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Africa: Investor Perspectives
AfricaFocus Bulletin
June 16, 2014 (140616)
(Reposted from sources cited below)
Editor's Note
"Among our survey results, what really stands out is the perception
of Africa's attractiveness as an investment destination relative to
other regions: from being ranked 8th out of 10 regions in our first
survey [2011], to 5th in each of the last two years, Africa ranked
2nd overall this year. This remarkable progress in a short space of
time shows how the image of Africa has begun to change." - Ernest &
Young
As often noted, the "Africa Rising" narrative highlighting economic
growth as the continent's dominant reality is misleading in many
respects, particularly in ignoring the unequal distribution of these
gains (see previous AfricaFocus Bulletins, such as
http://www.africafocus.org/docs12/app1205.php,
http://www.africafocus.org/docs13/real1302.php, and
http://www.africafocus.org/docs13/econ1310.php). What it does
capture, however, is a real change in perception by investors, as noted in
this new report from the giant international professional services firm
Ernest & Young. The change reflects not only an overall change in
Africa's image, but also shifting investment patterns.
The report, based on data on new foreign direct investment (FDI)
projects (excluding already established facilities and equity
investments) and on surveys of investors around the world, documents
rising interest in such projects by investors outside of Africa, as
well as by investors based in regional hubs such as South Africa,
Nigeria, and Kenya.
Notably, "intra-African investment is second only to Western Europe
as a source for FDI on the continent." Also visible in the new
investment is a shift from established extractive industries, still
dominant in African exports, to new sectors, such as financial
services, technology, and consumer products. These new sectors are
oriented principally to domestic markets.
The report also includes detailed case studies on the Africa
strategies of a number of multinational companies based in Africa,
Europe, North America, Asia, and Australia: Africa Infrastructure
Investment Managers, British American Tobacco, Bharti Airtel, CocaCola
Sabco, DHL, Ecobank, GE, IBM, Mara Group, Nestlé, Sanlam, SKF
and Tullow Oil.
For previous AfricaFocus Bulletins on economic issues, visit
http://www.africafocus.org/econexp.php
++++++++++++++++++++++end editor's note+++++++++++++++++
EY's attractiveness survey: Africa 2014
Ernest & Young
[Excerpts only. For full report, visit http://www.ey.com/attractiveness]
Foreword: Investing in the African opportunity
...
Despite the tremendous progress the continent has made in the postCold
War and postapartheid era, and despite consistent economic
growth over the past decade, perceptions about the continent often
remain stuck in the past. The good news this year is that this
appears to be changing. Among our survey results, what really stands
out is the perception of Africa's attractiveness as an investment
destination relative to other regions: from being ranked 8th out of
10 regions in our first survey, to 5th in each of the last two years,
Africa ranked 2nd overall this year. This remarkable progress in a
short space of time shows how the image of Africa has begun to
change.
...
While FDI flows into North Africa have declined significantly, those
into sub-Saharan Africa continue to grow - by 4.7% last year, and at
a compound annual growth rate (CAGR) of 19.5% since 2007. Regional
hubs, such as South Africa, Nigeria and Kenya, together with emerging
high- growth economies, such as Ghana, Mozambique, Zambia, Tanzania
and Uganda, are at the forefront of rising FDI levels.
Given all the positives that we have observed and analyzed over the
past four years, we remain convinced that the African growth story is
a compelling one, and it should be attracting even greater numbers of
FDI projects. Africa's share of global FDI projects has grown
steadily in the past decade, but remains at less than 5% of global
flows. Over this period, India alone has received a higher proportion
than the entire continent of Africa. The perception gap continues to
slow the acceleration of FDI flows into Africa, and it is illustrated
once again this year by the marked contrast in perceptions between
those who are already doing business in Africa and those who are not
yet. Those already active on the continent are more positive than
ever about its prospects, and rank it as by far the most attractive
investment destination in the world today. Those who are yet to
invest are far less enthusiastic, ranking Africa as the leastattractive
investment destination in the world. The gap could hardly
be wider.
