countries. Many governments are tackling this challenge and show commitment to improving institutional frameworks.
 
Africa's ‘resource-rich’ region is firmly on a path to sustainable growth and foreign direct investment will steadily grow. However, to accelerate and take advantage of this growth opportunity, national governments are conscious of the need to further improve the micro-business environment, promote social corporate responsibility and transparency, and nurture human capital to create a more skilled workforce. This will be vital if the ‘new Africa’ is to acquire some of the 85 to 90 million labour-intensive jobs in light manufacturing that rising wage pressures could force firms in China and East Asia to relocate to sub-Saharan Africa over the medium- to long-term.

Of course, the ‘risk factor’ could be high, due to instability, conflict or natural disasters in some countries, but levels of profitability are high too, with competition in some sectors relatively low.

Encouragingly, Africa is currently ranked in the same category as South America and Eastern Europe in terms of attractiveness for investors – a marked improvement on a decade ago.

Regional GDP growth of 5.4 per cent in 2012 – exceeding both Latin America and Central Eastern Europe – offers a glimmer of hope to the global economy. By contrast, the IMF expects advanced economies to grow at best by 1.4 per cent.  An efficient infrastructure, however, would make Africa an attractive destination for intra-regional trade and increased foreign investment.

By Guylain Gustave Moke
Political Analyst/Writer
Investigative Journalist

Sources: Foreign direct investment (FDI),
               World Bank reports & forecasts
               International Monetary Funds Reports & forecasts
               Ernst & Young forecasts
               Oxford University forecasts