Download - Africa Investment Outlook 2012
Africa Investment Outlook 2012 March 2012
Africa Investment Outlook
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Contents
1. Overview 3
2. Introduction
I. The Investment Scene: Growth with risks 5
3. Growing global appetite in investment opportunities
I. Federal Bonds 6
II. Increased Competition 6
4. Key investment drivers
I. Surging External Demand 7
II. China’s investments 7
III. Increase in Urbanization 8
IV. Robust Commodity Prices 8
V. Improved Economic Policies and Management 9
VI. Demographics 9
5. Investment growing trends
I. The three-tier consumer markets 10
II. The Mobile Phone Revolution 10
III. Natural resources 11
IV. Chinese investment in Africa 11
V. Outsourcing of economic activities to Sub-Saharan Africa 13
VI. Low cost inputs and consumption goods 14
VII. Access to more appropriate technologies 15
6. Investment Challenges
I. Inflation concerns 16
II. An infrastructure crisis 16
III. Drought 17
7. Key Considerations
I. The Demographic Divide 17
II. Chinese Conflicts of Interest 18
III. Uncertain Stock Markets 19
8. Sustainability of the Impact of Investment Drivers 19
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9. Appendix
I. Sub-Saharan Africa: Country Groupings 20
II. Member Countries of Regional Groupings 21
III. Africa’s Distribution of Resources 22
IV. Total Investment in Africa 23
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Overview
Africa’s economy has grown by 5% per year over the past 15 years, driven by rising exports,
increased investment, and economic policy liberalization. This research report begins with
the setting of the investment scene. Next is the growing global appetite in investment
opportunities, exploring the factors of federal bonds and increased competition among
investment players. A definition of the key investment drivers follows with an explanation
of the effects of the surging external demand, Increase in China’s investments, increase in
urbanization, robust commodity prices and improved economic policies. An investigation
into investment growing trends is next with an introduction to the opportunities and
challenges. The report ends with some recommendations on enhancing sustainable
investments in Africa and some key considerations.
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Featuring content from
The IMF’s Regional Economic Outlook: Sub-Saharan Africa: Oct 2011,
The Economist Intelligence Unit’s Africa: Open For Business,
The Economist Intelligence Units’ GCC trade and investment flows.
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Edited and Compiled by Sharon Obuobi
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The Investment Scene: Growth with risks
Sub-Saharan Africa: Output Growth
According to the IMF, in the sub-Saharan African region’s seven oil exporters, higher oil
and gas production levels should be sustained by continued strong oil demand, and non-
oil activity, particularly in the public sector, is being underpinned by the resurgence of
hydrocarbon revenues—a pattern most evident in Angola. Consequently, growth in the oil-
exporting countries is projected to average 6 percent this year and 7 percent in 2012.
Sub-Saharan Africa: Macroeconomic indicators Dec 2005 – June 2011
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The IMF reports that there has been a significant and rapid reorientation of exports toward
China, India, and other developing countries over the last decade. More than half of the
region’s trade (both exports and imports) is now with nontraditional partners, and
investment lows are moving in a similar path. The immediate payoffs from this
reorientation of trade include reduced export and output volatility.
Growing global appetite in investment opportunities
According to Dominic O’Neill’s Euromoney article entitled, “Investment Banks Eye The Last
Frontier: Africa”, with expectations that Sub-Saharan Africa's GDP growth rate will rise as
high as 7% in comparison to South Africa’s expected 3.5% many investors – Western,
Chinese, and South African alike – are eyeing Sub-Saharan Africa with renewed interest.
Federal Bonds
With this in mind, the role of African governments is of even greater importance due to
the need for better-developed infrastructure in order to cater to rapidly rising populations
and the fostering of economic growth.
O’Neill states that in 2011, Nigeria launched its first dollar sovereign bond while Zambia
and Senegal both obtained sovereign credit ratings for the first time. Other governments,
such as those of Kenya and Tanzania, are preparing their first dollar bonds, which is likely
to facilitate more issuance from these countries by banks and corporates.
Increased Competition
According to O’Neill, Africa’s wholesale-banking revenue currently totals more than $850
million a year. In addition the level of competition in increasing significantly as French, UK
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and US banks make plans to finance projects in Sub-Saharan Africa. Similarly, South Africa's
biggest banks are considering opportunities north of the border. Due to South Africa’s
economy’s commodities-driven nature, its firms are already strong in infrastructure and
resource financing which is much needed across Africa.
