Investor sentiment towards Sub-Saharan Africa to remain soft

by Developed Africa 8. December 2016 18:26

Ernst & Young, the global consulting giant, said that it expects investor sentiment towards Sub-Saharan Africa to remain soft, as foreign direct investment will slow over the next few years.

In the year-end update to its Africa Attractiveness Programme released on 7 December 2016, EY said the weakening investor sentiment towards SSA will be due to heightened geopolitical uncertainty around the world and greater risk aversion rather than the region’s deteriorating economic fundamentals. Beneath the averages and headlines, the growth dynamics across different individual countries and sub-regions are very mixed.

“Companies already doing business in Africa will continue to invest, but will probably exercise a greater degree of caution and be more discerning,” EY said. “Some of them will invest at a slower pace, looking to consolidate operations and drive profitability; while others are likely to double down on their investments, using this period of economic slowdown to further strengthen positions in key markets.”

EY further said that although SSA’s growth forecasts for 2016 have fallen to a two-decade low, the growth dynamics across different individual countries and sub-regions are very mixed. Outside of the sub-continent’s three biggest economies – Nigeria, South Africa, and Angola – many bright spots can be seen in the East, Francophone and North African regions. “Economic recovery in Angola, Nigeria and South Africa is likely to be a tough and gradual process,” EY said. “However, a diverse group of other economies – including Cote d’Ivoire, Senegal, Ethiopia, Kenya, Tanzania, Mozambique and Egypt are expected to sustain high growth rates over the next 5 years.”

The 'heatmap' below provides a snapshot of macroeconomic resilience across some of the key sub-Saharan African economies, and illustrates just how variable economic performance is across different parts of the continent. The color of each block represents the longer-term position for that metric - green being positive and red negative. The color of the circle in the block represents the current trend. 

It is clear from this illustration that the three largest economies in sub-Saharan Africa - Angola, Nigeria and South Africa - remain under pressure. In the six months since March 2016, the position of Angola and Nigeria in particular has deteriorated, with the Nigerian economy entering a recession and Angola forecast to register zero growth this year. Sustained low oil prices, and the subsequent deteriorating terms of trade that both economies have experienced since 2014, have led to a growing current account deficit and rising government debt levels. Although growth in South Africa remains low, there have been some improvements in key macro-economic indicators in the past six months - including the current account deficit and a somewhat stronger currency. This indicates at the very least that the economy has stabilised, and may in fact be a signal of a gradual recovery.

At the same time, and in contrast to challenging economic conditions in the big three, many of the East African and Francophone economies have remained resilient. Kenya, Ethiopia, Tanzania, Cote d'Ivoire and Senegal are among the African economies still expected to grow in the high single digits this year and next (and through 2021).

This partly has to do with the major exports of many of these economies being less impacted by declining terms of trade. In addition, investment in infrastructure, domestic consumer spending and the continued evolution of services and manufacturing, continues to spur growth in these economies.

The key to overcoming weak global demand lies in enhancing diversification policies. Economies that span a broad range of sectors tend to fare stronger in such periods. Nigeria and Angola provide strong evidence of reliance on a single commodity, as both economies either face or are already in recession. The resilience in certain African economies reinforces the need to accelerate the process of diversification in others. Diversification clearly requires structural economic reforms, and each country is at a different point along this path. This provides enormous opportunity for growth across the region, as investors respond to pragmatic policy reforms and seek opportunities across growing consumer, services and industrial sectors.

This article is an abstract from EY’s ‘Africa Attractiveness Program 2016: Year end update’.

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Some More Myths About Africa

by Developed Africa 29. November 2016 18:08

Euler Hermes debunks five more myths about Africa

Myth 6: No-one is going to finance African growth

Once the oil aftershock has worn off, Africa will resume growing at an average +3% a year. Some countries still post record growth rates higher than +5%, despite the hard shock. In addition, the financing and rebalancing of growth, including investments to be made, will be the key to a sustainable takeoff. The mix of funding will be crucial. In addition to external resources, particularly from foreign direct investment (FDI), some countries are already able to finance at least part of their growth with budgetary resources. This is the case in South Africa, Egypt and Senegal where they account for 25% and 30% of GDP in 2016. Household confidence and investor confidence will be indispensable to collect savings.

Nevertheless, the way ahead will be thorny: (i) budgetary revenues make up only 14.5% on average of the African GDP, compared with 30% in developed countries; (ii) FDI is only 2% of GDP, compared with 2.4% in developed countries.

Myth 7: African consumers are not bankable

Consumption growth in Africa is well under way. In 2016, Africa reports the highest consumption growth rates, led by Cote d'Ivoire (+6%), Uganda (+7%) and Nigeria (+5%), compared with +1.4% in OECD countries or +2% in Pacific Asia. Consumption development in Africa is driven by the continent's exploding urbanization: by 2045, African towns will be flooded with 24 million people, compared with only nine million in China and 11 million in India.

But African consumption development should follow a different path from that of developed countries. The wealth effect and internet access add to the volume growth of African consumption.

Consumers in Africa are going to skip some steps and force business sectors to reconsider their approach. This is especially striking in distribution, financial services or transports: for example, 70% of Moroccans have internet access (55% in China), and 14% of Kenyans use contactless payment cards (60% of French are still and always using bank checks).Euler Hermes has worked out a proprietary consumption potential indicator combining these three determinants. The verdict is final: Nigeria, Kenya, Morocco, Egypt and South Africa are the leading pack, followed by Ghana, Ivory Coast, Tanzania, Sudan and DRC.

Myth 8: It's hard to work with African companies

Given the payment terms granted by foreign suppliers to African companies, it is indisputable that stronger confidence would free considerable resources for growth. Out of EUR 800bn of goods imported every year by Africa, approx. 60% are paid cash. If transactions were settled at 30 days, this would free EUR 40bn of working capital requirements, equal to the GDP of Tanzania, or to 1.6% of the GDP of Africa.