...
Executive summary
A dramatic improvement in investor perceptions over the past four
years
Africa's perceived attractiveness relative to other regions has
improved dramatically over the past few years. Africa has moved
third-from-last position in 2011 to become the second-most attractive
investment destination in the world. This year, only North America
ranks ahead of Africa in terms of investment attractiveness. Sixty
percent of our survey respondents said that there had been an
improvement in Africa's investment attractiveness over the past year,
up four percentage points from the 2013 survey. Only 17% believe that
conditions have deteriorated. Similarly, nearly three out of four
respondents believe that Africa's attractiveness will improve further
over the next three years.
FDI numbers reveal a mixed picture
In 2013, the number of new FDI projects in Africa declined for the
second consecutive year, by 3.1%. Job creation resulting from FDI
projects also slowed in 2013. This was largely caused by the decline
in North Africa, due to regional political uncertainty. However, more
positively, the number of new FDI projects in SSA increased 4.7% in
2013. Capital investment into Africa also grew by a healthy 12.9%,
with a higher average project size of US$70.1m in 2013, from US$60.1m
in 2012.
Furthermore, Africa's share of global FDI flows has been improving
year on year. In 2013, Africa's share of global FDI projects reached
5.7% - its highest level in a decade. And an analysis of United
Nations Conference on Trade and Development (UNCTAD) FDI data also
reveals a story of steady progress: companies already established in
the region are bolstering their presence and reinvesting their
profits for growth.
Three key trends gain further momentum
In previous editions of the Africa attractiveness survey, we have
highlighted three broad shifts. These continued to gain traction in
2013. First, the SSA growth story has caught investor attention, with
an increasing number of FDI projects now being directed to the
region. This trend accelerated in 2013, with SSA's share in overall
African FDI projects and job creation reaching all-time highs.
Within SSA, Southern Africa is the leading region in terms of
absolute numbers of FDI projects, while both East and West Africa
have experienced strong growth rates. South Africa remains the
largest destination for FDI projects, with a widening lead. However,
a number of other countries, including Ghana, Nigeria, Kenya,
Mozambique, Tanzania and Uganda, are becoming more prominent on
investors' radar. Kenya and Ghana featured in the top four rankings
in 2013 for the first time, having previously ranked in the bottom
half of the top 10 FDI destinations.
A second major shift is the growing share of intra-regional
investment in Africa (CAGR of 31.5% in FDI projects between 2007 and
2013). This is encouraged by improving regional value chains and
strengthening regional integration. The share of FDI projects in
Africa with other African countries as their source reached 22.8% in
2013 - an all-time high. Intra-African investment is second only to
Western Europe as a source for FDI on the continent. Intra-African
investments are also the second-largest source of job creation on the
continent. South Africa is the most active intra-African investor,
followed by Kenya and Nigeria.
Overall, the US and the UK remain the top two sources of investment
into Africa, while the number of FDI projects from Asian countries,
particularly India, is on a rise.
The third shift is a change in sector focus, from extractive to
consumer-facing industries. Mining and metals, and coal, oil and
natural gas, which were previously the key sectors attracting major
FDI flows, have recently become less prominent, as service- and
consumer-related industries have increased in relative importance. In
fact, the share of the extractive sector in FDI projects was at its
lowest ever level in 2013, while the share of consumer-facing
industries, particularly technology, media and telecommunications
(TMT), retail and consumer products (RCP) and financial services, has
been increasing continuously. This matches with investor perceptions.
Although resource-driven sectors are expected to remain the highestpotential
industries over the next two years, infrastructure and
consumer-facing sectors are expected to increase in prominence.
