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Investing in Africa: from Dark Continent to Investment Hot Spot

In the changing global economic landscape, Africa is experiencing unparalleled economic growth. Which of its diverse and developing economies, however, offer real opportunities for Hong Kong investors and which are still best avoided?

Photo: Cape Town Harbour: Africa still needs infrastructure investment. (© Wesgro).
Cape Town Harbour: Africa still needs infrastructure investment.

Africa is currently experiencing unparalleled economic growth. For 2014, average growth across the continent is estimated to be in excess of 5%, with many countries likely to achieve more than 7%. According to a joint study by The Economist and the IMF, seven of the 10 fastest-growing economies in the world are in Africa.

The continent is also benefiting from generally reduced levels of conflict, while inflation – a traditional scourge of African economies – is also on a downward trend. Taken together, these factors all add to the appeal of doing business in Africa and make it an increasingly attractive investment destination.

According to the third annual index of investment destinations compiled by Rand Merchant Bank (RMB), Johannesburg – Where to Invest in Africa: A Guide to Corporate Investment – Africa continues to show an improvement in its attractiveness as an investment destination. The RMB index uses three indicators to rate the investment attractiveness of 52 countries – market size (GDP); economic growth (GDP growth forecasts over the next five years); and an operating environment rating (see Figures 1-3).

Through this composite approach and by equally weighting the three factors, the index aims to provide an accurate ranking of the countries in terms of their investment attractiveness. The index (whose timeline goes back to 1995) is intended to inform long-term corporate investment decisions, but does not purport to provide a country-by-country credit rating.

Although it is now clear prudent for many Hong Kong companies to consider Africa as an investment destination, the opportunities across the continent are uneven and many country-specific factors need to be taken into account. While acknowledging that the economic growth path for Africa is promising, Nema Ramkhelawan-Bana, an economist in the Global Markets Research Department of RMB, warns investors to be discerning when approaching African markets and to equip themselves with "on the ground market knowledge specific to their industries".

Top 10 African countries for investors

In the latest (2014) RMB index, South Africa is still ranked as the number-one African investment destination. This is despite the fact that the country continues to experience subdued economic growth – forecast at 2.7% by the finance minister in his February 2014 budget speech. This is largely as a result of crippling labour disputes in its key mineral and manufacturing sectors, weak consumer sentiment and a divided governing party.

There is an overall belief that South Africa needs a faster-growing economy in order to boost its efforts to reduce inequality and implement its redistributive policies. The rating accorded South Africa's operating environment for business showed a decline this year.

One of the 2014 study's most notable findings is that Nigeria's investment attractiveness continues to improve. It has moved into second place (up from third in 2013) and is now close on the heels of South Africa. Depending on its rate of economic growth, it is believed it could secure the top spot within the foreseeable future.

In fact, according to some figures, Nigeria officially became Africa's biggest economy when it rebased its GDP data on 6 April. Effectively, this means that its GDP statistics now take into account certain industries that hadn't previously been included. In reality, however, rebasing does not change how an economy is performing – it merely adjusts the statistical representation of GDP. It is also worth bearing in mind that, per capita, Nigeria underperforms when compared with South Africa, whose population is a third of Nigeria's.

Various economic developments are now coming to the fore in Nigeria. According to Ramkhelawan-Bana, Nigeria offers a particularly good potential investment base for companies in the retail/wholesale and IT industries.

Another notable movement in the 2014 index was recorded by Ghana. Ranked 10th in 2007, the West African country has moved up to fourth place, despite the relatively small size of its economy when compared to the three continental powerhouses (the combined economies of South Africa, Egypt and Nigeria account for 50% of Africa's total market size).

Although Egypt is ranked third, continued political discord there has detracted from its favourable characteristics. It was previously held in high regard on account of its sizeable market, large population and good operating environment.

The index also draws attention to Rwanda (ranked 14th). Rwanda seems an unlikely candidate for corporate investment. Yet this tiny landlocked country, with few resources and still struggling to shrug off the legacy of its 1994 civil war, has, interestingly, shot up the rankings. Explaining its success, Ramkhelawan-Bana says: "Rwanda has achieved a very positive environment for investment by implementing consistent reforms."

