East Africa Growing Interest in Investment Opportunities

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  • 1. Sub-Saharan Consulting Group.Innovative Business Solutions for Emerging Frontiers East Africa: Growing Interest in Investment Opportunities An Outlook on growing appetite in EA Investment Opportunities
  • 2. East Africa: Growing Interest in Investment OpportunitiesContents I. Regional Overview a. East Africa Community 4 II. Investment Climate a. Projections and Trends 5 b. Inflation 6 III. Investment Opportunities a. Increasing Investment Competitiveness for Oil 7 b. Information, Communication, and Technology 8 IV. Investment Risks a. Inflationary Pressures 9 b. The Role of the EAC in Political Risk 10 c. Growing political uncertainties for investors 10 V. East Africa Common Market Potential a. Achievements 12 b. Challenges 13 c. Job Fears 13 d. Benefits in Trade 14 VI. Developing stronger investor confidence: Recommendations 15VII. Appendix a. Member Countries of Regional Groupings 16 b. Africa’s Distribution of Resources 17 c. Natural gas in Africa 17 d. Operators in East Africa 18 e. Total Investment by Country 19 f. Internet Users and Mobile Subscriptions in EAC 20 g. EAC Common Market Development 211
  • 3. East Africa: Growing Interest in Investment Opportunities 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, The East African Community. 4th EAC Development Strategy.2
  • 4. East Africa: Growing Interest in Investment OpportunitiesContact 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 Obuobi3
  • 5. East Africa: Growing Interest in Investment OpportunitiesRegional OverviewEast Africa CommunityThe East African Community (EAC) is the regional intergovernmental organization of theRepublics of Kenya, Uganda, the United Republic of Tanzania, Republic of Rwanda andRepublic of Burundi with its headquarters in Arusha, Tanzania.The EAC is fastest-moving trade bloc in Africa at the moment. It introduced a common marketin July 2010 with the hopes of enhancing trade and economic growth in the east. Howevercritics say that the impact will be gradual, as many laws still need to be harmonized, andTanzania has preserved some opt-outs. The EAC also plans to fast track the introduction of asingle currency by 2012, but given the need to harmonize fiscal and monetary policy, criticssuggest that 2015 may be a more realistic deadline.According to the EAC, intra-EAC trade grew by 40% between 2005 and 2009. Uganda’s exportsto Kenya increased more than tenfold from USD15.5 Million in 2004 to USD172 Million in 2009,while Tanzania’s exports to Kenya over the same period nearly tripled, from USD 95.5 Millionto USD 300 Million. This pattern is expected to be enhanced with the Common Market, whichcame into effect in July 2010. This increased trade and investment among the EAC PartnerStates has broadened prospects for economic growth and development.4
  • 6. East Africa: Growing Interest in Investment OpportunitiesInvestment ClimateProjections and TrendsEast Africa is forecast to be the fastest-growing region in Africa. The Economist IntelligenceUnit predicts that although Kenya has no natural resources, it is the key financial and businesshub, and the Kenyan economy is expected to grow by 5-6% from ongoing development andreforms. Across the border, Uganda’s discovery of oil will boost development and growth, andthe country will join the oil club in a few years.5
  • 7. East Africa: Growing Interest in Investment OpportunitiesFurthermore, key mineral producers like Tanzania, will also perform well, as will strongagricultural economies like Ethiopia. Africa will become an increasingly important food supplierto global markets. Countries without major resources but with a strong reform record, such asRwanda, will also join the ranks of high growth achievers.InflationAccording to the IMF’s Regional Economic Outlook, there has a sharp increase in inflation insome east African countries as shown below:Across the EAC region, consumer price inflation was predicated to average 8.5% percent in2011 compared with 10.2% percent in 2012. Higher food and fuel prices have contributed tothe surge in inflation. Although the number of countries in which food inflation is currentlyabove 10 percent has increased in recent months, the number has remained well below thenearly 35 countries in which this was observed in 2008.6
  • 8. East Africa: Growing Interest in Investment OpportunitiesInvestment OpportunitiesIn Recent News: Increasing Investment Competitiveness for OilFinancial Times: Big oil groups join scramble for east Africa: By Guy Chazan, March 12, 2012Statoil set the oil industry abuzz late last month when it announced it had found largevolumes of natural gas off the coast of Tanzania, confirming east Africa’s reputation as one ofthe energy world’s most promising new frontier. Statoil had lockdown facilities on all its rigsand support vessels to keep staff safe in the event of a pirate attack, while a small flotilla,operated by security contractors and Tanzanian navy personnel, guards the drilling site.The threat of piracy might loom large, but it has not prevented a new scramble for east Africa,led by some of the world’s biggest oil companies. Suddenly