Foreign investment in Africa ‘set to grow as nations mature’, study says

Out-Law News | 01 Jun 2017 | 10:50 am | 2 min. read

Foreign direct investment (FDI) into Africa rose 31.9 percent last year and “will continue to grow” as the region’s economies expand, according to a new study.

The study by professional services firm EY said investment per project in Africa averaged $139 million, against $92.5m in 2015 – driven by “several large, capital intensive projects in the real estate, hospitality and construction and transport and logistics sectors”.

However, the share of FDI on the continent highlighted marked differences. The study said while sub-Saharan Africa’s three largest economies of Nigeria, South Africa and Angola “saw sharp downward revisions in growth forecasts”, a diverse group of the “second tier economies in Africa including Cote d’Ivoire, Senegal, Ethiopia, Kenya, Tanzania, Mozambique and Egypt are expected to sustain high growth rates over the next five years”.

EY said: “This somewhat mixed picture is not surprising to us. We believe that investor sentiment toward Africa is likely to remain somewhat softer over the next few years. From our point of view, this has far less to do with Africa’s fundamentals than it does with a world characterised by heightened geopolitical uncertainty and greater risk aversion.”

According to EY’s study, companies already doing business in Africa will continue to invest, “but will probably exercise a greater degree of caution and be more discerning”.

“We are still of the opinion that any shorter term shifts in FDI levels will be cyclical rather than structural,” EY said. “We also anticipate that the evolution of FDI – increasing diversification in terms of sources, destinations and sectors – will continue. Over the longer-term, as economic recovery slowly gathers pace and as many African economies continue to mature, we also anticipate that levels of FDI will remain robust and will continue to grow.”

The study showed that foreign investors over the past year “tended to gravitate toward the larger, more diverse economies in Africa” including South Africa in the south, Morocco and Egypt in the north, Nigeria in the west and Kenya in the east.

“Collectively, these markets attracted 58 percent of the continent’s total FDI projects in 2016,” the study said. “Given that these markets are the dominant anchor economies in their respective regions, they provide investors with greater scale and relatively more mature markets.”

According to the study, South Africa maintained its position as the continent’s leader from an FDI projects perspective with a 6.9 percent increase in from 2015. “There was a strong pick-up in FDI activity in the consumer products and retail (CPR) sector, where projects more than doubled from 19 in 2015 to 41 in 2016.” The study highlighted the example of global food giant Nestle which, in April 2016, inaugurated an instant coffee factory in KwaZulu-Natal after investing ZAR1.2 billion ($87.4m) in the plant’s expansion.

The study said Cote d’Ivoire “remains one of the fastest growing countries globally, although once again, highly dependent on commodity (cocoa) prices, and its ability to manage internal conflict”. Ghana’s prospects are “also looking increasingly promising, with a newly-elected administration promising to manage the public purse more prudently”.

However, the study said East Africa “remains the most buoyant of all”, with the four key economies of Kenya, Ethiopia, Tanzania, and Uganda “all poised for growth of six percent plus for the rest of the decade”.

EY’s Africa Attractiveness Index, introduced in 2016 to measure “the relative investment attractiveness of 46 African economies based on a balanced set of shorter and longer-term focused metrics”, ranked Morocco first in the ‘top 10’ table of nations followed by Kenya, South Africa, Ghana, Tanzania, Uganda, Cote d’Ivoire, Mauritius, Senegal and Botswana.

A report published last year by Analyse Africa said FDI to East Africa grew in 2015 despite an overall fall across the continent from $87bn to $66.5bn. The report indicated 705 projects were backed by foreign investors throughout Africa in 2015, with infrastructure taking about 44 percent of the inflows.