This situation engenders a sort of vicious cycle for African companies. Their cash flow suffers from the multiplication of cash payments, and this makes them more exposed to possible economic risks. As for domestic trade, this calculation in a country like Nigeria generates EUR 10bn of additional cash flows: a foot on the ladder for growth-seeking SMEs.

Myth 9: Agriculture is a thing of the past

Agriculture is the driver of econom ic growth in Africa: it remains the first contributor to employment and lifts millions of people out of poverty every year. Nevertheless, what is needed is a true green revolution to accelerate the catalyst role of the farming sector, by focusing productivity, market access and technologic contents.

In terms of growth by value of agricultural exports from 2005 to 2015, Ethiopia and Ivory Coast (+30%), Kenya and Rwanda (+20%) have specialised in high-value cash crops. Other countries, such as Zambia, Senegal and Morocco, have managed to use mechanisation and technology to increase agricultural productivity.

Myth 10: It's hard to find entrepreneurs and talents in Africa 

Education levels are increasing in Africa. In particular, access to university education in Cameroon has grown from 4.6% in 2000 to 13% in 2013. However, even in South Africa, the most proficient student, the percentage of youth entering university is only 20% by age group. Furthermore, official statistics on entrepreneurship are disappointing: in South Africa, just to make an example, only two companies are set up every 1 000 inhabitants.

These low figures mask the rampant informal entrepreneurship that is set to remain the basis for human capital development in the short term. Therefore, attention should be focused just on this entrepreneurial environment, apart from access to education. In Nigeria and Uganda for example, the towns of Lagos and Kampala have only recently reformed their registry system, a big problem for all those wishing to start business.

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Developed Africa has joined forces with Riviere Noir

by David Foxman 16. November 2016 16:20

Since setting out to promote African business opportunities we think we’ve learnt quite a lot about the dos and don’ts of investing in African projects – mostly don’ts, unfortunately! One of the dos, however, is the real need for proactivity. It would be nice to think that you can set out your stall of opportunities and that investors and businesses will beat a path to your door, but it doesn’t often happen that way. Absent an obvious arbitrage, political risk and credit risk mean that in most cases projects need a lot of extra selling to US and European prospects. That additional selling isn’t simply promotion per se; it also means structuring, explaining and financing business opportunities optimally.

That’s why Alex Glover of financial consultants Riviere Noir (rivierenoir.com) and I have decided to combine our resources to jointly offer consultancy services that will genuinely help viable African projects get started, and help companies and investors from outside Africa identify and tease out the advantages of opportunities in Africa. Between us we have the insight, hands-on skills, flexibility, experience and – crucially – contacts to do this.

Contact info@developedafrica.com for more information. 

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Creating Investment Interest in Malawi

by Developed Africa 18. July 2013 09:00

Joyce Banda, the President of Malawi has made several big moves to entice FDI

Mrs Banda recently devalued the Malawian currency to leave it at K250 against the American dollar, which despite causing upset with those is Malawi, it was done with a purpose.

By devaluing the currency Banda hoped to encouraged foreign investors and has definitely increased exports because Malawian goods have become far cheaper, creating more interest.  

The recent article from Ventures, is an interesting read that highlights both the negative and positive aspects of Banda's moves. But importantly it notes that whilst the old President Mutharika might have scared off investors as well alienated his country, Banda has taken many steps to further privatisation and increase interest. In particular regard to the country showing its readiness for change, it is highlighted that:

Mrs Banda hopefully revived such efforts through further privatisation and mandated currency devaluation"

The article, whilst giving both sides to the argument, can be seen to argue that investors should be encouraged by the President of Malawi's efforts and should not fear investing in Malawi's future.

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Obama in Africa: An opportunity overlooked too long

by Developed Africa 26. June 2013 09:00

Obama's upcoming trip to Senegal, Tanzaia and South Africa has garnered a fair amount of criticim in the USA due to its projected costs of $60 to $100 million. But this high cost has masked the massive potential both in terms of international relations and, more importantly, in the vast potential commercial returns of the continent. Obama has received a fair amount of criticism for lack of engagement with Africa in the last 5 years - as highlighted by the video above - which has allowed China to make huge political and commercial gains in their absence.

Harvard Business Review published an article on the trip highlighting these benefits:

Africa ranks second—behind emerging Asia—as the fastest growing region of the world. The IMF forecasts thatSub-Saharan Africa will grow at a rate of 5.4% this year, about 50% faster than Latin America, and infinitely more than Europe, which is currently expected to grow not at all or even contract. Also, Africa's growth is not from a small base. Africa today is a $2 trillion economy, roughly the same as Brazil or India (where few would say a presidential visit is wasted)"

An article on Bloomberg Businessweek  further stressed the potential for growth in economic cooperation with fast growing African states:

U.S. foreign direct investment to the whole region in 2011 amounted to just $3.1 billion, less than 10 percent of total FDI to Africa that year. The latest U.S. Trade Representative statistics suggest the stock of U.S. FDI in Tanzania was a pathetic $21 million. U.S. trade with the region as a whole was worth $94 billion—compared with $127 billion in China-Africa trade. America’s comparatively low economic engagement means the U.S. is missing out on trade and investment opportunities in a small but dynamic part of the global economy."

Clearly there is pressure from inside the USA and from African states for new ventures that Obama has so far largely ignored - he has previously made just one 24 hour visit to Ghana in 2009. This trip was low on any real substance and saw his administration lose favour for refusing to engage properly. This trip is Obama's chance to remedy that.

For more on potential trade opportunities between the USA and Africa take a look at this brief by the Center for Global Development.

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