Africa Investment Outlook 2012


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Africa Investment Outlook 2012

  1. 1. Africa Investment Outlook 2012March 2012
  2. 2. Africa Investment OutlookContents 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 191
  3. 3. Africa Investment Outlook 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 232
  4. 4. Africa Investment OutlookOverviewAfrica’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 withthe setting of the investment scene. Next is the growing global appetite in investmentopportunities, exploring the factors of federal bonds and increased competition amonginvestment players. A definition of the key investment drivers follows with an explanationof the effects of the surging external demand, Increase in China’s investments, increase inurbanization, robust commodity prices and improved economic policies. An investigationinto investment growing trends is next with an introduction to the opportunities andchallenges. The report ends with some recommendations on enhancing sustainableinvestments in Africa and some key considerations.3
  5. 5. Africa Investment Outlook 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.Contact Us7200 The Quorum, Oxford Business Park NorthOXFORD, OX4 2JZ, United KingdomT: + (44) 01865 589022F: + (44) 01865 481482E: info@s-scg.comEdited and Compiled by Sharon Obuobi4
  6. 6. Africa Investment OutlookThe Investment Scene: Growth with risksSub-Saharan Africa: Output GrowthAccording to the IMF, in the sub-Saharan African region’s seven oil exporters, higher oiland 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 ofhydrocarbon 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 20115
  7. 7. Africa Investment OutlookThe IMF reports that there has been a significant and rapid reorientation of exports towardChina, India, and other developing countries over the last decade. More than half of theregion’s trade (both exports and imports) is now with nontraditional partners, andinvestment lows are moving in a similar path. The immediate payoffs from thisreorientation of trade include reduced export and output volatility.Growing global appetite in investment opportunitiesAccording to Dominic O’Neill’s Euromoney article entitled, “Investment Banks Eye The LastFrontier: Africa”, with expectations that Sub-Saharan Africas GDP growth rate will rise ashigh 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 BondsWith this in mind, the role of African governments is of even greater importance due tothe need for better-developed infrastructure in order to cater to rapidly rising populationsand the fostering of economic growth.O’Neill states that in 2011, Nigeria launched its first dollar sovereign bond while Zambiaand 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 likelyto facilitate more issuance from these countries by banks and corporates.Increased CompetitionAccording to O’Neill, Africa’s wholesale-banking revenue currently totals more than $850million a year. In addition the level of competition in increasing significantly as French, UK6
  8. 8. Africa Investment Outlookand US banks make plans to finance projects in Sub-Saharan Africa. Similarly, South Africasbiggest banks are considering opportunities north of the border. Due to South Africa’seconomy’s commodities-driven nature, its firms are already strong in infrastructure andresource financing which is much needed across Africa.In Africa, Standard Chartered is making plans to expand in the securities services market, aswell as public equity. Banks like Standard Bank have increased personnel in Africainvestment banking to boost capabilities in debt capital markets in Nigeria, equities inKenya, and investment banking in Ghana.Key investment driversSurging External DemandA new key investment driver has been the surge in external demand, particularly fromChina and India, which are the fastest-growing countries in the world and hungry forresources—especially oil and minerals. According to the Economist, OECD growth will beweak and fragile while China, India, and most other emerging markets power ahead andhelp to keep commodity prices high.1China’s investmentsChina’s high-profile investments in Africa have also helped to put the continent on theglobal investment map. China’s meteoric rise over the last two decades and theexpectation 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-20097
  9. 9. Africa Investment OutlookChina 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 canreap. Africa is a virgin market. From a long-term manufacturing point of view, costs haveincreased in China and they will start to invest in manufacturing in Africa.Increase in UrbanizationAnother new key investment driver has been the increased pace of urbanization andconsumerism as Africans flock to the cities, disposable incomes rise, demand for moderngoods and services such as telecommunications and banking services accelerate. Africa isurbanizing rapidly with about 40% of the population now living in cities. This ratio is higherthan that of India and lower than that of China.Robust Commodity Prices8
