Africa: A rational investment choice

BLS Media – Commonwealth Investment Guide

Africa: A rational investment choice by Stephen Williams

The role of foreign direct investment in propelling Africa’s economies tends to be overstated, but is nevertheless extremely important. It is estimated that, in the last eight years alone, FDI helped create 1.6m new jobs in Africa. As Nigeria’s Minister of Finance Ngozi Okonjo-Iweakla commented in her previous role as the World Bank’s director for Africa: Africa aspires to move past the image of extreme poverty and conflict with which it has long been associated and to show that it is not only open for business but also actually in business.”

Foreign direct investment (FDI) into Africa totaled almost $320bn over 2006-2010, up from $117bn in the preceding five-year period. Encouragingly, non-resource sectors such as manufacturing, construction, tourism, telecoms and banking have drawn fresh investments.

While minerals, particularly hydrocarbons, still attract substantial flows of FDI for the medium-term, other sectors with longer-term growth potential – such as renewable energy, financial services, ITC and agro-production – are demonstrating strong growth.

“Doing business in Africa requires a long-term commitment and a steady hand,” cautions Dominic Barton managing director of McKinsey & Co. “There will be ups and downs, but many multinationals have already established a big presence on the continent,” he adds.

Few would suggest that 2011 was an uneventful year, and the markets’ attention was largely on the developed economies’ debt woes. This probably explains why Reuters reported that mergers and acquisition (M&A) deal-making across sub-Saharan Africa (SSA), including South Africa, fell by 53% to $21.3bn in 2011.

To some extent, the 2010 figure was in one sense ‘distorted’ by the massive $10.7bn acquisition by Bharti Airtel of much of the telco Zain’s African assets. The drop for Africa was significantly higher than the overall emerging markets region that saw a 13.6% year-on-year decline to $667.4bn. Global M&A figures showed a slight growth, rising 7% over the year to reach $2.6 trillion.

Yet Africa’s M&A figures included Anglo American’s $5.1bn acquisition of a 40% stake in diamond giant De Beers, from E Oppenheimer & Son, raising Anglo American’s interest in De Beers from 45% to 85% in Africa’s largest deal.

M&A activity was also supported by $4.1bn worth of equity issuance from Africa-based corporations. Deutsche Bank, followed by BNP Paribas and Citi, placed most of the equity deals across Africa in 2011. But many of the world’s major investment banks are now considering Africa as an investment destination, and local investment houses are flourishing. As Colin Colman, the head of Africa investments at the world’s biggest investment bank, Goldman Sachs, says: “Global investment banks, along with a wave of multinational corporations, are looking at SSA – including countries outside of South Africa – with renewed interest, primarily because of one thing: growth.”

One headline-grabbing deal was the global depositary receipt offering for a 20% stake in Dangote Cement, the Nigerian headquartered company with a pan-African strategy listed on the London Stock Exchange with a total market valuation of $14bn. Goldman Sachs, JP Morgan Chase and Morgan Stanley put this deal together.

“Africa is the untold story of the next decade, like India and China were this past decade,” argues Muhtar Kent, the CEO of Coca Cola. The presence and significance of our business in Africa is far greater than India and China even today. The relevance is much bigger.”

As Africa’s capital markets develop, so too do investors’ increasing interest in the continent. Long seen as only a natural resources play, there has been a clear shift in investor focus. During 2005-07, according to Ernst & Young, FDI was largely directed towards extractive resources, i.e. minerals, coal, oil and natural gas. But between 2007-10, there was a strong diversification into more consumer-oriented areas, such as tourism, consumer products, construction, telecoms and financial services.

Another interesting trend has been that Africans themselves are recognising the growth prospects and investment potential of the continent. According to Ernst & Young, there was a 21% compound growth rate from 2003 and 2010 in Africans investing in other African countries – and in a diverse range of sectors. In particular, legislative reforms to state pension fund regulations are unleashing new flows of African investments in Africa.

Another factor that could further stimulate African interest in African investment may be the paucity of opportunities for competitive returns in the West’s mature markets, as both the US and Europe struggle to deal with debt and recession.

But while investing in Africa’s so called frontier markets, notably Angola, Ethiopia, Kenya, Mauritius, Mozambique, Nigeria, Rwanda, Tanzania, Uganda and Zambia has demonstrated strong growth, the OECD has also drawn attention to how FDI is taking an big stake in Africa’s agricultural sector, especially outside of these 10 countries.

The OECD traces this trend back to the huge spike in global food prices that took place in 2008 and how, in 2009, both Korea and the UAE signed deals to grow wheat on 690,000 and 400,000 hectares of land, respectively, in the Sudan. Meanwhile, China secured 2.8m hectares of land in the Republic of Congo to create the world’s largest palm oil plantation.

But despite Africa’s growth trends, it currently attracts less than 5% of global FDI flows. Could this be about to change? Clearly, research group Oxford Economics believe so. They forecast that more and more businesses are plan investments, demonstrating just why Africa’s share of new global FDI projects has steadily improved in recent years. They foresee capital investments into Africa reaching $150bn by 2015, up from the $50bn the African Development Bank stated reached Africa as FDI in 2010.

The bottom line is that the global market for FDI is extremely competitive, and there is still much to be done to explain the African investment proposition to international investors. Perhaps Olaf Meier of the African Development Corporation made the most telling comment. He said: “One of the specific advantages of operating in Africa is that it is still possible to gain access to attractive investment targets with relatively low capital input due to the infancy of the industry. Early investors are therefore still able to catch the worm.”



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