In Africa, Standard Chartered is making plans to expand in the securities services market, as
well as public equity. Banks like Standard Bank have increased personnel in Africa
investment banking to boost capabilities in debt capital markets in Nigeria, equities in
Kenya, and investment banking in Ghana.
Key investment drivers
Surging External Demand
A new key investment driver has been the surge in external demand, particularly from
China and India, which are the fastest-growing countries in the world and hungry for
resources—especially oil and minerals. According to the Economist, OECD growth will be
weak and fragile while China, India, and most other emerging markets power ahead and
help to keep commodity prices high.1
China’s investments
China’s high-profile investments in Africa have also helped to put the continent on the
global investment map. China’s meteoric rise over the last two decades and the
expectation that it will grow faster than most other major economies well into the future,
means the Chinese authorities are on a quest to secure access to raw materials.
Sector Composition of China’s Investment in Africa by end-2009
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China is finding many of the minerals and oil it needs in Africa, and is building much-
needed infrastructure in return. Furthermore, China is looking to cultivate markets it can
reap. Africa is a virgin market. From a long-term manufacturing point of view, costs have
increased in China and they will start to invest in manufacturing in Africa.
Increase in Urbanization
Another new key investment driver has been the increased pace of urbanization and
consumerism as Africans flock to the cities, disposable incomes rise, demand for modern
goods and services such as telecommunications and banking services accelerate. Africa is
urbanizing rapidly with about 40% of the population now living in cities. This ratio is higher
than that of India and lower than that of China.
Robust Commodity Prices
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There is a stronger global demand for commodities in the aftermath of recession, driven in
particular by the burgeoning appetites of China and India for minerals and energy
products, which are boosting commodity prices. Higher commodity prices, in turn, are
driving investment in exploration and extraction.
Improved Economic Policies and Management
The apparent willingness of countries in Africa to implement economic reform has
improved the attractiveness of the region to foreign investors and businesses that will be
increasingly keen to tap into the continent’s high-growth markets at a time of sclerotic
growth in the developed world.
Demographics
The continent will have the youngest, fastest-growing and fastest-urbanizing population in
the world. Its population has increased from around 110 million in the mid-19th century to
an estimated 1 billion people today. This is set to double before 2050.
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Investment-growing trends
With the increase in urbanization and disposable income within the middle class, the
demand for modern goods and services is beginning to surge. According to the Economist,
by 2030 Africa’s top 18 cities could have a combined spending power of US$1.3 trillion. By
2050, 63% of Africa’s population will be urban.
The Three-tier consumer markets
Africa’s consumers can be divided into three main tiers, and businesses will need to build
their strategies accordingly.
1. The rising and the future middle-class market of 350 – 500 million, similar to the
segments in India and China.
2. The consumers at the bottom of the pyramid, which is growing, and the ascent of the
mobile phone has proven that there is a market.
3. The challenge for firms to move from basic goods to affordable products.
Companies will need to look at all three strategies, but new investors and existing investors
will also need to look at the broader consumer markets
The mobile-phone revolution
Due to Africa’s very poor landline infrastructure and the easy availability of mobiles, the
mobile-phone market has grown rapidly. According to the Economist, the number of
mobile subscribers jumped from around zero in the mid-1990s to 88 million in 2005, and
reached an incredible 360 million in 2010, which equates to 45% of the population.
It also explains that in addition to its tele-banking capabilities, the mobile phone provides
farmers and traders with up-to-date market information, and is becoming the main tool for
accessing the Internet. Mobile Internet is growing rapidly in some markets, such as in
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Kenya, where subscriber numbers more than doubled in 2010 alone to 4.7m. There has
also been a rapid emergence of products, which will facilitate the spread of real commerce
and e-commerce as well as provide a new platform for official transfers and the payment
of bills.
Natural resources
Natural resources, especially minerals and particularly oil, will remain central to many
resource-rich countries that are benefiting from stronger global demand in the aftermath
of recession.
Oil has been the main focus of foreign direct investment (FDI), but key minerals, such as
gold, copper, iron ore, chrome and diamonds, and more exotic elements, are major draw-
cards. Most notably, new junior mining firms, which tend to be more dynamic and
responsive, are playing a key part in the investment surge. (See Appendix C: Africa’s
distribution of natural resources).
Chinese investment in Africa
China has emerged as a leading investor in Africa in the resources sector, with an increase
in initial big investments from US $681 million in 2000 to US $9.3 billion in 2010.
