“Sharpen your Perception”On 24 December 2010, BRIC nations invited a new member to their elite list. That country was therainbow African nation of South Africa. BRIC community as it was famous worldwide welcomed a ‘S”to be known as BRICS (S stands for South Africa) now. This is not really surprising given that SouthAfrica is the first African economy with a gross domestic product equivalent to one quarter of that ofIndia and representing 25% of the African continent.There was a time when African continent was known, predominantly, for its dense, almostimpenetrable jungles. Fast forward to the first decade of the new century, its African markets, that isgetting denser!95 million African consumers spent 250 billion Euros in 2010, with this figure projected to touch 132million in 2020 for a market estimated at 450 billion Euros.FDI in Africa surging on year to year basis,resilience of the continent when global economy powerhouses were in turmoil, and increasedinterest of the world, especially Asian economies in the continent have become new identity ofAfrica.Let’s analyze what has changed, & contributed to the turning around of African economic despair into an African might!
Ten years ago London-based publication, The Economist, dubbed Africa “The Hopeless Continent”. This year (2010), The Economist, in recognition of the huge dividends that Africa is reaping, named Africa the “economic lion” ready to take its place beside the Chinese dragon and the Indian tiger. Recent FIFA World Cup has brought Africa back on the global scene. With a total population of 944 million people and an area of 30.3 million sq kms, the African continent represents huge potential and large reserves of yet untapped mineral resources like diamonds, gold, oil and natural gas and precious metals. The past decade has been remarkable for Africa even if much remains to be done. The last decade has been great in terms of growth and returns on investment, with the Gross Domestic Product (GDP) rising at around 5% a year to reach $1.6-trillion in 2008, the best performance in 40 years. Last year, Africa was one of just two regions (the other was Asia) where GDP rose. Between 2004 and 2008, real GDP growth in SSA has averaged 6.5%; 4.7%in 2010 due to financial crisis around the world which resulted in decline in investments in Africa. However, going forward, GDP is projected to increase to the figure of 5.3% in 2011 according to the latest estimate by the World Bank. Africa, offers huge investment opportunities in energy and infrastructure. The growing intra-trade should help reposition the region.Africa Resources & Production Share in TheGlobe Today, the African market is where more and more opportunities exist for investors seeking higher returns in the developing world. One underlying factor for increased opportunities is clearly the rise of the AfricanDiamond 65% consumer. In 2000, Africa had 50 million households earning more than $5 000 a year - the threshold whereGold 54% you can start having discretionary spending. Now continent have 80 million households, which is 60% more inPlatinum 90% eight years, indicating that the urban African consumer is rising. There is rapid urbanization in Africa and nowCrude 10% 40% of Africans are living in cities, and, in 2030, it will be 50%Coffee 50%Cocoa 70%Cobalt 45%
Rush of Foreign Direct Investment in AfricaAs the primary focus of leading global investors has traditionally been on the developed economies and that of booming markets like Brazil, Russia, India and China,much of Africa’s changing economic landscape has been overlooked. The United Nations Conference on Trade and Development (UNCTAD) analyzed the trends of FDIinflows and outflows and suggests that the developing countries like India, China and Brazil etc. are no longer the mere destination of FDI, but also are becoming asource of FDI. The total world FDI inflows, which stood at $59 billion in 1982, grew dramatically to $648 billion in 2004 and reached its peak of $1,833 billion in 2007(UNCTAD, 2008). The FDI has become vital source of economic development for the African continent, especially over last one decade.In Africa, FDI inflows amounted to $36 billion in 2006, which was 20% higher than the previousrecord of $30 billion in 2005 and twice the 2004 value of $18 billion and rose to a historic value of$53 billion in 2007, $88 billion in 2008 thereby becoming major financial source for Africa’sdevelopment. However, in 2009, FDI inflows declined to $59 billion due to contraction of globaldemand for, and prices of, African export commodities. Although the decline was moderate, it stillhad major repercussions for a region where FDI flows account for about a fifth of gross capitalformation and is a vital source of job creation and technology dissemination. At the same time,African countries have geared up and are developing Special Economic Zones to attract FDI.Foreign investors, notably China, are promoting the creation of such zones, which provideemployment, spill over to domestic economies and allow firms to benefit from betterinfrastructure and easier regulations. By investing in Africa, emerging countries also benefit fromInvestment flows from Asia to AfricaThe past decade has witnessed a substantial growth in Asian involvement on the African continent. In addition, the ever-growing emerging markets of the East arehungry: their re-discovery of Africa as a place that could quench their thirst for natural resources and strategic minerals, as well as serve as an outlet for abundantaccumulated capital for investment purposes has become evident by the Asians’ consolidated presence on the continent.Among the top investors in Africa, leading Asian countries such as China, India, Japan and Malaysia account for nearly 37% of total Capital investments landing intoAfrica between 2003 and 2010. Total Asian investments into Africa stood at approximately USD 11.40 billion in 2009.
