Foreign Companies See Big Money-Making Opportunities in Africa

Lagos, Nigeria
Many firms are heading to places like Lagos, Nigeria

Drawn by the chance to make significant return on investment, foreign companies from the U.S. and Europe are flocking to countries in Africa looking for opportunities and recruiting more managers willing to relocate to Africa.

Companies like J.P. Morgan now view Africa as a much less risky investment than they did a few years ago—J.P. Morgan just added Nigeria to its government-bond index for emerging markets. Morgan predicts this will bring an extra $1.5 billion to Nigeria.
Earlier this week, Standard Chartered, a London-based bank that specializes in emerging markets, announced that it will invest $100 million in Africa over the next three years. The bank, which makes about 90 percent of its income in Africa, Asia and the Middle East, hopes to double the $1.3 billion in income it derives from Africa, 8 percent of company profits. Standard Chartered’s move is part of a pattern of companies seeing enormous opportunity for growth on the African continent. The strategy of concentrating on emerging markets has paid off in a big way for Standard Chartered, allowing it to avoid the economic woes that have plagued Western markets in recent years.
According to the Economist, foreign direct investment in Africa has increased by about 50 percent in the last 7 years, as companies are looking at Africa the same way they did China and India a decade ago.

“In recent years investors have been piling into Lagos and Nairobi as if they were Frankfurt and Tokyo of old,” says a story in the Economist. “Anemic growth in the rich world has made Africa an attractive destination for money and its managers.”

With a land mass equivalent to that of China, India, Japan, United States, Mexico and Europe combined, Africa can start using these new funds to build a desperately needed infrastructure.

The International Monetary Fund predicts that the continent’s GDP will grow by 5 percent this year and in 2013 may rise to 5.7 percent, which is faster growth than anywhere else in the world. But, of course, despite all the growth and excitement, one inescapable fact remains: Africans are still extremely poor, and most will probably stay that way for a long time. Of the 11 countries in the world at “extreme risk” of having a food crisis, 9 are in Africa.

But still, two World Bank economists just published a recent paper that says if Africa were one country, it would be “middle income” —a threshold defined by having annual income per person of more than $1,000, an admittedly low number. Africa’s average is $1,700 and 22 countries in Africa surpass that number, with a combined population of 400 million—even including Sudan and Angola.

One of the World Bank economists, Wolfgang Fengler, identified four causes of Africa’s rise:

1. The continent has the right kind of population growth: most Africans live increasingly longer while having fewer children, rather than the other way round. The UN says that Nigeria may overtake the United States by 2055 as the third-most-populous country after India and China, yet simultaneously reduce its birth rate.

2. Rapid urbanization is creating efficiency gains and luring investors to capital cities that have begun to thrive and where growing population density cuts transport times and fosters small-scale industrialization.

3. Technology is having a bigger effect on Africa than anywhere else, because it started from such a low base. In the past decade the use of telephones went from 0.7 percent of the population when land lines were rotten to 70 percent with the advent of mobile phones; Africa is a global pioneer in banking on mobile devices, not least since most people have no access to conventional banking.

4. Governance and economic management by officials have gotten better, again from very modest beginnings. The growing popularity of African sovereign debt is a good indicator.

“If current trends continue, most of Africa will be middle-income by 2025,” Fengler says.

But in order for it to happen, Africa will need skilled workers and capital.

“Both are available in abundance in the West, where interest rates are low and job prospects grim,” the Economist says. “Hence the proliferation of African investment conferences in London and New York. There is much talk of where in Africa factories can be built and bonds bought. But equally high on the agenda is hunting talent from all parts of the world, Africa included. Managers search lunch tables for staff to poach and for investment professionals with experience in other emerging markets that could be useful in Africa.”

As a result of this demand, an executive from a big Wall Street firm said salaries for Africa positions have gone up by 30 percent in the past year.

“The continent is taking off but it’s still a tricky place to make money,” he told the Economist. “Political risks are high and contracts hard to enforce. Success often depends more on the quality of your people than on the attractiveness of the local market.”

 

By; Nick Chiles