Strong growth in new projects into Africa is expected from 2012 with foreign direct investment (FDI) inflows forecast to reach US$150 billion by 2015, says top consulting and auditing firm Ernst & Young. The company’s analysis shows that there has been a drop in investment in the last 2 years following a peak in 2008, but Africa is still an attractive investment destination and has maintained its relative share of global investment flows.
Ernst & Young’s first “Africa Attractiveness” survey says foreign investors see huge long-term growth possibilities. With regard to future investment strategies, 42% of the businesses surveyed considering investing further in Africa and an additional 19% of executives confirming they will maintain their operations on the continent. Those companies that have invested and already integrated Africa into their overall investment strategy are particularly positive.
Emerging markets interest in Africa
Much of the interest is coming from investors based in emerging markets, with investment from emerging markets into Africa up from 100 new projects in 2003 to 240 in 2010 (annual growth of 13% per year). Emerging markets investment now comprises 38% of the total into Africa (from 30% in 2003) and 74% of emerging market investors surveyed said Africa had become a more attractive investment destination over the last 3 years and they were increasingly positive about the long-term investment potential.
Developed regions such as Europe and North America are more ambivalent, as a large proportion of respondents from these regions appear to believe that Africa’s progress has stalled over the last few years. However, North American respondents are more optimistic about Africa’s long term investment potential with Europeans remaining relatively pessimistic.
The survey combines an analysis of investment into Africa over the past 10 years with a survey of over 562 global executives on their views about how and where investment will take place in the next decade. In the last decade inward FDI into Africa has climbed from 338 new projects in 2003 to 633 in 2010.
Ajen Sita, Managing Partner: Africa at Ernst & Young says in a press release: “FDI has a particularly important role to play as a future source of longer term capital for reinvestment in infrastructure initiatives and as an accelerator of sustainable growth across Africa. And there is far more to come. Although the African share of global FDI has grown over the past decade, we believe that it does not reflect the increasing attractiveness of a region that has one of the fastest economic growth rates and highest returns on investment in the world.”
Global competition for investment
Africa is in competition for international capital and resources and is currently ranked in the same category as Latin America and Eastern Europe in terms of attractiveness for investors.
Mark Otty, Area Managing Partner Ernst & Young Europe, Middle East, India and Africa comments: “There has been a fundamental shift in the global economy over the past few years, with emerging markets not only dominating investor attention and capital flows, but also playing an increasingly strategic role in defining the global economic agenda.” African markets must position themselves appropriately in this shifting landscape to accelerate growth and development and avoid getting left behind by other emerging markets and regions
The levels of risk in investing in Africa can be high but levels of profitability are high too, with competition in some sectors comparatively low. This investment window may not remain open for long, but it suggests that Africa actually appears to be relatively well positioned, with the only emerging region clearly ahead in terms of investor perceptions at this point being Asia.
Barriers to investment
Sita says: “There are of course parts of the Continent where there are real and perceived barriers to investment due to political instability and corruption. These are obvious challenges but those investing in Africa and Africans themselves have much to be positive about. We are confident that Africa is on a sustainable growth curve and that FDI rates will steadily grow. However, to accelerate and take advantage of this growth process, governments and investors – foreign and domestic – should act now. The earliest to do so, and the canniest, will benefit the most.”
The large majority of respondents view the extractive industries (mining) as a major area of investment perceiving it to be the sector with the greatest growth potential over the next few years. However, a more diverse range of sectors are now beginning to emerge as attractive investment options, with tourism (15%), consumer products (15%), construction (14%), telecommunications (13%) and financial services (9%) featuring strongly as offering high growth potential among respondents.
Ernst & Young says the African growth story is underpinned by a longer-term process of economic and regulatory reform that has occurred across much of the continent since the end of the Cold War; a period during which inflation has been brought under control, foreign debt and budget deficits reduced, state-owned enterprises privatised, regulatory and legal systems strengthened, and many African economies opened up to international trade and investment.
Where does the investment go?
Ten African countries attracted 70% of the new FDI projects in Africa between 2003 and 2010 (South Africa, Egypt, Morocco, Algeria, Tunisia, Nigeria, Angola, Kenya, Libya, Ghana). There has also been a significant growth in the investment by African countries within Africa growing by 21% between 2003 and 2010. However, despite the considerable growth in the number of projects the amount of capital remains less than that provided by other emerging economies.
The majority of respondents believe that Africa will only offer high and robust growth potential over the longer term (i.e. beyond 3 years). Strong growth in new FDI into Africa is expected from 2012 onward, reaching US$150 bn by 2015. In 2015 alone, the estimated number of jobs created will be over 350,000.
The continued growth of FDI will be based in part on the economic recovery of Africa’s main developed market investors, and the continued strong growth of emerging markets such as China and India. The GDP growth of Africa will continue to remain robust averaging a healthy 5% up to 2015, and predicated partly on an assumption of continued strong demand for, and high prices of, commodities.