africa investment outlook 2012

Africa Investment Outlook 2012 March 2012

Africa Investment Outlook

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Contents

1. Overview 3

2. Introduction

I. The Investment Scene: Growth with risks 5

3. Growing global appetite in investment opportunities

I. Federal Bonds 6

II. Increased Competition 6

4. Key investment drivers

I. Surging External Demand 7

II. China’s investments 7

III. Increase in Urbanization 8

IV. Robust Commodity Prices 8

V. Improved Economic Policies and Management 9

VI. Demographics 9

5. Investment growing trends

I. The three-tier consumer markets 10

II. The Mobile Phone Revolution 10

III. Natural resources 11

IV. Chinese investment in Africa 11

V. Outsourcing of economic activities to Sub-Saharan Africa 13

VI. Low cost inputs and consumption goods 14

VII. Access to more appropriate technologies 15

6. Investment Challenges

I. Inflation concerns 16

II. An infrastructure crisis 16

III. Drought 17

7. Key Considerations

I. The Demographic Divide 17

II. Chinese Conflicts of Interest 18

III. Uncertain Stock Markets 19

8. Sustainability of the Impact of Investment Drivers 19


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9. Appendix

I. Sub-Saharan Africa: Country Groupings 20

II. Member Countries of Regional Groupings 21

III. Africa’s Distribution of Resources 22

IV. Total Investment in Africa 23


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Overview

Africa’s economy has grown by 5% per year over the past 15 years, driven by rising exports,

increased investment, and economic policy liberalization. This research report begins with

the setting of the investment scene. Next is the growing global appetite in investment

opportunities, exploring the factors of federal bonds and increased competition among

investment players. A definition of the key investment drivers follows with an explanation

of the effects of the surging external demand, Increase in China’s investments, increase in

urbanization, robust commodity prices and improved economic policies. An investigation

into investment growing trends is next with an introduction to the opportunities and

challenges. The report ends with some recommendations on enhancing sustainable

investments in Africa and some key considerations.


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Featuring content from

The IMF’s Regional Economic Outlook: Sub-Saharan Africa: Oct 2011,

The Economist Intelligence Unit’s Africa: Open For Business,

The Economist Intelligence Units’ GCC trade and investment flows.

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Edited and Compiled by Sharon Obuobi


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The Investment Scene: Growth with risks

Sub-Saharan Africa: Output Growth

According to the IMF, in the sub-Saharan African region’s seven oil exporters, higher oil

and gas production levels should be sustained by continued strong oil demand, and non-

oil activity, particularly in the public sector, is being underpinned by the resurgence of

hydrocarbon revenues—a pattern most evident in Angola. Consequently, growth in the oil-

exporting countries is projected to average 6 percent this year and 7 percent in 2012.

Sub-Saharan Africa: Macroeconomic indicators Dec 2005 – June 2011


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The IMF reports that there has been a significant and rapid reorientation of exports toward

China, India, and other developing countries over the last decade. More than half of the

region’s trade (both exports and imports) is now with nontraditional partners, and

investment lows are moving in a similar path. The immediate payoffs from this

reorientation of trade include reduced export and output volatility.

Growing global appetite in investment opportunities

According to Dominic O’Neill’s Euromoney article entitled, “Investment Banks Eye The Last

Frontier: Africa”, with expectations that Sub-Saharan Africa's GDP growth rate will rise as

high as 7% in comparison to South Africa’s expected 3.5% many investors – Western,

Chinese, and South African alike – are eyeing Sub-Saharan Africa with renewed interest.

Federal Bonds

With this in mind, the role of African governments is of even greater importance due to

the need for better-developed infrastructure in order to cater to rapidly rising populations

and the fostering of economic growth.

O’Neill states that in 2011, Nigeria launched its first dollar sovereign bond while Zambia

and Senegal both obtained sovereign credit ratings for the first time. Other governments,

such as those of Kenya and Tanzania, are preparing their first dollar bonds, which is likely

to facilitate more issuance from these countries by banks and corporates.

Increased Competition

According to O’Neill, Africa’s wholesale-banking revenue currently totals more than $850

million a year. In addition the level of competition in increasing significantly as French, UK


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and US banks make plans to finance projects in Sub-Saharan Africa. Similarly, South Africa's

biggest banks are considering opportunities north of the border. Due to South Africa’s

economy’s commodities-driven nature, its firms are already strong in infrastructure and

resource financing which is much needed across Africa.

