AFSIC | 11 – 12 OCTOBER 2021

Africa and the golden age
of global investment

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For years, many have recognised the unbridled 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 while progress has been steady up to now, with many countries beginning to lift themselves out of the Covid-19 slump, Africa is primed to take centre stage.

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).  This trade deal has removed a number of quotas, most notably on wine, sugar, canned fruit, and fruit and fruit juices, in favour of the African countries.

Other nations are keen to follow suit, with Emmanuel Macron due to host his first Africa-France summit 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 so many are only now starting to take notice of the investment opportunities in Africa.

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.

This massive increase means that there is a colossal need for infrastructure finance on everything from roads, transport and housing to modern and digital communication systems, such as low-cost broadband. However, despite this need, there is an estimated $1 trillion infrastructure gap in Africa and consistent infrastructure development remains a key challenge.

But there is hope, in August South Africa’s Department of Public Works and Infrastructure (DPWI) published a draft of its national infrastructure plan 2050, and the expectation is that Africa will be able to bridge this gap because of the opportunities that a single interconnected market will bring. Institutional investors worldwide are well aware of the potential of the continent for industrial and manufacturing development, and we are already seeing essential projects taking place including the expansion of roads, railways and ports. The success of these projects is crucial in generating confidence amongst global investors to demonstrate that Africa is heading in the right direction.

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 accelerated the energy transition from fossil fuels to greener, more sustainable energy, particularly 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 ESG.

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. Often still viewed as a higher risk than developed markets, the opportunities offered to investors in Africa require a shift in mindset towards the long term. 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 Africa offers for global investors who have the right patience and risk appetite. 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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