Africa and Mauritius have traditionally enjoyed close cultural, business and bilateral ties. With its extensive network of Double Taxation Avoidance Agreements andInvestment Promotion and Protection Agreements as well as with its memberships with regional trading blocs like Southern African Development Community (SADC)and the Common Market for Eastern & Southern Africa (COMESA), Mauritius continues to be the preferred investment platform for investments and the ideal gatewaybetween Asian and Africa. In 2009, approximately 20% of all outward investment from India to Africa went through Mauritius. China is equally using Mauritius as a basefor expansion into the promising African continent. For instance, through the Jinfei Economic Zone project China will invest around USD 750 million in Mauritius. ThisEconomic Zone will be used as the regional hub for Chinese investments landing into Africa.Of all the other Asian countries, China and India are playing the most active role in the economy of African countries through both Greenfield investments and crossborder acquisitions. Chinese and Indian investors have made significant investments in the manufacturing and infrastructure projects in the region. Compared to therest of the world, poor infrastructure and logistical challenges, corruption, lack of respect for the rule of law and a poor regulatory environment make sub-Saharan Africathe most difficult place to do business. To demonstrate, weak infrastructure increases transaction costs, which in turn decreases a firm’s productivity and thus profits.Both China and India have been investing in massive infrastructural projects such as roads, railways, harbours, telecommunications, finance and banking, therebylowering firms’ operational costs, while also regenerating Africa’s decaying infrastructure. By linking the building of infrastructure to their burgeoning economies’ hungerfor resources, Asia is thus also addressing Africa’s deficient infrastructure networks. To demonstrate, China and the DRC have signed a resource-backed deal, wherebyChina’s Sinohydro will receive mining rights for approximately 10 million tonnes of copper in return for China Railway Engineering Corporation (CREC) revitalizing anestimated 3,000 km of railways and 6,000 km of roads, as well as constructing hospitals, schools, power and other transport infrastructure.Will Africa continue to exhibit splendorous performance in this decade as well?African trade is already shifting toward the dynamic emerging markets, notably China. Trade between China and Africa has been expanding rapidly, growing by anaverage of 30 percent a year over the past decade, and likely exceeded $100 billion in 2010. These new partners will continue to show strong demand for goods thatAfrica can supply, and will be alert for opportunities to invest directly. For Africa, the key priorities will be negotiating fair and durable deals with big multinational firmsand making the best use of the revenue windfalls, especially when the resources are nonrenewable.With new financial resources—from windfall natural resources revenues, new-found access to private capital, increased tax effort, or additional official developmentassistance—African countries can fund transformative investments. Solid investment projects, especially in transportation and power, could radically improve growthprospects and the ability to efficiently deliver public services.
The needs are massive: the World Bank has estimated that in sub-Saharan Africa alone the total financing needed is $93 billion a year, of which a thirdremains unfunded. Besides more financing, tackling the infrastructure gap will take a concentrated effort to improve how public investment projects areselected and managed. Many African countries have only recently emerged from comprehensive debt relief and will need to be mindful of the debt-sustainability ramifications of new financing.Foreseeable PitfallsIf growth in advanced industrial and dynamic emerging economies falls short of expectations, the effects will be felt in Africa. This is potentially worrisomebecause most African countries have yet to rebuild the policy buffers that helped to mitigate the adverse effects of the last crisis. Rebuilding these buffers istherefore urgent.Although the overall inflation outlook remains moderate, there are notable upside risks in food, fuel, and other commodities, suggestive of a rerun of the2008 food and fuel price crisis that was only extinguished by the global financial crisis. These risks call for continued effort on agricultural policies on thesupply side, and efficient social safety nets on the demand side.Notwithstanding the rapid gains of the last decade, poverty, often extreme, remains pervasive in sub-Saharan Africa. In far too many places, more rapidgrowth has not yet translated into local employment opportunities, a better social safety net, or a higher quality of life. In addition, weak governance, limitedadministrative capacity, or political instability (and even outright conflict) have suppressed or reversed per-capita-GDP gains.The worlds poorest continent, mainly dependent on minerals and commodity exports for revenue, surprised economists by weathering the global economiccrisis better than the West. Outlook for the continent remains favorable except for danger of another global financial crisis, which would impact investments,& demand. Another deterrent is the fiscal austerity program in Europe, Africa’s largest trading partner. But at the same time, let’s not discount the surge indomestic demand across the continent which has potential of negating any dip in global demand.Africa’s trump card for the new decade is not minerals but untapped 1 billion people strong African market! How the Dark Continent chooses to play on itmay become one of the financial sagas of our times.
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