The key hub economies attract the strongest FDI flows - matching
investor perceptions
Investors see the three regional hub markets - namely South Africa in
the south, Nigeria in the west and Kenya in the east - as the most
attractive investment destinations in SSA. These three countries
account for over 40% of total FDI projects in SSA. Angola, which is
the fourth-largest recipient of FDI projects, is similarly perceived
to be the fourth-most attractive investment destination. However,
investors who are not yet established in Africa are less aware of
opportunities in countries other than South Africa. For instance,
while 27.5% of investors already doing business in Africa express
interest in Nigeria, only 13.3% of respondents with no business
presence view the country as attractive.
In North Africa, too, we find that FDI flows are a reasonably close
match with investor perceptions. Morocco and Egypt are seen as the
two most attractive countries in North Africa, by 55% of investors.
...
The stark perception gap remains
While investor perceptions about Africa have improved dramatically,
improvement in FDI numbers has been more modest. The most likely
reason for this is the stark and enduring perception gap, illustrated
in our survey by the differences between respondents
established in Africa and those with no business presence in the
continent. Those with an established business presence are more
positive than ever about Africa's prospects, and they rank it as the
most attractive investment destination in the world. These investors
have concrete action plans to generate growth in Africa, and many of
them are investing in growth across the continent.
On the other hand, investors not yet established in Africa are far
less confident about the continent's prospects. Only 39% believe that
Africa's attractiveness has improved, while only 51% believe it will
improve in the future. Their less optimistic view is, however, slowly
changing - improving from last year's 31.2% and 47.3%, respectively.
...
Africa's share of global FDI projects increases
Africa's relative share of global FDI continues to rise. In 2013, it
received 5.7% of global FDI projects. This is up from just 3.6% in
2003 and represents its highest share in the past decade. In terms of
capital invested, Africa's proportion of the global total increased,
albeit more moderately, from 7.8% in 2012 to 8.2% in 2013. However,
in terms of jobs created as a result of this investment, its share
has fallen to 6.2%.
...
Three key trends gain further momentum
Our analysis of African FDI projects over the last decade reveals
three broad and significant trends, all of which accelerated in 2013.
These are:
The growth of investment into SSA
The expansion of intra-African investment
The shift of investment from extractive to consumer-facing sectors
SSA's share of FDI rises
There is a clear dichotomy between FDI flows into North Africa and
SSA. While FDI in the latter has increased steadily over the last few
years, political uncertainty in North Africa has led to fewer FDI
projects and lower capital investments.
Comparing FDI flows pre-crisis (2003-07) with post-crisis (2008-13),
we find that 2007 proved to be a tipping point for SSA. Since 2007,
SSA has accounted for an increasing share of projects, both by number
and value. This trend accelerated in 2013, with SSA's share of
overall African FDI projects and job creation achieving all-time
highs of 82.8% and 79%, respectively. This growth is underpinned by
solid FDI flows to four countries in particular: South Africa, Kenya,
Ghana and Nigeria.
The rates of return for inward investment in SSA are also among the
highest in the world. According to UNCTAD, in 2011, four SSA
countries featured among the top 20 economies in terms of FDI rates
of return. In our previous editions of the Africa attractiveness
survey, we have discussed the factors behind the SSA growth story.
They include: strong macroeconomic growth and outlook, improving
business environment, rising consumer class, abundant natural
resources, democratic dividend and infrastructure development.
...
The US and the UK are the largest investors in Africa
Between 2004 and 2013, the US was the largest investor in Africa,
with 768 FDI projects (12.2% of the total). The UK was in second
place. In 2012, British and American companies tied in first
position, with the UK taking the lead in 2013.
...
Fluctuating interest of Western European countries on the continent
Given its cultural and historic ties, France has always been a key
investor in Africa. It was the third-most active investor by projects
between 2004 and 2013, with 584 projects. However, since 2010,
France's share has declined, as a result of political upheaval across
North Africa - Morocco, Tunisia, Algeria and Egypt are its primary
investment destinations. In December 2013, the French President
announced a target to double trade with Africa by 2018, in a bid to
win back France's share of African trade.