In Africa, Standard Chartered is making plans to expand in the securities services market, as

well as public equity. Banks like Standard Bank have increased personnel in Africa

investment banking to boost capabilities in debt capital markets in Nigeria, equities in

Kenya, and investment banking in Ghana.

Key investment drivers

Surging External Demand

A new key investment driver has been the surge in external demand, particularly from

China and India, which are the fastest-growing countries in the world and hungry for

resources—especially oil and minerals. According to the Economist, OECD growth will be

weak and fragile while China, India, and most other emerging markets power ahead and

help to keep commodity prices high.1

China’s investments

China’s high-profile investments in Africa have also helped to put the continent on the

global investment map. China’s meteoric rise over the last two decades and the

expectation that it will grow faster than most other major economies well into the future,

means the Chinese authorities are on a quest to secure access to raw materials.

Sector Composition of China’s Investment in Africa by end-2009


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China is finding many of the minerals and oil it needs in Africa, and is building much-

needed infrastructure in return. Furthermore, China is looking to cultivate markets it can

reap. Africa is a virgin market. From a long-term manufacturing point of view, costs have

increased in China and they will start to invest in manufacturing in Africa.

Increase in Urbanization

Another new key investment driver has been the increased pace of urbanization and

consumerism as Africans flock to the cities, disposable incomes rise, demand for modern

goods and services such as telecommunications and banking services accelerate. Africa is

urbanizing rapidly with about 40% of the population now living in cities. This ratio is higher

than that of India and lower than that of China.

Robust Commodity Prices


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There is a stronger global demand for commodities in the aftermath of recession, driven in

particular by the burgeoning appetites of China and India for minerals and energy

products, which are boosting commodity prices. Higher commodity prices, in turn, are

driving investment in exploration and extraction.

Improved Economic Policies and Management

The apparent willingness of countries in Africa to implement economic reform has

improved the attractiveness of the region to foreign investors and businesses that will be

increasingly keen to tap into the continent’s high-growth markets at a time of sclerotic

growth in the developed world.

Demographics

The continent will have the youngest, fastest-growing and fastest-urbanizing population in

the world. Its population has increased from around 110 million in the mid-19th century to

an estimated 1 billion people today. This is set to double before 2050.


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Investment-growing trends

With the increase in urbanization and disposable income within the middle class, the

demand for modern goods and services is beginning to surge. According to the Economist,

by 2030 Africa’s top 18 cities could have a combined spending power of US$1.3 trillion. By

2050, 63% of Africa’s population will be urban.

The Three-tier consumer markets

Africa’s consumers can be divided into three main tiers, and businesses will need to build

their strategies accordingly.

1. The rising and the future middle-class market of 350 – 500 million, similar to the

segments in India and China.

2. The consumers at the bottom of the pyramid, which is growing, and the ascent of the

mobile phone has proven that there is a market.

3. The challenge for firms to move from basic goods to affordable products.

Companies will need to look at all three strategies, but new investors and existing investors

will also need to look at the broader consumer markets

The mobile-phone revolution

Due to Africa’s very poor landline infrastructure and the easy availability of mobiles, the

mobile-phone market has grown rapidly. According to the Economist, the number of

mobile subscribers jumped from around zero in the mid-1990s to 88 million in 2005, and

reached an incredible 360 million in 2010, which equates to 45% of the population.

It also explains that in addition to its tele-banking capabilities, the mobile phone provides

farmers and traders with up-to-date market information, and is becoming the main tool for

accessing the Internet. Mobile Internet is growing rapidly in some markets, such as in


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Kenya, where subscriber numbers more than doubled in 2010 alone to 4.7m. There has

also been a rapid emergence of products, which will facilitate the spread of real commerce

and e-commerce as well as provide a new platform for official transfers and the payment

of bills.

Natural resources

Natural resources, especially minerals and particularly oil, will remain central to many

resource-rich countries that are benefiting from stronger global demand in the aftermath

of recession.

Oil has been the main focus of foreign direct investment (FDI), but key minerals, such as

gold, copper, iron ore, chrome and diamonds, and more exotic elements, are major draw-

cards. Most notably, new junior mining firms, which tend to be more dynamic and

responsive, are playing a key part in the investment surge. (See Appendix C: Africa’s

distribution of natural resources).

Chinese investment in Africa

China has emerged as a leading investor in Africa in the resources sector, with an increase

in initial big investments from US $681 million in 2000 to US $9.3 billion in 2010.


