Foreign investors are increasingly aware of the huge long-term growth possibilities that Africa presents, according to Ernst & Young’s first Africa attractiveness survey, which predicts that foreign direct investment (FDI) inflows into the continent will reach US$150-billion by 2015.
Published earlier this month, the survey combines an analysis of investment into Africa over the last decade with a survey of over 562 global executives on their views about how and where investment will take place in the next decade.
The survey shows that Africa has seen an 87% increase in inward FDI over the last decade, from 338 new projects in 2003 to 633 in 2010.
“Despite a drop in investment in the last couple of years following a peak in 2008, Africa has remained an attractive investment destination throughout the global downturn and has managed to maintain its relative share of global investment flows as a result,” Ernst & Young said in a statement.
“Strong growth in new projects into Africa is expected from next year, with FDI inflows forecast to reach $150-billion by 2015.”
‘There is far more to come’
When it comes to future investment strategies, Africa is high on the agenda of global investors, with 42% of the businesses surveyed considering investing further in the region, and an additional 19% of executives confirming that 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, the survey finds.
“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,” said Ajen Sita, Ernst & Young’s managing partner for Africa.
“And there is far more to come,” Sita added. “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.”
Emerging markets take a growing interest
According to the survey, Africa is becoming increasingly attractive to international investors, particularly to those in emerging markets.
Investment from emerging markets increased at a rate of 13% per annum over the last decade, from 100 new projects in 2003 to 240 in 2010, and now comprises 38% of the total into Africa, up from 30% in 2003.
In Ernst & Young’s survey of leading global businesses, 74% of emerging market investors said that Africa had become a more attractive investment destination over the last three years. They were also increasingly positive about Africa’s long-term investment potential.
“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,” said Mark Otty, Ernst & Young’s area managing partner for Europe, Middle East, India and Africa.
Developed regions such as Europe and North America are more ambivalent, however, with a large proportion of respondents from these regions seeming to believe that Africa’s progress had stalled over the last few years. However, North American respondents were more optimistic about Africa’s long-term investment potential, with Europeans remaining relatively pessimistic.
“While investors from developed markets are relatively more cautious about Africa, they still represent the largest proportional investment into Africa and, critically, this investment is going into a diverse range of sectors beyond natural resources,” said Ernst & Young.
Moving away from extractive industries
Unsurprisingly, the large majority of respondents viewed Africa’s oil and mining industries as the sector with the greatest growth potential over the next few years.
However, the survey finds that a more diverse range of sectors are 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.
Still on a par with Latin America, Eastern Europe
“Despite the relatively positive and improving perceptions of Africa, it is in competition for the international capital and resources that will help drive and sustain growth and social development,” Ernst & Young said.
The continent is currently ranked in the same category as Latin America and Eastern Europe in terms of attractiveness for investors.
“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,” said Otty.
African success stories
The African growth story in the last decade 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, the survey notes.
Over this period, 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.
Ernst & Young’s analysis of FDI projects shows that that investment success stories are spread across the continent. Ten African countries – South Africa, Egypt, Morocco, Algeria, Tunisia, Nigeria, Angola, Kenya, Libya, Ghana – attracted 70% of new FDI projects between 2003 and 2010.
There has also been significant growth of 21% in the investment by African countries within Africa 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.”
Strong growth from 2012
Although the majority of survey respondents were optimistic about Africa’s future, most believed that the continent would only offer high and robust growth potential over the longer term (beyond three years).
“Strong growth in new FDI into Africa is expected from 2012 onward, reaching US$150-billion by 2015,” Ernst & Young said.
“Besides the critical importance of capital, which can continue to be reinvested in infrastructure, and other long-term developmental initiatives, this will create a number of the other direct and indirect benefits. Not least among these will be job creation; in 2015 alone, the estimated number of jobs created will be over 350 000.”
According to the survey, 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, predicated partly on an assumption of continued strong demand for, and high prices of, commodities.”
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, said Sita.
“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.
“There are of course parts of the continent where there are real and perceived barriers to investment due to political instability and corruption,” Sita said. Notwithstanding these challenges, Ernst & Young was “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.”