Investment from Spain and Germany has been rising steadily. In
fact, measured by jobs, Spain jumped sharply to 3rd largest investor
in 2013, from 11th in 2012. German FDI projects in Africa also grew
at a CAGR of 10.4% between 2004 and 2013.
Asian investors build on the African opportunity
India is the largest investor in Africa, with 342 FDI projects
since 2004. Indian banks, including Bank of Baroda and ICICI Bank,
are expanding their footprint in Africa to capitalize on historical
ties, increase bilateral trade and benefit from the under-penetrated
banking market. Similarly, Indian conglomerate Tata Group plans to
invest US$1.7b to set up new assembly lines for commercial and
passenger vehicles, and possibly to expand its presence in the
hospitality and mining sectors.
China has long made use of Africa's raw materials and its markets
for manufactured goods. The country has become the continent's
largest trading partner, with trade expanding from US$10b in 2000 to
US$200b in 2013. However, overall Chinese greenfield FDI in Africa
remains relatively low. Since 2004, the country has directed just 166
projects to Africa, with only 11 initiated in 2013. This is in
contrast to China's significant investments in African
infrastructure, which exceeded US$13b in 2012, according to the
Infrastructure Consortium for Africa's annual report.
Japan has been ramping up its investments in Africa. This is
demonstrated by the 76.5% jump in projects in 2013. Africa's strong
economic growth has traditionally attracted Japanese exporters. Plans
are also underway to tap the continent's oil and natural gas reserves
for Japan's industrial economy. Japanese companies make up the
largest investor group in Africa's automotive industry.
Consumer-facing industries rise in prominence
With the diversification of economic activity in Africa gathering
pace, growing employment levels are creating a new consumer class.
This, in turn, is undoubtedly attracting wider investor attention.
The rising African consumer has paved the way for increasing FDI in
consumer-focused services and manufacturing sectors.
The shift of investment from extractive to service-oriented sectors
becomes even more apparent when examining the last decade's data. In
2004, mining and metals accounted for 14.1% of projects, while coal,
oil and natural gas made up 11.6%. In 2013, these sectors' share of
total projects accounted for just 2.4% and 3.5% respectively.
Financial services, TMT and RCP attract nearly half of total FDI
projects in Africa
Three predominantly consumer-facing sectors - financial services, TMT
and RCP - have been the primary beneficiaries of FDI projects. The
financial services sector was the largest recipient of FDI projects
in Africa between 2007 and 2013. Foreign banks and other financial
services companies are either launching or expanding operations in
Africa to tap the growing but under-serviced financial services
market. In 2013, for example, UK banking company Standard Chartered
announced that it will invest US$100m in Africa, with the aim of
doubling Financial the size of its business by 2018. Growing
services, investor interest is not just limited to foreign TMT and
RCP companies. Regional banks and other together financial services
firms in Africa are ramping account for up their presence across the
continent.
Expected increases in consumer spending, especially on discretionary
goods, indicates continued, strong RCP investments in Africa. In
2013, consumer products giant Procter & Gamble announced plans to
spend US$450m to upgrade existing plants and build new ones in
Africa. Of this amount, US$175m will be used to construct a plant in
South Africa to make products such as detergents, and US$200m will be
spent on a baby-care products plant in Nigeria, which is already
under construction.
Among retailers, Carrefour partnered with CFAO, a distributor, to
expand its presence on the continent. Additionally, Walmart is
planning to open 90 new outlets across Sub-Saharan Africa by 2016
through its South African arm Massmart Holdings.
In 2013, RCP was the second largest sector, accounting for 17.5% of
FDI projects in Africa. It was also the lead sector in terms of job
creation during the year.
Africa: the next manufacturing hotspot?
Africa has the resources and the comparative advantage to position
itself as the world's next manufacturing hub. Labor costs are low.