Mozambique and Tanzania, whichuntil recently did not even feature on the world energy map, have become some of the gasindustrys hottest real estate.Royal Dutch Shell and PTT Exploration, the state-controlled Thai energy group, launched rivaloffers for Cove Energy, a small Africa-focused oil and gas explorer with an 8.5 per cent stake ina big gas field in Mozambique. Two state-owned Indian groups, GAIL and ONGC, have alsoexpressed an interest in bidding for Cove, though an announcement by the Mozambiqueauthorities last week that they might impose a capital gains tax on the sale of the London-based group could deter potential bidders.The biggest finds were offshore Mozambique, by Anadarko Petroleum and Cove, and Eni ofItaly. Their two fields combined could contain up to 60tn cubic feet of recoverable resources ofgas – nearly as much as Kuwait’s entire reserves. That should be enough to turn Mozambiqueinto a key exporter of liquefied natural gas, or LNG, to China and India’s fast-growingeconomies. And with the region still relatively unexplored, there could be plenty more wherethat came from, analysts say. Fewer than 500 wells have been drilled in east Africa, comparedwith some 20,000 in the north and nearly 15,000 in the west of the continent, according toexplorer Afren. The large LNG plant that Anadarko has proposed building there will cost about$25bn, more than twice the country’s gross domestic product. “Mozambique is one of the7
  • 9. East Africa: Growing Interest in Investment Opportunitiespoorest countries in Africa, and if it gets this right, it could be one of the richest,” says MrAshby-Rudd at Standard Bank.Anadarko has announced it is looking to sell some of its stake in the Mozambique field, andCove put itself up for sale in January. As the majors pile in, the pace of drilling is picking up.Morgan Stanley expects 23 wells to be drilled off Kenya, Tanzania and Mozambique this year,almost double the number in 2011. “Eastern sub-Saharan Africa has a lot of potential to growquickly, and create a lot of value for us,” says Eni’s Mr Descalzi. “It’s a very exciting moment,both for us and the countries we’re in.”See Appendix, figures C for Natural gas predictions in Africa and D for a map of mentioned Operators in East AfricaInformation, Communication and Technology (ICT)The EAC has identified Information and communication technology (ICT) is an increasinglypriority area of the EAC Common Market in its pursuit of economic growth and developmentamong partner states. The ICT is critical towards socio-economic and political developments inthe region. In addition, ICT is considered as a channel through which the EAC common marketwill improve global access of people and competitiveness of goods and services from theregion.Appendix D shows the growth in internet use and mobile subscriptions in East Africa. Kenya isidentified as the country with the largest number of users and subscriptions followed byUganda and Tanzania. Although Rwanda and Burundi recorded relatively low figures,increasing internet use and mobile subscriptions have been reported. However the total EACinternet use increased significantly from about 2.1 to 6.75 million in Rwanda and 9.7 to 39.7million in Burundi, both from 2005 to 2008.8
  • 10. East Africa: Growing Interest in Investment OpportunitiesInvestment RisksAlong with the positive reports and prospects for the majority of countries in sub-SaharanAfrica who are set to sustain fairly healthy growth rates in 2011 and 2012, there are still someinvestment risks that must be considered. The drought in east Africa and the surges in foodand fuel prices are causing considerable difficulties in other parts of the sub-Saharan Africanregion, particularly to the urban poor. According to the Economist Intelligence Unit, the other,more potent threat to the region’s economic prospects is the debt overhang in manyadvanced economies that is threatening to significantly slow down global growth further in thecoming months.Inflationary pressuresAccording to the IMF, recent inflation observations for east African countries point toinflationary pressures which are increasing to worrying levels—nearly 40 percent in Ethiopia,and over 16 percent in Kenya and 21 percent in Uganda. As explained in the RegionalEconomic Outlook, the surge in inflation in these countries points to the dangers of delayingthe monetary policy response to shocks. Similarly, the failure to shift fiscal policy from theexpansionary footing on which it was placed during the downturn in 2009–10 to a moreneutral stance consistent with debt sustainability considerations is eventually going to be evenmore detrimental to sustaining high growth and development. Although elections so far in theelection-heavy year of 2011 have had much less economic impact than feared, political factorsremain an important risk within the region. Much like in other situations worldwide, financialsystems are vulnerable to both global and domestic pressures.9
