Africa, home to a billion people and endowed with abundant resources, is now one of the world’s fastest-growing continents. The region, particularly sub-Saharan Africa, offers lucrative opportunities in many sectors aside from the mining and minerals industries.
Today, multinationals are increasingly viewing see this diverse region as the ‘next big’ destination for global investments.
The International Monetary Fund (IMF) has estimated Africa’s regional GDP growth to reach six per cent in 2014, which would surpass the Middle East, South America and Central Eastern Europe. This growth will be driven by the strong domestic demand, with rising investments in infrastructure and export capacity in many countries.
According to the IMF, 22 out of the 45 sub-Saharan economies including Sierra Leone, Cote d’Ivoire, Ghana, Rwanda and Ethiopia have grown above five per cent in recent years.
Some countries have witnessed sound economic policies, micro-business reforms and fast-rising incomes of individuals, by increasing higher value-added production, and with the diversification of exports to new emerging markets in Asia.
Earlier, Africa was only viewed for extracting mineral resources. But now, the robust demographics and vibrant economies like sub-Saharan Africa are attracting private equity firms like the Carlyle Group and Actis, from the United States and Europe.
These investors are focusing on the infrastructure, consumer goods and financial services sectors, which benefit from growing urbanisation and the rise of the middle-class consumers. The World Bank has estimated that most African economies would achieve ‘middle income’ status by 2025.
In a recent UN Conference on Trade and Development, it was revealed that the share of consumer-related foreign direct investment (FDI) greenfield projects to the total FDIs in green field projects in countries including Nigeria, Angola, Kenya and South Africa, rose to 23 per cent in 2012 from just seven per cent four years ago.
Sub-Saharan Africa also boasts some of the highest growth rates in mobile connections in the continent, with cellphone users skyrocketing from merely 11mn in 2000 to around 500mn right now. Broadband penetration has increased in recent years. Vodafone (UK) and France Telecom dominate the telecoms industry, but the region now needs a second round of investments to upgrade the information and communications technologies (ICT), and to expand mobile banking and Internet access.
Financial services are expected to contribute about one-fifth to Africa’s total output by 2020. Most of the African markets are open to foreign banking. Russia’s Renaissance Capital has estimated that Africa’s GDP would swell to US$29 trillion by 2050 from US$2 trillion presently.
The infrastructure backlog, however, needs to be US$22bn a year to keep apace with an annual GDP growth of seven per cent, according to the African Development Bank (AfDB). Tackling bottlenecks mainly in energy, transport and water/sanitation are imperative to moving onto a much higher growth trajectory, in attracting foreign investments, as well as for achieving the Millennium Development Goals (MDGs).
Rising capital inflows Ernst and Young (E&Y) managing partner (Africa), Ajen Sita, said, “FDIs can act as a future source of long term capital for reinvesting in infrastructure, and as an accelerator of sustainable growth across Africa. Although the African share of global FDI has grown over the past decade, we believe that it does not reflect the increasing attractiveness of the region.” FDIs into Africa have been estimated to reach US$150bn by 2015, according E&Y.
The European Union is the single largest FDI partner for Africa’s top-ten recipients. In 2012, bilateral trade between Africa and European Union touched US$256bn.
Major European export destinations for Africa include France, Germany, Netherlands, Spain, Britain and Italy. About two-fifths of Africa’s non-oil exports go to the EU countries.
The EU is currently negotiating EPAs with 35 African countries.
True, investing in frontier markets can be risky, but levels of profitability are high as well, with competition in some sectors comparatively low compared to matured regions.
The McKinsey Global Institute sees a huge opportunity for businesses of all types, with consumer industries in Africa predicted to grow by US$410bn by 2020.
Unlike in the previous decades, Africa now has stronger foundations to support future prosperity. But the development of financial markets, including the diversification beyond a bank-based system is much needed. It is also imperative to enhance efforts to improve business climates to support output diversification and to generate new jobs. In fact, seven of the world’s top-10 fastest-growing economies over the medium-term, will be in Africa.
By Moin Siddiqi