Africa increasingly attractive to emerging market investors
Johannesburg - 3 May 2011 Foreign investors see the huge long-term growth possibilities that Africa presents according to Ernst & Young's first Africa Attractiveness Survey which 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.
Ernst & Young analysis of foreign direct investment (FDI) projects shows that in the last decade Africa has seen an increase in inward FDI from 338 new projects to the continent in 2003 to 633 in 2010 (an increase of 87%). 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. Strong growth in new projects into Africa is expected from next year with FDI inflows forecast to reach US$150b by 2015.
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 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.
Ajen Sita, Managing Partner: Africa at Ernst & Young says, “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.”
Emerging markets take a growing interest in Africa, developed markets more ambivalent
Africa is becoming increasingly attractive to international investors particularly in emerging markets. Over the last decade investment from emerging markets into Africa has increased rapidly from 100 new projects in 2003 to 240 in 2010 (representing an annual growth of 13% per year). Emerging markets investment now comprises 38% of the total into Africa; up from 30% in 2003.
This is confirmed by our survey of leading global businesses with 74% of emerging market investors surveyed saying that Africa has become a more attractive investment destination over the last three years. They are also increasingly positive about Africa's long term investment potential.
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.”
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.
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.
Moving away from extractive industries
Unsurprisingly, the large majority of respondents view the extractive industries 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.
Competing in an increasingly globalised economy
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. It is currently ranked in the same category as Latin America and Eastern Europe in terms of attractiveness for investors.
As Otty explains, “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.”
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; 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.
Analysis of the projects shows that that investment success stories are spread across the Continent. 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 future is bright
Although the majority of respondents are optimistic about Africa's future, most of them believe that the continent will only offer high and robust growth potential over the longer term (i.e. beyond three years). Strong growth in new FDI into Africa is expected from 2012 onward, reaching US$150b by 2015. 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.
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.
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.
“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,” Sita concludes.
To download the report please visit www.ey.com/za