AFSIC | 11 – 12 OCTOBER 2021

Africa and the golden age
of global investment

Absa | Corporate and Investment Banking > Insights and Events > Africa and the golden age of global investment
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For years, many have recognised the burgeoning potential that Africa holds for global investors. The continent is home to eight of the 15 fastest growing economies in the world, so its economic prosperity matters globally. But the pandemic has hit Africa hard, with meaningful recovery set to take several years. Now more than ever, Africa requires investment, and that investment offers great opportunity, both to global investors and the future of the continent.

In its latest World Investment Report, the United Nations Conference on Trade and Development (UNCTAD) notes that the share of Africa in the foreign direct investment (FDI) inflows into developing economies declined from 6.3 per cent to 5.9 per cent. In Sub-Saharan Africa, FDI inflows decreased by 12 per cent to US$30 billion, with investment growing in only a few countries. In West Africa, inflows to Nigeria increased slightly, from US$2.3 billion in 2019 to US$2.4 billion. Ethiopia, despite registering a 6 percent reduction in inflows to US$2.4 billion, accounted for more than one-third of foreign investment to the sub-region.  Southern Africa saw FDI decrease by 16 percent to US$4.3 billion, with Mozambique and South Africa accounting for most inflows.

In spite of the economic havoc that came as a result of the Covid-19 pandemic, however, the UNCTAD projects an increase in FDI into Africa by 2022. The anticipated increase in FDI will be underpinned by a rise in demand for commodities and new opportunities following the restructuring of the global value chain, the approval of key projects and the impending finalization of the African Continental Free Trade Area (AfCFTA) agreement’s Sustainable Investment Protocol.

In addition to the anticipated FDI drivers, the UK has been particularly vocal about commitment to its relationship with Africa post Brexit. The UK-Africa Trade Summit in 2020, and a virtual update at the beginning of this year, has set in motion new trade agreements which are already paving a way for a mutually beneficial future. Deals include the UK’s free-trade agreement with the Southern African Customs Union and the Mozambique-UK Economic Partnership (SACU+M).

Other nations are keen to follow suit, with Emmanuel Macron holding his first Africa-France summit this month and President Biden recently announcing the revival of the “Prosper Africa” initiative which aims to bolster trade and investment with the continent.

With the spotlight firmly shining on Africa, as well as the continued collaboration with nations such as China, one might reasonably ask why many are only now starting to view investment opportunities in Africa a viable option. Here are some possible answers:

AfCFTA

Ratified at the start of this year, the African Continental Free Trade Area (AfCFTA) aims to form the world’s largest free trading area across all 54 African countries. The AfCFTA is already being hailed as a golden ticket towards the continent’s long term economic prosperity.

It is estimated that the trade pact will increase African exports by $560 billion, increase intra-continental exports by 81% and increase non-African country exports by 19%. Crucially, a unified process will also make global trade easier, opening opportunities for global investors looking to invest capital in Africa, and businesses in Africa hoping to secure funding.

Infrastructure

Africa is home to a young and diverse population that is projected to be double its current size by 2050. Couple this with the opportunities presented by AfCFTA and one realises that the current gap in infrastructural development and the spend thereon, needs to be closed to leverage what will be sizeable opportunities. There is a colossal need for infrastructure development on everything from roads, transport, and housing to modern and digital communication systems, such as low-cost broadband. The spend required to fund this development is estimated to be in the region of $1 trillion

Although infrastructural development and progress is still slow in parts, we are seeing some essential projects across the continent that will add to the growing network of roads, rail, port, and other notable infrastructure development nodes. This is critical because, as more infrastructure projects are completed, these will generate increased confidence among global investors and finance institutions demonstrating that Africa is on the right track.

But real action, rather than rhetoric, is required with increasing public and private collaboration in order to achieve meaningful progress.

There is huge opportunity to be gained from a single interconnected market and institutional investors worldwide are well aware of the potential of the continent for industrial and manufacturing development. It is also an opportunity for Africa to develop it’s ESG credentials taking advantage of environmentally sustainable technology to help deliver progress.

ESG

ESG is a growing concern for investors worldwide and Africa offers huge opportunities for businesses to invest in sustainable infrastructure. The Covid-19 pandemic, and subsequent lockdown measures, has brought into focus the energy transition from fossil fuels to cleaner hybrid, energy across Africa. The continent is also home to some of the most abundant geography on the planet which presents many sustainable opportunities yet to be fully realised.

Recovery from the pandemic is a huge priority for Absa and new funding models are crucial to that success. Development Finance Institutions (DFIs) have long been at the forefront of sustainable development and are critical providers of financing in Africa, promoting similar standards to those associated with ESG measures.

As investment vehicles, DFIs can plug funding gaps on projects that other investors might turn down due to concerns over the risk or length of an investment. However, there is also potential for a co-lending or hybrid model where investors lend jointly with DFIs. This means that institutions can invest in the aspects that match their risk appetite with DFIs guaranteeing the rest.

This model has some really promising applications and could be crucial to boosting Africa’s post pandemic recovery in a sustainable manner.

Risk vs Reward

A convergence of factors has seen Africa emerge as a highly prized investment opportunity worldwide. But there are challenges with a greater level of risk as well as the need to understand a huge and diverse continent. But, with a potential greater risk, comes greater reward, and in a world which is light on yielding assets, Africa remains a source of elevated yields.

What cannot be denied is the huge potential that this huge and growing continent offers for global investors who have the right patience, risk appetite and local knowledge. As the world looks towards solutions for post pandemic recovery, we hope that investors recognise the opportunity for collaboration and partnership which will ultimately ensure growth and prosperity worldwide.

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