Africa IS open for business
despite the pandemic

There is no question that the events that unfolded in South Africa in early July do not paint the continent in the best light but Africa remains one of the few remaining frontier markets where capital can generate significant investment returns for the patient investor.

While it is easy for arm-chair analysts to look at recent social unrest in South Africa or the military coup in Guinea and say “Africa is not conducive to good business”, the discussion is far more nuanced than the news headlines let on.

A decade ago, “Africa” was viewed as a homogenous frontier market. Over the last 10 to 15 years, the domestic financial markets are developing and country-specific data is emerging. It is clear that each of the 54 African countries represent their own unique challenges and opportunities.

Countries like Egypt and Morocco are not necessarily front-of-mind when one talks about high-growth economies but both have emerged from 2020 on the front-foot and are doing some innovative things to grow their economies and attract foreign investors.

Across the continent there is a very real concern around a chronic shortage of critical infrastructure such water, electricity and transport which in turn is hindering growth. Without this investment, African markets will fail to realise their potential.

A nagging concern for those looking from the outside into Africa is that this investment deficit creates a situation such as we are currently seeing in South Africa where a shrinking corporate and private tax base is expected to carry the burden of infrastructure and social programs.

It is important that this narrative does not become the norm.

In finance, there is a core rule: Capital will follow yield.

If we look at data around Foreign Direct Investment (FDI) into South Africa for instance, we actually see quite a positive trend as the graph below highlights:

President Ramaphosa’s drive to attract new investment saw net inbound Foreign Direct Investment (FDI) triple in  – despite the impact of COVID-19. The automotive sector was one of the big beneficiaries with the likes of Mercedes and Ford investing significant new infrastructure while Toyota South Africa have committed to the production of alternate energy vehicles domestically.

The alcohol sector has faced some massive headwinds and negative headlines in the last 18 months and one would be forgiven for assuming that investors would steer clear of local investment. Yet we see Heineken tabling an offer for local group Distell, which is currently valued at R31bn. This transaction reflects the largest transaction Heineken has undertaken since 2018 where it bid for China Resource Beer.

It is not just big corporates who are circling attractively established assets and businesses. Technology analyst Maxime Bayen tracks venture capital activity on the African continent and highlights that in the first half of 2021, African technology start-ups raised over $1.3bn in funding led by South Africa, Nigeria, Egypt and Kenya. This $1.3bn at the halfway mark is more than what was raised across all of 2019 for African start-ups and what is more impressive about the 2021 number is that 70% of these deals are funded by foreign investors.

A number of these transactions are in the financial technology space and should improve access to finance and the ability to move funds around the continent in a more efficient manner over time. Less friction in the ecosystem will benefit all stakeholders.

Chinese investment into Africa does have its detractors but as the London School of Economics points out, they are deploying significant capital into the continent and Chinese State Owned Enterprises are the biggest investors by value and dominate new investment in the resources, energy and transportation sectors. In 2019, the $110bn in Chinese investment into Africa accounted for 20% of Africa’s economic growth.

As China shifts from being a low-cost producer and its middle-class develops, the country has a strategic requirement to feed 800 million consumers by the year 2030. This is expected to be a big driver for agriculture activities in Africa who are expected to satisfy this demand.

With new investment driving economic expansion, there will be a requirement for sustainable and consistent energy supply and countries like South Africa are attracting a lot of interest from foreign investors who are looking to fund ventures in high-growth emerging markets. As energy supply improves, this drives additional economic activity which in turn leads to capacitating of downstream industries and broadens the tax base.

There is no question that the events that unfolded in South Africa in early July do not paint the continent in the best light but it is important to understand that Africa remains one of the few remaining frontier markets where capital can generate significant investment returns for the patient investor.

Context is important and the African growth story remains intact, no matter what the headlines say.