  • 11. East Africa: Growing Interest in Investment OpportunitiesThe Role of the EAC in Political RiskThe EAC states that democracy is critical in the achievement of sustainable economic growthand development. It explains, that the greatest hindrance to democratic consolidation in EAC isthe perennial conflicts within the horn of Africa and the great lakes region, terrorism andpiracy threats including the proliferation of small arms and influx of refugees into the region.The EAC is documenting its participation in initiatives to improve peace and stability in theregion with a view to increasing economic development prospects. These include peace andsecurity missions in Somalia and Democratic Republic of Congo; the Sudanese ComprehensivePeace Agreement (CPA), the Great Lakes region, and the Intergovernmental Authority onDevelopment (IGAD) initiatives through which security and stability of the greater EasternAfrica region will be pursued. Within the EAC, Partner States are envisioning the formation ofthe East African Political Federation to advance socio-economic and political developmentamong the five Partner States in line with AU aspirations.Growing political uncertainties for investorsFDI inflows correlate inversely with the levels of political risks associated with any country. Thepolitical risk indicator is a composite of diverse issues covering governability, socioeconomicenvironment, ethnic tensions, constitutes components. The sum total of the component’sindexes rankings indicates whether a country is of high or low risk politically. On the basis ofthe International Country Risk Guide (ICRG) indicators, the higher the score, the lower the risk.With the understanding that country specific scores between 0 to 49.5 per cent are associatedwith very high risk; 50 to 59.5 per cent is high risk; 60 to 69.5 per cent is moderate risk and 80to 100 per cent is very low risk, the EAC has recognized three of its states that have beenranked under the ICGR system. Uganda, Kenya and Tanzania have registered gradual butsteady increases during the period under review.For the period 2006-2010:  Uganda was ranked 55- 5610
  • 12. East Africa: Growing Interest in Investment Opportunities  Tanzania was ranked 62- 64  Kenya was ranked 56- 58.On the basis of these ratings, the EAC believes that there is room for improving governance,rule of law and socio-economic issues in the region in order to improve investment conditionsin the region due to the realization that high political risk negatively affects economicperformance of a country or region and in particular investment flows.11
  • 13. East Africa: Growing Interest in Investment OpportunitiesEast Africa Common Market PotentialAccording to the East Africa Community, the key achievement under the Common Market hasbeen the successful conclusion of the negotiation, signing and ratification of the EAC CommonMarket Protocol. The EAC explains that the strategic thrust of the CM Protocol has been thatof enhancing and institutionalizing the guaranteed provisions in the Protocol throughharmonization of policies, legal and regulatory framework and establishment of supportiveinstitutions to facilitate private sector investments, efficient and effective service delivery andwide stakeholder involvement.AchievementsIn terms of the achievements, the EAC has stated that, in addition to the Partner Stateautonomous liberalization the SAPs and the WTO offers; the preparatory process for theimplementation of the EAC Treaty has resulted in the achievements of:  Gradual currency convertibility and macro-economic convergence  Adoption of common travel documents, work permits and fees for education, tourism, etc  Common negotiating frameworks  Substantial progress in harmonization of academic and professional qualifications  Free movement of capital and harmonization of transport facilitating instruments.The EAC testifies that this has also resulted in increased cross border student exchange,alternative methods of mobilizing additional development resources from the stock markets,joint sporting activities including interuniversity sports, free movement of natural persons andlabour.12
  • 14. East Africa: Growing Interest in Investment OpportunitiesChallengesA number of challenges stand in the way of realizing the full benefits of the CommonMarket. These include:  Inadequate institutional, national and regional level capacities to domesticate regional policies and information access  Low levels of awareness across Partner States  Inappropriate legal and regulatory frameworks, continued nationalistic tendencies, weak private sector, differences in education systems, cultural diversities, language barriers, differences in level of economic development including limited participation of the various stakeholders  Weak capacities of implementing agencies  Inadequate safeguard measures and dispute settlement mechanisms  Incomplete harmonization of examination and certification  Inappropriate labour policies and legislation  Weak urban planning policies and disparities in intra-regional trade.Job FearsSome member states are concerned that they might have to cope with an influx of better-trained Kenyan workers. The concern over an inflow of migrant labour, especially from Kenya,is shared in other countries in the region.In an interview for the BBC, Jacqueline Mkindi, the executive director of the TanzaniaHorticultural Association whose members produce fruit, flowers and vegetables for export said,"Free movement of labour should be encouraged, but to a certain level - not to deprive localpeople from accessing local jobs. If you have a large number of Tanzanians losing jobs - thenpeople will not feel okay with the common market."13