Currency appreciation and rapid wage increases in other countries
could spark industrial migration to African nations with conducive
investment climates. For example, many aerospace companies are moving
production capabilities to North African countries (Tunisia and
Morocco) to take advantage of low costs and geographic proximity. In
September 2013, Bombardier Aerospace began construction on a new
manufacturing plant in the Midparc Casablanca Free Zone in Morocco,
which is expected to be operational by mid-2014. The company is
planning to invest US$200m on equipment and buildings by 2020.
Africa also has abundant natural resources, which can be used as raw
materials for light manufacturing. Retailers such as H&M and Primark
already source clothing from Ethiopia. The continent enjoys
preferential access to both the US and EU markets through the African
Growth and Opportunity Act and the Cotonou Agreement, respectively.
Additionally, a construction boom is expanding access to power. The
proliferation of mobile telephony has proven to be a boon for small
suppliers. Labor productivity on the continent has also been
increasing, led by vastly improving education levels. The promise of
the African consumer market is another critical element.
The increasing attractiveness of Africa's manufacturing sector is
evident from recent activities by a number of companies. Chinese
shoemaker Huajian - which already operates a factory in Addis Ababa
that employs 600 people - is planning to invest US$2b to create a
light manufacturing special economic zone in Ethiopia. This
initiative could create employment for almost 100,000 Ethiopian
workers. Similarly, in Egypt, Chinese electronic company Hisense is
currently producing 100,000 LCD TVs a year together with its local
partner Sun TV. US technology giant GE is investing US$250m in
Nigeria to set up an electrical gear manufacturing plant.
...
Perception: A giant leap in Africa's relative attractiveness
Key points
1 The most striking observation from this year's survey is how far
Africa's perceived attractiveness has improved. In less than five
years, Africa has risen from eighth position to being rated as the
joint second most desirable regional investment destination in the
world, tied with Asia.
2 Sixty percent of survey respondents with a presence in Africa
believe that the continent's attractiveness improved in 2013. Only
around 17% of respondents believe that conditions have deteriorated.
Furthermore, nearly three out of four respondents (73%) believe that
the continent's attractiveness will improve over the next three
years. Only 10% expect that the continent's attractiveness to decline
in the medium term.
3 While the resources sector remains critical to FDI interest,
agriculture is only marginally behind mining and metals.
Infrastructure ranks third in terms of likely growth areas. These
changing sector priorities are in line with a growing need to meet
the demands of a rapidly urbanizing population and rising middle
class.
4 The hub economies in each region - namely South Africa in the
south, Nigeria in the west, Kenya in the east, and Morocco and Egypt
in the north - are strongly perceived by investors as being the most
attractive geographies for investments (and this closely matches
actual FDI flows).
5 The perception gap between those already doing business on the
continent and those with no business presence remains striking. Those
with an established business presence in Africa are twice as positive
about the continent's prospects as non-established investors, and
they rank Africa as the most attractive investment destination in the
world. In contrast, investors not established in Africa rank Africa
as the least attractive destination in the world.
...
This year, our respondents ranked Africa as a more attractive place
to do business than seven other regions. Only North America is
perceived to be more attractive. Africa is tied in second place with
Asia. This is a very significant improvement from previous years. In
2011, Africa was only ahead of Central America and the former Soviet
states. In the 2013 survey, Africa was perceived to be more
attractive than 5 out of 10 regions. This trend clearly indicates
that Africa's potential as a rapid-growth market is gaining wider
recognition.
Africa's stronger investment attractiveness is best explained by its
own sustained growth rates in the context of slower global growth
and, more recently, by structural weaknesses in many other emerging
markets in the wake of the unwinding of US quantitative easing.
Africa's growth prospects are likely to remain solid, as an
urbanizing and rising middle class drives demand for consumer
products and improved services.
AfricaFocus Bulletin is an independent electronic publication
providing reposted commentary and analysis on African issues, with a
particular focus on U.S. and international policies. AfricaFocus
Bulletin is edited by William Minter.
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