Africa as an investment destination

Under the theme “Delivering on Africa’s Promise”, the 23rd World Economic Forum (WEF) on Africa will provide an important platform for regional and global leaders from business, government and civil society to deepen the continent’s integration agenda and renew commitment to a sustainable path of growth and development.

Africa is on the tip of the tongues of business people and investors all over the world. The recent BRICS summit that took place in Durban, which was convened under the theme, BRICS and Africa – Partnership for Development, Integration and Industrialisation, was further proof of this. But what has brought the ‘dark continent’ into the limelight?

Africa represents a unique opportunity in a global environment where developed economies are not providing investors with reasonable return on investment. Advanced economies are only expected to grow by around 1.5% in 2013, whilst the International Monetary Fund (IMF) forecasts that Sub-Saharan economies will grow by 5.7% this year, up from 4.7% in 2012.

Foreign direct investment inflows

These higher growth rates can be ascribed to a combination of favourable factors, including growth in export volumes, higher commodity prices, and foreign direct investment (FDI) inflows. In fact, according to the United Nations Conference on Trade and Development (UNCTAD), FDI flows to developed countries fell drastically in 2012, reaching levels last seen almost 10 years ago.

FDI flows to Africa, however, grew by 5.5% between 2011 and 2012.  The continent represents somewhat of an open playing field, with significant potential in largely untapped markets waiting for development.

The attractiveness of Africa as an investment destination has been positively impacted by a number of developments in the regulatory environment in African countries:

  • Transparency with regard to macroeconomic policy
  • A focus on more market-friendly economic policies
  • A focus on addressing corruption, and
  • The introduction of investment incentives.

Africa as an investment destination

These developments have made it easier for potential new entrants to markets to do business. In addition, increases in productivity on the continent, the diversification of African economies as they move away from resources, the size of the African market, and rates of urbanisation, are creating conditions that could potentially be favourable to investment.

Interest in Africa is driven by two mega-trends:

  • Enormous global demand for Africa’s resources; from mining, oil, and gas, to fertile, unused agricultural land, and
  • Consumer-based demand resulting from the rapidly growing ‘one billion plus’ population, rapid urbanisation, and a growing middle-class of young, globally minded and largely well-educated people.

Africa is home to 10% of the world’s oil, 40% of its gold, between 80-90% of the chromium, and 60% of the world’s total of arable uncultivated land is found in Africa. This presents investors with unique opportunities to get involved in different parts of the value chain in both the agricultural and resources sector.

Africa’s growing middle class

Africa’s population demographics don’t follow the ‘inverse pyramid’ seen in developed countries, where there is real concern regarding the aging workforce that puts strain on young people to support those who cannot work anymore. This factor has contributed significantly to the sovereign debt crisis in Europe.

In Africa, the growing young middle class outnumbers the older members of African society and investors should take advantage of this trend while it still exists. To take advantage of these trends, however, it’s important to realise that the economies that will be really successful in Africa will be the ones that can diversify their economies, using the income they receive from resources to develop other sectors such as retail, banking, and services.

Share your thoughts here on Africa’s potential as an investment destination… What will it take for African economies to provide a reasonable return on investment?

David Okwara

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