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According to the Economist, trade between the two continents has also been rising: 12.4%
of all exports from Africa went to China last year, a fifteenfold increase on 2001. Angola is
the leading supplier of oil to China, followed by Nigeria.
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There has also been a shift into services, and the sector has taken the largest chunk of
investment. In addition, the next few years will see the development of industrial parks in
key African countries. One industrial park is already operating in Mauritius, and more are
planned in Nigeria, Ghana, Kenya and South Africa. The aim of these parks is to improve
infrastructure and the regulatory environment, and to encourage Chinese firms to establish
manufacturing industries in the parks, as they benefit from tax break holidays, favourable
regulations and good infrastructure.
Outsourcing of economic activities to sub-Saharan Africa
According to the Economist, rising wages in Brazil, China, India, and other countries could
prompt them to further outsource their economic activities to sub-Saharan Africa,
especially in light manufacturing. These BICs are moving up the value chain with China and
India in manufacturing, and Brazil in biofuels. Thus there is the potential to outsource these
activities to sub-Saharan Africa. Global rebalancing between advanced and emerging
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economies could accelerate this process, with more rapid industry upgrading in China and
India.
Low-cost inputs and consumption goods
Sub-Saharan Africa could benefit from imports available at a much lower cost from
emerging partners than from its traditional partners. Low-cost capital goods boost the
productivity of sub-Saharan Africa’s producers, whereas low-cost manufactured imports
benefit consumers and producers (through lower wage pressures and cheaper inputs).
Intraregional integration could also boost growth by promoting horizontal FDI, creating
economies of scale and improving the allocation of factors of production within the region.
However there are also negative reactions to this aspect as low-cost imports also dilute the
local markets and put some local producers out of work. As a result of a directly correlated
increase in unemployment, countries like Angola have reacted very badly to these imports.
Estimated and Projected Exports by Sub-Saharan Africa to Partners
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Access to more appropriate technologies
Through intensifying trade and investment relationships with other developing countries
like China, countries in the sub-Saharan African region also have access to cheaper and
less sophisticated technologies that may be more appropriate for their level of
development.
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Investment Challenges
The key economic risks range from weak fiscal and monetary policies, high inflation,
volatile currencies, high taxes, nationalization issues, skills shortages, inadequate
infrastructure and red tape.
Inflation concerns
Inflation has now returned to levels recorded before the commodity price spike in 2007-
2008. In Sub-Saharan Africa, the average rate of inflation jumped to 11.7% in 2008 with
soaring oil and food prices, but retreated to 8.5% in 2009 as the global downturn curbed
price pressures. The annual average rate is expected to hover at around 7.1% in 2010-2012.
However, inflation will remain comparatively high in a global context and will be vulnerable
to fluctuations in commodity and product markets. The ongoing power crisis, severe
infrastructure bottlenecks and higher tariffs will also have an impact on inflation.
An infrastructure crisis
Most operators in Africa will agree that the poor state of physical infrastructure, especially
electricity and transport, is one of the biggest impediments to business. For instance,
Nigeria, with a population of 150 million, has the same power capacity as Hungary, with a
population of less than 10 million. These issues have also had a profound effect on
investors. Very few locations have sufficient infrastructure, with the exception of South
Africa, but even there power and transport provision is inadequate.
Faster growth in recent years has highlighted deficiencies, exposing bottlenecks in ports,
roads, rail and power supply. Although substantial infrastructure investment is under way—
for example, resource extraction deals secured by Chinese and Indian firms typically involve
a commitment to build local infrastructure—improvements will take time. Africa will need
investments of at least US$ 93billion in the power sector alone.
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Drought
The drought in the Horn of Africa is imposing direct production, fiscal, and external costs
on the countries affected by food shortages and refugees in addition to its immense
humanitarian burden. The IMF estimates that the initial impact on output in Ethiopia and
Kenya will be less than ½ percent of GDP, but the final impact of the drought, and its
ramifications throughout the region, could ultimately be much larger. For example, in
Tanzania, the drought has reduced hydroelectric power generation, with attendant
implications for not only output but also fiscal accounts
Key Considerations
The demographic dividend
With more than one-half of its population under 24 years of age, Africa is one of the most
populated and youngest markets in the world. According to the Economist, by 2050
Africa’s population of 2 billion will have overtaken that of India (1.6 billion) and of China
(1.4 billion).
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By 2015, the proportion of Africa’s youth (under 15 years) is expected to rise to 45% of the
total population and urbanizing the fastest.