  • 15. East Africa: Growing Interest in Investment OpportunitiesFrederick Masiga, business editor for the Daily Monitor newspaper in the Ugandan capital,Kampala was also interviews and was quoted saying, "most Ugandans think their jobs will betaken over by their neighbour, Kenya. Its a quite understandable view, because so manyKenyans are already established in Uganda. Some Ugandans feel that once the borders areopened and you get people flowing across the border and looking for jobs, they are going tobe out-competed in the labour market."Thus the challenge for the EAC will be the regulation of migrating labour from partneringcountries, in order to avoid an increase in local unemployment.Benefits In TradeDespite the worries about migrant labour, most businesses support the move to a commonmarket and are keen to see an end to the delays and costs of getting their goods acrossborders. Consumers hope that this will resolve challenges like the difference in operation hoursbetween Kenya and Tanzania. The common market aims to build on this - to enable the freemovement of people, capital and services and abolish import duties. The hope is that memberstates will adopt a common currency by 2012, allowing them to move towards a politicalfederation.See Appendix E for the breakdown of the Common Market projected development stages14
  • 16. East Africa: Growing Interest in Investment OpportunitiesDeveloping stronger investor confidence: RecommendationsDue to the high level of increased investment competition for East Africa’s oil and natural gas,the pressure to ensure stronger investor confidence in this area seems reduced. Somerecommendations to develop this further would be to:  Reinforce profitability of investment projects  Communicate the EAC’s dedication to a politically safe and economically healthy environment  Communicate the economic sustainability of FDI investments  Communicate the confidence of European, and South African banks in investment opportunities (See Africa Investment Outlook)15
  • 17. East Africa: Growing Interest in Investment OpportunitiesFor applicable, practical information on mitigating the risks of doing business in east Africa,the IFC has published a detailed report entitled, “Doing Business in the East AfricanCommunity”. This report will be provided along with this research report.For information on Key Considerations, please see the Key Considerations section in the AfricaInvestment Outlook research report.AppendixA. Member Countries of Regional Groupings16
  • 18. East Africa: Growing Interest in Investment OpportunitiesB. Africa’s Distribution of ResourcesC. Natural gas in Africa17
  • 19. East Africa: Growing Interest in Investment OpportunitiesD. Operators in East Africa18
  • 20. East Africa: Growing Interest in Investment OpportunitiesE. Total Investment by Country19
  • 21. East Africa: Growing Interest in Investment OpportunitiesF. Internet Users and Mobile Phone Subscription in EAC20
  • 22. East Africa: Growing Interest in Investment OpportunitiesG. EAC Common Market DevelopmentDevelopment Objective: To fully implement the EAC Common Market Protocol (CMP)21
  • 23. East Africa: Growing Interest in Investment Opportunities22
  • 24. East Africa: Growing Interest in Investment OpportunitiesDiagrams in-text A. Real GDP Growth Forecasts"GCC trade and investment flows: The emerging-market surge." Economist Intelligence Unit.(2011): n. page. Print. B. Consumer PricesSub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys: RegionalEconomic Outlook. Oct (2011) C. Africa GDP vs world GDP"GCC trade and investment flows: The emerging-market surge." Economist Intelligence Unit.(2011): n. page. Print.Diagrams in AppendixA. Member Countries of Regional GroupingsSub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys: RegionalEconomic Outlook. Oct (2011)B. Africa: Key Resources"Africa: open for business. The potential, challenges and risks." Economist Intelligence Unit.(2012): n. page. PrintC. Natural Gas in AfricaChazan, Guy. "Big oil groups join scramble for east Africa." Financial Times 12 Mar 2012, n. pag.Print.D. Operators in East AfricaChazan, Guy. "Big oil groups join scramble for east Africa." Financial Times 12 Mar 2012, n. pag.Print.E. Total Investment by Country23
  • 25. East Africa: Growing Interest in Investment OpportunitiesSub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys: RegionalEconomic Outlook. Oct (2011)F. Internet Users and Mobile Phone SubscriptionThe East African Community. 4th EAC Development Strategy. Arusha: , 2011. Print.G. EAC Common Market DevelopmentThe East African Community. 4th EAC Development Strategy. Arusha: , 2011. Print.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.Chazan, Guy. "Big oil groups join scramble for east Africa." Financial Times 12 Mar 2012, n.pag. Print.The East African Community. 4th EAC Development Strategy. Arusha: , 2011. 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). Print.24