  10. 10. Africa Investment OutlookThere is a stronger global demand for commodities in the aftermath of recession, driven inparticular by the burgeoning appetites of China and India for minerals and energyproducts, which are boosting commodity prices. Higher commodity prices, in turn, aredriving investment in exploration and extraction.Improved Economic Policies and ManagementThe apparent willingness of countries in Africa to implement economic reform hasimproved the attractiveness of the region to foreign investors and businesses that will beincreasingly keen to tap into the continent’s high-growth markets at a time of scleroticgrowth in the developed world.DemographicsThe continent will have the youngest, fastest-growing and fastest-urbanizing population inthe world. Its population has increased from around 110 million in the mid-19th century toan estimated 1 billion people today. This is set to double before 2050.9
  11. 11. Africa Investment OutlookInvestment-growing trendsWith the increase in urbanization and disposable income within the middle class, thedemand 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. By2050, 63% of Africa’s population will be urban.The Three-tier consumer marketsAfrica’s consumers can be divided into three main tiers, and businesses will need to buildtheir 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 investorswill also need to look at the broader consumer marketsThe mobile-phone revolutionDue to Africa’s very poor landline infrastructure and the easy availability of mobiles, themobile-phone market has grown rapidly. According to the Economist, the number ofmobile subscribers jumped from around zero in the mid-1990s to 88 million in 2005, andreached 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 providesfarmers and traders with up-to-date market information, and is becoming the main tool foraccessing the Internet. Mobile Internet is growing rapidly in some markets, such as in10
  12. 12. Africa Investment OutlookKenya, where subscriber numbers more than doubled in 2010 alone to 4.7m. There hasalso been a rapid emergence of products, which will facilitate the spread of real commerceand e-commerce as well as provide a new platform for official transfers and the paymentof bills.Natural resourcesNatural resources, especially minerals and particularly oil, will remain central to manyresource-rich countries that are benefiting from stronger global demand in the aftermathof recession.Oil has been the main focus of foreign direct investment (FDI), but key minerals, such asgold, 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 andresponsive, are playing a key part in the investment surge. (See Appendix C: Africa’sdistribution of natural resources).Chinese investment in AfricaChina has emerged as a leading investor in Africa in the resources sector, with an increasein initial big investments from US $681 million in 2000 to US $9.3 billion in 2010.11
  13. 13. Africa Investment OutlookAccording 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 isthe leading supplier of oil to China, followed by Nigeria.12
  14. 14. Africa Investment OutlookThere has also been a shift into services, and the sector has taken the largest chunk ofinvestment. In addition, the next few years will see the development of industrial parks inkey African countries. One industrial park is already operating in Mauritius, and more areplanned in Nigeria, Ghana, Kenya and South Africa. The aim of these parks is to improveinfrastructure and the regulatory environment, and to encourage Chinese firms to establishmanufacturing industries in the parks, as they benefit from tax break holidays, favourableregulations and good infrastructure.Outsourcing of economic activities to sub-Saharan AfricaAccording to the Economist, rising wages in Brazil, China, India, and other countries couldprompt 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 andIndia in manufacturing, and Brazil in biofuels. Thus there is the potential to outsource theseactivities to sub-Saharan Africa. Global rebalancing between advanced and emerging13
  15. 15. Africa Investment Outlookeconomies could accelerate this process, with more rapid industry upgrading in China andIndia.Low-cost inputs and consumption goodsSub-Saharan Africa could benefit from imports available at a much lower cost fromemerging partners than from its traditional partners. Low-cost capital goods boost theproductivity of sub-Saharan Africa’s producers, whereas low-cost manufactured importsbenefit consumers and producers (through lower wage pressures and cheaper inputs).Intraregional integration could also boost growth by promoting horizontal FDI, creatingeconomies 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 thelocal markets and put some local producers out of work. As a result of a directly correlatedincrease in unemployment, countries like Angola have reacted very badly to these imports.Estimated and Projected Exports by Sub-Saharan Africa to Partners14
  16. 16. Africa Investment OutlookAccess to more appropriate technologiesThrough intensifying trade and investment relationships with other developing countrieslike China, countries in the sub-Saharan African region also have access to cheaper andless sophisticated technologies that may be more appropriate for their level ofdevelopment.15
  17. 17. Africa Investment OutlookInvestment ChallengesThe key economic risks range from weak fiscal and monetary policies, high inflation,volatile currencies, high taxes, nationalization issues, skills shortages, inadequateinfrastructure and red tape.Inflation concernsInflation 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 withsoaring oil and food prices, but retreated to 8.5% in 2009 as the global downturn curbedprice 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 vulnerableto fluctuations in commodity and product markets. The ongoing power crisis, severeinfrastructure bottlenecks and higher tariffs will also have an impact on inflation.An infrastructure crisisMost operators in Africa will agree that the poor state of physical infrastructure, especiallyelectricity 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 apopulation of less than 10 million. These issues have also had a profound effect oninvestors. Very few locations have sufficient infrastructure, with the exception of SouthAfrica, 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 involvea commitment to build local infrastructure—improvements will take time. Africa will needinvestments of at least US$ 93billion in the power sector alone.16
