Has Africa’s Time Come?

Via The Financial Times, details of a new report from Ernst & Young on Africa’s investment potential:

“As executives and politicians descend on Cape Town for Africa’s World Economic Forum, Ernst & Young has a succinct message for foreign investors – “It’s time for Africa.”

In a new report, Africa Attractiveness Survey, the professional services company is forecasting that foreign direct investment into the continent will reach $150bn by 2015, up from less than $100bn last year. While that remains below a 2008 peak when FDI topped $200bn, the mineral-rich continent looks set to becoming increasingly attractive long term to international investors, particularly in emerging markets, E&Y reckons.

“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,” says Ajen Sita, managing partner for Africa at E&Y.

Afro-optimists have been predicting “the year of Africa” for some time, on the belief that a continent better known to some for conflict and corruption has been making steady progress along the bumpy road towards stability and better governance.

Africa has also benefited from Asian demand for its abundant commodities. Its economies have been growing at an average compound rate of 5 per cent a year for the past decade – twice that of the developed world.

Yet the upbeat E&Y report suggests there are still sceptics who need convincing that Africa’s time has really come.

African respondents were the most positive about the continent’s progress over the past three years, with 86 per cent saying things had improved; 74 per cent of investors from other emerging markets said Africa had become more attractive.

But “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,” the report says.

A significant minority of respondents from North America and Europe (16 per cent and 9 per cent, respectively) felt Africa had deteriorated during the past three years, while 46 per cent believed it had neither improved nor deteriorated.

And it is the age-old barrier of political instability that appears to be the dominant factor among more pessimistic respondents.

The report says:

Africa is high on the agenda of investors, with 43% considering investing further in the region and an additional 19% of business leaders confirming they will maintain their operations on the continent. … However, one-third of investors are still not considering investing in Africa. Despite 23% of them focusing on their local market and not considering international expansion, the reasons companies give for not wanting to invest in Africa are instructive in order to shape recommendations for the future. The most common barrier raised by business leaders surveyed is the instability of the political environment. Access to customers and the level of infrastructure (transport, logistic and telecommunication) are also cited as areas of concern. Corruption and security issues are considered as major barriers by one out of five of our respondents.

The report also notes that many new FDI projects between 2003 and 2010 were concentrated in 10 of the huge and diverse continent’s 53 nations – South Africa, Egypt, Morocco, Algeria, Tunisia, Nigeria, Angola, Kenya, Libya and Ghana.

The north Africa members of that clique have been at the heart of the revolutionary unrest that has swept the Arab world. Nigeria has also been plagued by post-election violence – although voting in the continent’s most populous state was credited with being among its most transparent.

Elsewhere, Ivory Coast lurched perilously close to civil war earlier this year and remains vulnerable to further violence, while on the eastern side of the continent Uganda – once a darling of western donors – has endured bouts of unrest as the government cracks down on opponents.

Africa has managed to maintain its “increased share of FDI compared with other regions” through the economic crisis, E&Y notes, although it is still a meagre percentage of the global total, ranging from 3.6 per cent of new FDI projects in 2003 to a high of 5.2 per cent 2008 and 4.5 per cent last year.

Investment is also diversifying away from extractive industries, with more inflows going to sectors such as tourism, construction, telecommunications and financial services.

The hope is that the positive trends outweigh the negative and Africa can start to match its obvious potential.

The report says:

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,” Sita says.

“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.”

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