AfricaFocus (Washington, DC)

Africa: Investor Perspectives

analysis

Editor's Note

"Among our survey results, what really stands out is the perception of Africa's attractiveness as an investment destination relative to other regions: from being ranked 8th out of 10 regions in our first survey [2011], to 5th in each of the last two years, Africa ranked 2nd overall this year. This remarkable progress in a short space of time shows how the image of Africa has begun to change." - Ernest & Young

As often noted, the "Africa Rising" narrative highlighting economic growth as the continent's dominant reality is misleading in many respects, particularly in ignoring the unequal distribution of these gains (see previous AfricaFocus Bulletins, such as http://www.africafocus.org/docs12/app1205.php, http://www.africafocus.org/docs13/real1302.php, and http://www.africafocus.org/docs13/econ1310.php).

What it does capture, however, is a real change in perception by investors, as noted in this new report from the giant international professional services firm Ernest & Young. The change reflects not only an overall change in Africa's image, but also shifting investment patterns.

The report, based on data on new foreign direct investment (FDI) projects (excluding already established facilities and equity investments) and on surveys of investors around the world, documents rising interest in such projects by investors outside of Africa, as well as by investors based in regional hubs such as South Africa, Nigeria, and Kenya.

Notably, "intra-African investment is second only to Western Europe as a source for FDI on the continent." Also visible in the new investment is a shift from established extractive industries, still dominant in African exports, to new sectors, such as financial services, technology, and consumer products. These new sectors are oriented principally to domestic markets.

The report also includes detailed case studies on the Africa strategies of a number of multinational companies based in Africa, Europe, North America, Asia, and Australia: Africa Infrastructure Investment Managers, British American Tobacco, Bharti Airtel, CocaCola Sabco, DHL, Ecobank, GE, IBM, Mara Group, Nestlé, Sanlam, SKF and Tullow Oil.

For previous AfricaFocus Bulletins on economic issues, visit http://www.africafocus.org/econexp.php

EY's attractiveness survey: Africa 2014

Ernest & Young

[Excerpts only. For full report, visit http://www.ey.com/attractiveness]

Foreword: Investing in the African opportunity

Despite the tremendous progress the continent has made in the postCold War and postapartheid era, and despite consistent economic growth over the past decade, perceptions about the continent often remain stuck in the past.

The good news this year is that this appears to be changing. Among our survey results, what really stands out is the perception of Africa's attractiveness as an investment destination relative to other regions: from being ranked 8th out of 10 regions in our first survey, to 5th in each of the last two years, Africa ranked 2nd overall this year. This remarkable progress in a short space of time shows how the image of Africa has begun to change.

While FDI flows into North Africa have declined significantly, those into sub-Saharan Africa continue to grow - by 4.7% last year, and at a compound annual growth rate (CAGR) of 19.5% since 2007.

Regional hubs, such as South Africa, Nigeria and Kenya, together with emerging high- growth economies, such as Ghana, Mozambique, Zambia, Tanzania and Uganda, are at the forefront of rising FDI levels.

Given all the positives that we have observed and analyzed over the past four years, we remain convinced that the African growth story is a compelling one, and it should be attracting even greater numbers of FDI projects.

Africa's share of global FDI projects has grown steadily in the past decade, but remains at less than 5% of global flows. Over this period, India alone has received a higher proportion than the entire continent of Africa. The perception gap continues to slow the acceleration of FDI flows into Africa, and it is illustrated once again this year by the marked contrast in perceptions between those who are already doing business in Africa and those who are not yet.

Those already active on the continent are more positive than ever about its prospects, and rank it as by far the most attractive investment destination in the world today. Those who are yet to invest are far less enthusiastic, ranking Africa as the leastattractive investment destination in the world. The gap could hardly be wider.

Executive summary

A dramatic improvement in investor perceptions over the past four years

Africa's perceived attractiveness relative to other regions has improved dramatically over the past few years. Africa has moved third-from-last position in 2011 to become the second-most attractive investment destination in the world. This year, only North America ranks ahead of Africa in terms of investment attractiveness.

Sixty percent of our survey respondents said that there had been an improvement in Africa's investment attractiveness over the past year, up four percentage points from the 2013 survey. Only 17% believe that conditions have deteriorated. Similarly, nearly three out of four respondents believe that Africa's attractiveness will improve further over the next three years.

FDI numbers reveal a mixed picture

In 2013, the number of new FDI projects in Africa declined for the second consecutive year, by 3.1%. Job creation resulting from FDI projects also slowed in 2013.