  18. 18. Africa Investment OutlookDroughtThe drought in the Horn of Africa is imposing direct production, fiscal, and external costson the countries affected by food shortages and refugees in addition to its immensehumanitarian burden. The IMF estimates that the initial impact on output in Ethiopia andKenya will be less than ½ percent of GDP, but the final impact of the drought, and itsramifications throughout the region, could ultimately be much larger. For example, inTanzania, the drought has reduced hydroelectric power generation, with attendantimplications for not only output but also fiscal accountsKey ConsiderationsThe demographic dividendWith more than one-half of its population under 24 years of age, Africa is one of the mostpopulated and youngest markets in the world. According to the Economist, by 2050Africa’s population of 2 billion will have overtaken that of India (1.6 billion) and of China(1.4 billion).17
  19. 19. Africa Investment OutlookBy 2015, the proportion of Africa’s youth (under 15 years) is expected to rise to 45% of thetotal population and urbanizing the fastest.Chinese conflicts of interestsOne key issue that has arisen is whether it is the responsibility of Chinese investors todevelop skills and provide education, or the responsibility of the African governments todevelop the skills needed to create opportunities, jobs and growth. Based on the trends todate, both the governments and investors, whether they are Chinese or other internationaloperators, 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 human18
  20. 20. Africa Investment Outlookcapital will remain one of the biggest challenges in Africa. This is something, however, thatIndian investors are addressing to some extent. As part of their African strategy, which is tosecure resources, efforts to transfer skills—on a small scale—are taking place. If leftunchecked, the prospect of an African Spring cannot be discounted.Uncertain Stock MarketsThe IMF predicts that over the next five years, seven of the top-10 fastest-growingeconomies will be in Africa. A large amount of the higher GDP growth in Africa isattributed 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, thebiggest exchange - Nigerias - has daily trading volumes only in the low tens of millions ofdollars, which makes the building of brokerage operations across the continent infeasibleat the moment.Sustainability of the Impact of Investment DriversThe impact of the surge in external demand as well as the increase in urbanization andconsumerism 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 ahost of other variables, including democracy and governance, the state of infrastructureand the pace of deregulation taken into account.19
  21. 21. Africa Investment OutlookAppendixA. 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 3.2.20
  22. 22. Africa Investment OutlookB. Member Countries of Regional Groupings21
  23. 23. Africa Investment OutlookC. Africa’s distribution of resources22
  24. 24. Africa Investment OutlookD. Total Investment: Countries23
  25. 25. Africa Investment Outlook24
  26. 26. Africa Investment Outlook Diagrams in-textA. 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 Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys: Regional Economic Outlook. Oct (2011)C. Sector Composition of China’s Investment in Africa by end-2009 Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys: Regional Economic Outlook. Oct (2011)D. Partners The Chinese in Africa: Trying to pull together. Published April 20, 2011. From Print Edition. Web. Accessed Mar 25, 2012.E. Africa’s Slice The Chinese in Africa: Trying to pull together. Published April 20, 2011. From Print Edition. Web. Accessed Mar 25, 2012.F. Estimated and Projected Exports by Sub-Saharan Africa to Partners Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys: Regional Economic Outlook. Oct (2011)G. Population forecasts for selected countries World Population Projections: Growing pains. Published May 5 2011. The Economist Online. Web. Accessed Mar 25. 2012 25
  27. 27. Africa Investment OutlookDiagrams in AppendixA. Sub-Saharan Africa: Country Groupings by ResourceSub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys:Regional Economic Outlook. Oct (2011)B. Member Countries of Regional GroupingsSub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys:Regional Economic Outlook. Oct (2011)C. Africa: Key Resources"Africa: open for business. The potential, challenges and risks." Economist Intelligence Unit.(2012): n. page. PrintD. Total Investment by CountrySub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys:Regional Economic Outlook. Oct (2011)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 IntelligenceUnit. (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 EuropeanBusiness. Web. 24 Mar. 2012."Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys:Regional Economic Outlook. Oct (2011): Web. 27 Mar. 2012.26