Looking at the figures overall, she says: "Investors need to take an overall view of an economy and not just look at the variables of market size and growth, but also establish the ease of doing business." This advice applies particularly well to Angola. Rated 20th in the RMB index, Angola may have a fast-growing economy (mainly oil-driven), but its operating environment for business is not especially favourable, with this likely to create a barrier to investment.

Ethiopia is becoming an increasingly viable market for investors. As a result, it is now ranked among the top 10 most attractive African investment destinations, with investors predominantly focusing on its agriculture sector.

North and East African countries are jostling for positions in the bottom half of the top 10. This has seen Morocco overtaking Tunisia, and Tanzania moving ahead of Kenya.

Ramkhelawan-Bana is confident that the theoretical findings of this research reflect the real investment picture. She says: "The index found a strong correlation between the countries' rankings as attractive investment destinations and the actual levels of foreign direct investment that these countries have drawn."

Top 10 African Investment Destinations

CountryRanking (Africa)Ranking (World)
South Africa133
Nigeria238
Egypt344
Ghana447
Morocco551
Tunisia653
Libya761
Ethiopia867
Tanzania968
Kenya1072
Source: Rand Merchant Bank (RMB), Where to Invest in Africa, 2014

Chart: Market size
Source: RMB, Where to Invest in Africa, 2014
Chart: Market growth (GDP five-year forecast)
Source: RMB, Where to Invest in Africa, 2014
Chart: Operating environment
Source: RMB, Where to Invest in Africa, 2014


Regional economic blocs

One of the key components the report considered was regionalisation in Africa. This sought to establish where there is an investment benefit for those countries belonging to regional economic trading zones. There are eight regional trading blocs officially recognised by the African Union, with all of them aiming to encourage regional growth by increasing the level of trade integration.

Identifying the shortcomings of these blocs, Ramkhelawan-Bana says: "The problem we are finding is that there are no institutional frameworks for implementing the objectives of the blocs. This needs to be addressed before regional integration can lead to improved trade creation. There is a need for greater political will among member states and increased buy-in from monetary and fiscal policy perspectives to make the regional trading zones viable."

On the face of it, Africa's appeal as an investment destination continues to grow. Of the 52 countries ranked in the RMB index, 42 showed an improvement in their investment attractiveness. The African renaissance, popularised by former South African president Thabo Mbeki, might well be turning into a reality for many of those African countries previously excluded from the gains of economic growth.

As investment destinations, however, African countries still have some way to go before they are ready to compete with the rest of the world (see the table). Out of all the countries ranked, only two African countries made it into the top 40 worldwide – South Africa (33rd) and Nigeria (38th).

Ramkhelawan-Bana suggests there are several reasons for this. Firstly, a characteristic of many African countries is the dual-deficit problem (i.e. both a fiscal and current account deficit), which leads to a shortfall in the state funding of the essential infrastructure needed for business.

Photo: Nema Ramkhelawan-Bana: “due diligence needed”.
Nema Ramkhelawan-Bana: "due diligence needed".

Secondly, African economies still tend to rely heavily on resources, and concentrating growth in one sector has been shown to be unsustainable. Thirdly, the lack of access to corporate finance is a clear barrier to conducting business in Africa.

However, for Ramkhelawan-Bana, perhaps the most discouraging factor is that, over the timeline of the study, Africa has not done much to improve its often-antagonistic business environment. In RMB study, for instance, only Botswana and Rwanda achieved a 'good' ranking in terms of ease of doing business; SA scored 'moderately good'; seven countries made it into the 'average' category; while the remainder (42 countries) were ranked 'below average'.

In terms of those companies looking to enter the African market, Ramkhelawan-Bana believes it is essential to appoint someone on the ground who is familiar with the local environment.

She says: "When doing due diligence, potential investors need to be aware of the hidden challenges. They need to establish if there is sufficient structural support in the markets and they need to be aware of the risks in terms of the political, regulatory and operational environments."

Mark Ronan, Special Correspondent, Cape Town

Content provided by Picture: HKTDC Research
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