This was largely caused by the decline in North Africa, due to regional political uncertainty. However, more positively, the number of new FDI projects in SSA increased 4.7% in 2013. Capital investment into Africa also grew by a healthy 12.9%, with a higher average project size of US$70.1m in 2013, from US$60.1m in 2012.

Furthermore, Africa's share of global FDI flows has been improving year on year. In 2013, Africa's share of global FDI projects reached 5.7% - its highest level in a decade.

And an analysis of United Nations Conference on Trade and Development (UNCTAD) FDI data also reveals a story of steady progress: companies already established in the region are bolstering their presence and reinvesting their profits for growth.

Three key trends gain further momentum

In previous editions of the Africa attractiveness survey, we have highlighted three broad shifts. These continued to gain traction in 2013.

First, the SSA growth story has caught investor attention, with an increasing number of FDI projects now being directed to the region. This trend accelerated in 2013, with SSA's share in overall African FDI projects and job creation reaching all-time highs.

Within SSA, Southern Africa is the leading region in terms of absolute numbers of FDI projects, while both East and West Africa have experienced strong growth rates.

South Africa remains the largest destination for FDI projects, with a widening lead. However, a number of other countries, including Ghana, Nigeria, Kenya, Mozambique, Tanzania and Uganda, are becoming more prominent on investors' radar. Kenya and Ghana featured in the top four rankings in 2013 for the first time, having previously ranked in the bottom half of the top 10 FDI destinations.

A second major shift is the growing share of intra-regional investment in Africa (CAGR of 31.5% in FDI projects between 2007 and 2013). This is encouraged by improving regional value chains and strengthening regional integration.

The share of FDI projects in Africa with other African countries as their source reached 22.8% in 2013 - an all-time high. Intra-African investment is second only to Western Europe as a source for FDI on the continent. Intra-African investments are also the second-largest source of job creation on the continent. South Africa is the most active intra-African investor, followed by Kenya and Nigeria.

Overall, the US and the UK remain the top two sources of investment into Africa, while the number of FDI projects from Asian countries, particularly India, is on a rise.

The third shift is a change in sector focus, from extractive to consumer-facing industries. Mining and metals, and coal, oil and natural gas, which were previously the key sectors attracting major FDI flows, have recently become less prominent, as service- and consumer-related industries have increased in relative importance.

In fact, the share of the extractive sector in FDI projects was at its lowest ever level in 2013, while the share of consumer-facing industries, particularly technology, media and telecommunications (TMT), retail and consumer products (RCP) and financial services, has been increasing continuously.

This matches with investor perceptions. Although resource-driven sectors are expected to remain the highestpotential industries over the next two years, infrastructure and consumer-facing sectors are expected to increase in prominence.

The key hub economies attract the strongest FDI flows - matching investor perceptions

Investors see the three regional hub markets - namely South Africa in the south, Nigeria in the west and Kenya in the east - as the most attractive investment destinations in SSA.

These three countries account for over 40% of total FDI projects in SSA. Angola, which is the fourth-largest recipient of FDI projects, is similarly perceived to be the fourth-most attractive investment destination.

However, investors who are not yet established in Africa are less aware of opportunities in countries other than South Africa. For instance, while 27.5% of investors already doing business in Africa express interest in Nigeria, only 13.3% of respondents with no business presence view the country as attractive.

In North Africa, too, we find that FDI flows are a reasonably close match with investor perceptions. Morocco and Egypt are seen as the two most attractive countries in North Africa, by 55% of investors.

The stark perception gap remains

While investor perceptions about Africa have improved dramatically, improvement in FDI numbers has been more modest. The most likely reason for this is the stark and enduring perception gap, illustrated in our survey by the differences between respondents established in Africa and those with no business presence in the continent.

Those with an established business presence are more positive than ever about Africa's prospects, and they rank it as the most attractive investment destination in the world. These investors have concrete action plans to generate growth in Africa, and many of them are investing in growth across the continent.

On the other hand, investors not yet established in Africa are far less confident about the continent's prospects. Only 39% believe that Africa's attractiveness has improved, while only 51% believe it will improve in the future. Their less optimistic view is, however, slowly changing - improving from last year's 31.2% and 47.3%, respectively.

Africa's share of global FDI projects increases

Africa's relative share of global FDI continues to rise. In 2013, it received 5.7% of global FDI projects. This is up from just 3.6% in 2003 and represents its highest share in the past decade. In terms of capital invested, Africa's proportion of the global total increased, albeit more moderately, from 7.8% in 2012 to 8.2% in 2013. However, in terms of jobs created as a result of this investment, its share has fallen to 6.2%.