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According to the Economist, trade between the two continents has also been rising: 12.4%

of all exports from Africa went to China last year, a fifteenfold increase on 2001. Angola is

the leading supplier of oil to China, followed by Nigeria.


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There has also been a shift into services, and the sector has taken the largest chunk of

investment. In addition, the next few years will see the development of industrial parks in

key African countries. One industrial park is already operating in Mauritius, and more are

planned in Nigeria, Ghana, Kenya and South Africa. The aim of these parks is to improve

infrastructure and the regulatory environment, and to encourage Chinese firms to establish

manufacturing industries in the parks, as they benefit from tax break holidays, favourable

regulations and good infrastructure.

Outsourcing of economic activities to sub-Saharan Africa

According to the Economist, rising wages in Brazil, China, India, and other countries could

prompt them to further outsource their economic activities to sub-Saharan Africa,

especially in light manufacturing. These BICs are moving up the value chain with China and

India in manufacturing, and Brazil in biofuels. Thus there is the potential to outsource these

activities to sub-Saharan Africa. Global rebalancing between advanced and emerging


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economies could accelerate this process, with more rapid industry upgrading in China and

India.

Low-cost inputs and consumption goods

Sub-Saharan Africa could benefit from imports available at a much lower cost from

emerging partners than from its traditional partners. Low-cost capital goods boost the

productivity of sub-Saharan Africa’s producers, whereas low-cost manufactured imports

benefit consumers and producers (through lower wage pressures and cheaper inputs).

Intraregional integration could also boost growth by promoting horizontal FDI, creating

economies of scale and improving the allocation of factors of production within the region.

However there are also negative reactions to this aspect as low-cost imports also dilute the

local markets and put some local producers out of work. As a result of a directly correlated

increase in unemployment, countries like Angola have reacted very badly to these imports.

Estimated and Projected Exports by Sub-Saharan Africa to Partners


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Access to more appropriate technologies

Through intensifying trade and investment relationships with other developing countries

like China, countries in the sub-Saharan African region also have access to cheaper and

less sophisticated technologies that may be more appropriate for their level of

development.


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Investment Challenges

The key economic risks range from weak fiscal and monetary policies, high inflation,

volatile currencies, high taxes, nationalization issues, skills shortages, inadequate

infrastructure and red tape.

Inflation concerns

Inflation has now returned to levels recorded before the commodity price spike in 2007-

2008. In Sub-Saharan Africa, the average rate of inflation jumped to 11.7% in 2008 with

soaring oil and food prices, but retreated to 8.5% in 2009 as the global downturn curbed

price pressures. The annual average rate is expected to hover at around 7.1% in 2010-2012.

However, inflation will remain comparatively high in a global context and will be vulnerable

to fluctuations in commodity and product markets. The ongoing power crisis, severe

infrastructure bottlenecks and higher tariffs will also have an impact on inflation.

An infrastructure crisis

Most operators in Africa will agree that the poor state of physical infrastructure, especially

electricity and transport, is one of the biggest impediments to business. For instance,

Nigeria, with a population of 150 million, has the same power capacity as Hungary, with a

population of less than 10 million. These issues have also had a profound effect on

investors. Very few locations have sufficient infrastructure, with the exception of South

Africa, but even there power and transport provision is inadequate.

Faster growth in recent years has highlighted deficiencies, exposing bottlenecks in ports,

roads, rail and power supply. Although substantial infrastructure investment is under way—

for example, resource extraction deals secured by Chinese and Indian firms typically involve

a commitment to build local infrastructure—improvements will take time. Africa will need

investments of at least US$ 93billion in the power sector alone.


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Drought

The drought in the Horn of Africa is imposing direct production, fiscal, and external costs

on the countries affected by food shortages and refugees in addition to its immense

humanitarian burden. The IMF estimates that the initial impact on output in Ethiopia and

Kenya will be less than ½ percent of GDP, but the final impact of the drought, and its

ramifications throughout the region, could ultimately be much larger. For example, in

Tanzania, the drought has reduced hydroelectric power generation, with attendant

implications for not only output but also fiscal accounts

Key Considerations

The demographic dividend

With more than one-half of its population under 24 years of age, Africa is one of the most

populated and youngest markets in the world. According to the Economist, by 2050

Africa’s population of 2 billion will have overtaken that of India (1.6 billion) and of China

(1.4 billion).


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By 2015, the proportion of Africa’s youth (under 15 years) is expected to rise to 45% of the

total population and urbanizing the fastest.