Chinese conflicts of interests
One key issue that has arisen is whether it is the responsibility of Chinese investors to
develop skills and provide education, or the responsibility of the African governments to
develop the skills needed to create opportunities, jobs and growth. Based on the trends to
date, both the governments and investors, whether they are Chinese or other international
operators, will need to invest in education, skills and infrastructure. If not, as in Europe,
history will repeat itself and show that the transfer of skills and development of human
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capital will remain one of the biggest challenges in Africa. This is something, however, that
Indian investors are addressing to some extent. As part of their African strategy, which is to
secure resources, efforts to transfer skills—on a small scale—are taking place. If left
unchecked, the prospect of an African Spring cannot be discounted.
Uncertain Stock Markets
The IMF predicts that over the next five years, seven of the top-10 fastest-growing
economies will be in Africa. A large amount of the higher GDP growth in Africa is
attributed to Chinese state-linked investments. In countries such as Angola and Ethiopia,
where China is dominant, deals are generally brokered bilaterally, closed to outside bidders,
without use of international banks.
With the increase in Africa funds and allocations to Africa in global emerging market funds,
there are billions of dollars of new capital available to Africa-related stocks. However, the
biggest exchange - Nigeria's - has daily trading volumes only in the low tens of millions of
dollars, which makes the building of brokerage operations across the continent infeasible
at the moment.
Sustainability of the Impact of Investment Drivers The impact of the surge in external demand as well as the increase in urbanization and
consumerism offers hope that this economic growth may be sustainable. The challenge,
however, is how quickly they will translate into actual growth in particular countries with a
host of other variables, including democracy and governance, the state of infrastructure
and the pace of deregulation taken into account.
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Appendix
A. Sub-Saharan Africa: Country Groupings by Resource
*Country has reached the completion point under the enhanced HIPC Initiative and has qualified for MDRI relief.
Key Points:
The 7 oil exporters are countries where net oil exports make up 30% or more of total exports.
The 11 middle-income countries not classified as oil exporters or fragile countries had average per
capita gross national income in the years 2008–10 of more than US $992.70.
The 14 low-income countries not classified as oil exporters or fragile countries had average per capita
gross national income in the years 2008–10 equal to or lower than US$992.70 and IRAI scores higher
than 3.2.
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B. Member Countries of Regional Groupings
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C. Africa’s distribution of resources
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D. Total Investment: Countries
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Diagrams in-text
A. Sub-Saharan Africa Output Growth
Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys:
Regional Economic Outlook. Oct (2011)
B. Sub-Saharan Africa: Macroeconomic indicators Dec 2005 – June 2011
Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys:
Regional Economic Outlook. Oct (2011)
C. Sector Composition of China’s Investment in Africa by end-2009
Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys:
Regional Economic Outlook. Oct (2011)
D. Partners
The Chinese in Africa: Trying to pull together. Published April 20, 2011. From Print Edition.
http://www.economist.com/node/18586448. Web. Accessed Mar 25, 2012.
E. Africa’s Slice
The Chinese in Africa: Trying to pull together. Published April 20, 2011. From Print Edition.
http://www.economist.com/node/18586448. Web. Accessed Mar 25, 2012.
F. Estimated and Projected Exports by Sub-Saharan Africa to Partners
Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys:
Regional Economic Outlook. Oct (2011)
G. Population forecasts for selected countries
World Population Projections: Growing pains. Published May 5 2011. The Economist Online.
http://www.economist.com/blogs/dailychart/2011/05/world_population_projections. Web.
Accessed Mar 25. 2012
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Diagrams in Appendix
A. Sub-Saharan Africa: Country Groupings by Resource
Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys:
Regional Economic Outlook. Oct (2011)
B. Member Countries of Regional Groupings
Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys:
Regional Economic Outlook. Oct (2011)
C. Africa: Key Resources
"Africa: open for business. The potential, challenges and risks." Economist Intelligence Unit.
(2012): n. page. Print
D. Total Investment by Country
Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys:
Regional Economic Outlook. Oct (2011)
Other Sources
"Africa: open for business. The potential, challenges and risks." Economist Intelligence Unit.
(2012): n. page. Print
"GCC trade and investment flows: The emerging-market surge." Economist Intelligence
Unit. (2011): n. page. Print.
O’Neill, Dominic. "Investment Banks Eye the Last Frontier: Africa." Euromoney. 00142433
(2011): ABI/INFORM Global; ABI/INFORM Trade & Industry; ProQuest European
Business. Web. 24 Mar. 2012.
"Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys:
Regional Economic Outlook. Oct (2011): Web. 27 Mar. 2012.