Three key trends gain further momentum

Our analysis of African FDI projects over the last decade reveals three broad and significant trends, all of which accelerated in 2013. These are:

The growth of investment into SSA

The expansion of intra-African investment

The shift of investment from extractive to consumer-facing sectors

SSA's share of FDI rises

There is a clear dichotomy between FDI flows into North Africa and SSA. While FDI in the latter has increased steadily over the last few years, political uncertainty in North Africa has led to fewer FDI projects and lower capital investments.

Comparing FDI flows pre-crisis (2003-07) with post-crisis (2008-13), we find that 2007 proved to be a tipping point for SSA. Since 2007, SSA has accounted for an increasing share of projects, both by number and value.

This trend accelerated in 2013, with SSA's share of overall African FDI projects and job creation achieving all-time highs of 82.8% and 79%, respectively. This growth is underpinned by solid FDI flows to four countries in particular: South Africa, Kenya, Ghana and Nigeria.

The rates of return for inward investment in SSA are also among the highest in the world. According to UNCTAD, in 2011, four SSA countries featured among the top 20 economies in terms of FDI rates of return.

In our previous editions of the Africa attractiveness survey, we have discussed the factors behind the SSA growth story. They include: strong macroeconomic growth and outlook, improving business environment, rising consumer class, abundant natural resources, democratic dividend and infrastructure development.

The US and the UK are the largest investors in Africa

Between 2004 and 2013, the US was the largest investor in Africa, with 768 FDI projects (12.2% of the total). The UK was in second place. In 2012, British and American companies tied in first position, with the UK taking the lead in 2013.

Fluctuating interest of Western European countries on the continent

Given its cultural and historic ties, France has always been a key investor in Africa. It was the third-most active investor by projects between 2004 and 2013, with 584 projects.

However, since 2010, France's share has declined, as a result of political upheaval across North Africa - Morocco, Tunisia, Algeria and Egypt are its primary investment destinations. In December 2013, the French President announced a target to double trade with Africa by 2018, in a bid to win back France's share of African trade.

Investment from Spain and Germany has been rising steadily. In fact, measured by jobs, Spain jumped sharply to 3rd largest investor in 2013, from 11th in 2012. German FDI projects in Africa also grew at a CAGR of 10.4% between 2004 and 2013.

Asian investors build on the African opportunity

India is the largest investor in Africa, with 342 FDI projects since 2004. Indian banks, including Bank of Baroda and ICICI Bank, are expanding their footprint in Africa to capitalize on historical ties, increase bilateral trade and benefit from the under-penetrated banking market.

Similarly, Indian conglomerate Tata Group plans to invest US$1.7b to set up new assembly lines for commercial and passenger vehicles, and possibly to expand its presence in the hospitality and mining sectors.

China has long made use of Africa's raw materials and its markets for manufactured goods. The country has become the continent's largest trading partner, with trade expanding from US$10b in 2000 to US$200b in 2013.

However, overall Chinese greenfield FDI in Africa remains relatively low. Since 2004, the country has directed just 166 projects to Africa, with only 11 initiated in 2013. This is in contrast to China's significant investments in African infrastructure, which exceeded US$13b in 2012, according to the Infrastructure Consortium for Africa's annual report.

Japan has been ramping up its investments in Africa. This is demonstrated by the 76.5% jump in projects in 2013. Africa's strong economic growth has traditionally attracted Japanese exporters.

Plans are also underway to tap the continent's oil and natural gas reserves for Japan's industrial economy. Japanese companies make up the largest investor group in Africa's automotive industry.

Consumer-facing industries rise in prominence

With the diversification of economic activity in Africa gathering pace, growing employment levels are creating a new consumer class.

This, in turn, is undoubtedly attracting wider investor attention. The rising African consumer has paved the way for increasing FDI in consumer-focused services and manufacturing sectors.

The shift of investment from extractive to service-oriented sectors becomes even more apparent when examining the last decade's data. In 2004, mining and metals accounted for 14.1% of projects, while coal, oil and natural gas made up 11.6%. In 2013, these sectors' share of total projects accounted for just 2.4% and 3.5% respectively.

Financial services, TMT and RCP attract nearly half of total FDI projects in Africa

Three predominantly consumer-facing sectors - financial services, TMT and RCP - have been the primary beneficiaries of FDI projects. The financial services sector was the largest recipient of FDI projects in Africa between 2007 and 2013.

Foreign banks and other financial services companies are either launching or expanding operations in Africa to tap the growing but under-serviced financial services market.

In 2013, for example, UK banking company Standard Chartered announced that it will invest US$100m in Africa, with the aim of doubling Financial the size of its business by 2018. Growing services, investor interest is not just limited to foreign TMT and RCP companies. Regional banks and other together financial services firms in Africa are ramping account for up their presence across the continent.

