Prospects pick up as awareness of continent’s potential increases
Traditional investment destinations — as well as rising stars — see growth, writes DAVID JACKSON
THE African growth story is more than a phenomenon that has sparked global attention over the past couple of years — it symbolises the overall achievement of a continent that has seen consistent economic growth for more than a decade across a critical mass of African markets.
Within this time span, the size of the overall African economy has more than tripled, while that of the sub-Saharan economy has almost quadrupled, according to Michael Lalor, Lead Director for EY’s Africa Business Centre.
He says that individual African economies, ranging from Ghana to Nigeria, Mozambique and east African countries, have been growing consistently at high single-digit rates for the better part of a decade.
“Given the economic situation in many of the mature markets, as well as in SA,” Lalor says, “many wouldbe investors have only recently begun to sit up and take notice of Africa’s undoubted potential.”
With an eye to investment trends, Lalor adds: “On the positive side, our research indicates that foreign direct investment (FDI) in sub-Saharan Africa has grown at a compound rate of more than 20% since 2007. There is no doubt the sub-Saharan market has become increasingly attractive to investors.”
EY’s data indicates a 50% compound growth of FDI into Ghana, with other rising stars such as Tanzania and Mozambique also coming to the fore, while more traditional investment destinations such as Nigeria and Kenya — and to some extent SA itself — have also seen a pick up in investment.
Says Lalor: “Across this range of markets the trend has generally been one of fairly positive growth.”
On the other hand, he cautions, the entire continent — including north Africa — attracted only 5.6% of global FDI projects in 2012. This represents less FDI projects than those attracted by India alone — and far fewer than China.
However, the proportion of global projects into Africa has almost doubled over the past seven years, although from a relatively low base.
“As awareness of Africa’s potential increases, prospects are picking up — and with good reason. Our view is that, given the improving fundamentals and what we believe is the sustainability of the continent’s growth story, Africa should be attracting even far more FDI than it currently is. In general, FDI is good not for only economic growth but also for broader social development, not only because of the capital that flows into these markets and the taxes accrued but, importantly, because jobs are directly created.
“In addition, the investments being made by responsible companies in supply chain development, technology transfer and skills development, among others, are critical for the development of these economies.”
Without these investments, Lalor argues, development in African countries would take far longer to gain momentum.
He says one of the lead indicators that encourages his firm to take a positive stance about the nature of investment into Africa has been a significant shift in inward investment into the tertiary, or services, sectors.
“While there is still a perception most of the investment into Africa goes into resources, such as the extraction of minerals and oil — and while these remain attractive sectors for investors — the bulk of the new investment is going into the service sectors such as financial services, communications, consumer goods and products, as well as retail.”
Lalor says that the core of EY’s analytical FDI focus is on private, largely greenfield investment that brings new job-creating capital into the continent, rather than on equity investment or government-togovernment transactions per se.
“In this category of private investment, China is not the major role player, but is still largely into infrastructure-related projects at a government-to-government level, typically in return for resources.”
Lalor says that the majority of private investment seen by the firm has tended to be driven by investors from the US, the UK and France. “But over the past five years we have seen significant growth in greenfield investments from India, while private investments from China are starting to pick up — and we expect that to accelerate over the next few years.
But the biggest growth over this five-year period has been in intraAfrica investment, particularly from Kenya, Nigeria and SA, into and across the rest of the continent.
In 2012, for instance, South African firms invested in most of the FDI projects undertaken in Africa, outside of SA. “In this regard, South African firms were the biggest investors in Africa last year. For us, the inherent risks of doing business in Africa are no different than in other emerging market regions. Companies would be advised to benchmark Africa and individual African countries against other emerging market countries.
“When we conduct these types of benchmarks, Africa is not fundamentally more risky than any other emerging market region, whether Asia or Latin America, for example,” says Lalor.
Vusi Khoza, GM, Corporate Affairs for South African sugar producer TSB Sugar, says the company is looking to expand its footprint on the African continent by building a new sugar production facility in Mozambique.
While the demand for sugar continues to grow and outstrip supply, there is little that sugar producers can do within the country to boost their production levels. This is mainly due to the shortage of new agricultural land in the country.
Says Khoza: “The proximity of Mozambique to our current operation — just north of our home base in Malalane in Mpumalanga — made it an ideal location for TSB’s expansion into Africa.”
He says Mozambique enjoys a position as a preferential EU market, which allows sugar exports from the country at preferential rates compared with volatile world spot prices. This is an advantage that SA does not have. Sugar production costs are also lower in Mozambique due to the lower labour costs.
“Combined with available fertile land, adequate sunshine hours and reliable water supply, the country becomes a viable expansion node for TSB,” says Khoza.