Chinese conflicts of interests

One key issue that has arisen is whether it is the responsibility of Chinese investors to

develop skills and provide education, or the responsibility of the African governments to

develop the skills needed to create opportunities, jobs and growth. Based on the trends to

date, both the governments and investors, whether they are Chinese or other international

operators, will need to invest in education, skills and infrastructure. If not, as in Europe,

history will repeat itself and show that the transfer of skills and development of human


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capital will remain one of the biggest challenges in Africa. This is something, however, that

Indian investors are addressing to some extent. As part of their African strategy, which is to

secure resources, efforts to transfer skills—on a small scale—are taking place. If left

unchecked, the prospect of an African Spring cannot be discounted.

Uncertain Stock Markets

The IMF predicts that over the next five years, seven of the top-10 fastest-growing

economies will be in Africa. A large amount of the higher GDP growth in Africa is

attributed to Chinese state-linked investments. In countries such as Angola and Ethiopia,

where China is dominant, deals are generally brokered bilaterally, closed to outside bidders,

without use of international banks.

With the increase in Africa funds and allocations to Africa in global emerging market funds,

there are billions of dollars of new capital available to Africa-related stocks. However, the

biggest exchange - Nigeria's - has daily trading volumes only in the low tens of millions of

dollars, which makes the building of brokerage operations across the continent infeasible

at the moment.

Sustainability of the Impact of Investment Drivers The impact of the surge in external demand as well as the increase in urbanization and

consumerism offers hope that this economic growth may be sustainable. The challenge,

however, is how quickly they will translate into actual growth in particular countries with a

host of other variables, including democracy and governance, the state of infrastructure

and the pace of deregulation taken into account.


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Appendix

A. Sub-Saharan Africa: Country Groupings by Resource

*Country has reached the completion point under the enhanced HIPC Initiative and has qualified for MDRI relief.

Key Points:

The 7 oil exporters are countries where net oil exports make up 30% or more of total exports.

The 11 middle-income countries not classified as oil exporters or fragile countries had average per

capita gross national income in the years 2008–10 of more than US $992.70.

The 14 low-income countries not classified as oil exporters or fragile countries had average per capita

gross national income in the years 2008–10 equal to or lower than US$992.70 and IRAI scores higher

than 3.2.


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B. Member Countries of Regional Groupings


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C. Africa’s distribution of resources


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D. Total Investment: Countries


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Diagrams in-text

A. Sub-Saharan Africa Output Growth

Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys:

Regional Economic Outlook. Oct (2011)

B. Sub-Saharan Africa: Macroeconomic indicators Dec 2005 – June 2011



C. Sector Composition of China’s Investment in Africa by end-2009



D. Partners

The Chinese in Africa: Trying to pull together. Published April 20, 2011. From Print Edition.

http://www.economist.com/node/18586448. Web. Accessed Mar 25, 2012.

E. Africa’s Slice

The Chinese in Africa: Trying to pull together. Published April 20, 2011. From Print Edition.

http://www.economist.com/node/18586448. Web. Accessed Mar 25, 2012.

F. Estimated and Projected Exports by Sub-Saharan Africa to Partners



G. Population forecasts for selected countries

World Population Projections: Growing pains. Published May 5 2011. The Economist Online.

http://www.economist.com/blogs/dailychart/2011/05/world_population_projections. Web.

Accessed Mar 25. 2012


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Diagrams in Appendix

A. Sub-Saharan Africa: Country Groupings by Resource



B. Member Countries of Regional Groupings



C. Africa: Key Resources

"Africa: open for business. The potential, challenges and risks." Economist Intelligence Unit.

(2012): n. page. Print

D. Total Investment by Country



Other Sources

"Africa: open for business. The potential, challenges and risks." Economist Intelligence Unit.

(2012): n. page. Print

"GCC trade and investment flows: The emerging-market surge." Economist Intelligence

Unit. (2011): n. page. Print.

O’Neill, Dominic. "Investment Banks Eye the Last Frontier: Africa." Euromoney. 00142433

(2011): ABI/INFORM Global; ABI/INFORM Trade & Industry; ProQuest European

Business. Web. 24 Mar. 2012.

"Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys:

Regional Economic Outlook. Oct (2011): Web. 27 Mar. 2012.

africa investment outlook 2012

Business

investment scene

investment opportunities

increased investment

investment challenges

chinese investment

investment flows

investment players

total investment