Expected increases in consumer spending, especially on discretionary goods, indicates continued, strong RCP investments in Africa. In 2013, consumer products giant Procter & Gamble announced plans to spend US$450m to upgrade existing plants and build new ones in Africa.

Of this amount, US$175m will be used to construct a plant in South Africa to make products such as detergents, and US$200m will be spent on a baby-care products plant in Nigeria, which is already under construction.

Among retailers, Carrefour partnered with CFAO, a distributor, to expand its presence on the continent. Additionally, Walmart is planning to open 90 new outlets across Sub-Saharan Africa by 2016 through its South African arm Massmart Holdings.

In 2013, RCP was the second largest sector, accounting for 17.5% of FDI projects in Africa. It was also the lead sector in terms of job creation during the year.

Africa: the next manufacturing hotspot?

Africa has the resources and the comparative advantage to position itself as the world's next manufacturing hub. Labor costs are low. Currency appreciation and rapid wage increases in other countries could spark industrial migration to African nations with conducive investment climates.

For example, many aerospace companies are moving production capabilities to North African countries (Tunisia and Morocco) to take advantage of low costs and geographic proximity.

In September 2013, Bombardier Aerospace began construction on a new manufacturing plant in the Midparc Casablanca Free Zone in Morocco, which is expected to be operational by mid-2014. The company is planning to invest US$200m on equipment and buildings by 2020.

Africa also has abundant natural resources, which can be used as raw materials for light manufacturing. Retailers such as H&M and Primark already source clothing from Ethiopia. The continent enjoys preferential access to both the US and EU markets through the African Growth and Opportunity Act and the Cotonou Agreement, respectively.

Additionally, a construction boom is expanding access to power. The proliferation of mobile telephony has proven to be a boon for small suppliers. Labor productivity on the continent has also been increasing, led by vastly improving education levels. The promise of the African consumer market is another critical element.

The increasing attractiveness of Africa's manufacturing sector is evident from recent activities by a number of companies. Chinese shoemaker Huajian - which already operates a factory in Addis Ababa that employs 600 people - is planning to invest US$2b to create a light manufacturing special economic zone in Ethiopia.

This initiative could create employment for almost 100,000 Ethiopian workers. Similarly, in Egypt, Chinese electronic company Hisense is currently producing 100,000 LCD TVs a year together with its local partner Sun TV. US technology giant GE is investing US$250m in Nigeria to set up an electrical gear manufacturing plant.

Perception: A giant leap in Africa's relative attractiveness

Key points

1 The most striking observation from this year's survey is how far Africa's perceived attractiveness has improved. In less than five years, Africa has risen from eighth position to being rated as the joint second most desirable regional investment destination in the world, tied with Asia.

2 Sixty percent of survey respondents with a presence in Africa believe that the continent's attractiveness improved in 2013. Only around 17% of respondents believe that conditions have deteriorated.

Furthermore, nearly three out of four respondents (73%) believe that the continent's attractiveness will improve over the next three years. Only 10% expect that the continent's attractiveness to decline in the medium term.

3 While the resources sector remains critical to FDI interest, agriculture is only marginally behind mining and metals. Infrastructure ranks third in terms of likely growth areas. These changing sector priorities are in line with a growing need to meet the demands of a rapidly urbanizing population and rising middle class.

4 The hub economies in each region - namely South Africa in the south, Nigeria in the west, Kenya in the east, and Morocco and Egypt in the north - are strongly perceived by investors as being the most attractive geographies for investments (and this closely matches actual FDI flows).

5 The perception gap between those already doing business on the continent and those with no business presence remains striking. Those with an established business presence in Africa are twice as positive about the continent's prospects as non-established investors, and they rank Africa as the most attractive investment destination in the world. In contrast, investors not established in Africa rank Africa as the least attractive destination in the world.

This year, our respondents ranked Africa as a more attractive place to do business than seven other regions. Only North America is perceived to be more attractive. Africa is tied in second place with Asia.

This is a very significant improvement from previous years. In 2011, Africa was only ahead of Central America and the former Soviet states. In the 2013 survey, Africa was perceived to be more attractive than 5 out of 10 regions. This trend clearly indicates that Africa's potential as a rapid-growth market is gaining wider recognition.

Africa's stronger investment attractiveness is best explained by its own sustained growth rates in the context of slower global growth and, more recently, by structural weaknesses in many other emerging markets in the wake of the unwinding of US quantitative easing.

Africa's growth prospects are likely to remain solid, as an urbanizing and rising middle class drives demand for consumer products and improved services.

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