16 May 2014
Foreign direct investment (FDI) in sub-Saharan Africa is on the rise, with the continent’s share of global FDI projects at its highest level in a decade, and sharply improved perceptions making it the second-most attractive investment destination in the world, according to Ernst & Young’s 2014 Africa Attractiveness Survey.
The survey, released in Johannesburg and London on Thursday, also found that intra-African investment was on the rise, and noted an investor shift from extractive industries to consumer-related sectors on the continent.
Ernst & Young’s latest survey combines an analysis of international investment into Africa since 2003 with a 2014 survey of over 500 global business leaders about their views on the potential of the African market.
The data shows that while there has been a decline in African FDI project numbers, from 774 in 2012 to 750 in 2013, primarily due to ongoing uncertainty in North Africa, they remain easily in excess of the 390 projects per year the continent was averaging before the 2008-09 global financial crisis.
At the same time, the report point to a noticeable divide between FDI trends in north Africa compared to sub-Saharan Africa. While FDI projects in North Africa declined by nearly 30% in 2013, projects in sub-Saharan Africa increased by 4.7%, reversing the sub-region’s decline in 2012 while further widening the gap between the two sub-regions, with sub-Saharan Africa’s share of FDI projects exceeding 80% for the first time.
While the UK remains the lead investor into the continent, intra-African investment continues to steadily rise, according to the report.
Investors are also looking beyond the more established markets of South Africa, Nigeria and Kenya to expand their operations, as well as moving into more consumer-related sectors as Africa’s middle class expands.
“Africa’s share of global FDI projects has grown steadily over the past decade, and it is a promising sign that investors are now looking across the continent and to new sectors,” Ernst & Young Africa CEO Ajen Sita said in a statement on Thursday. “Further regional integration and infrastructure development should continue to entice investors to the exciting investment opportunities that Africa can offer.”
New FDI hotspots emerging
There was significant movement in the list of top 10 countries by FDI projects in 2013, the report found. Only South Africa and Nigeria retained their 2012 positions, of first and third with 142 projects and 58 projects respectively. However, FDI projects in both these countries witnessed a slight decline, while countries such as Kenya (68 projects), Ghana (58) and Mozambique (33) all moved up the ranks.
Zambia and Uganda were the new entrants in the top 10 list in 2013, with 25 and 21 FDI projects respectively, an increase of more than 20%. In contrast, North African countries such as Morocco, Tunisia (ranked 8th in 2012) and Egypt slipped in the rankings.
In 2013, both west and east Africa surpassed north Africa for the first time, becoming the second and third-most attractive sub-regions in Africa after southern Africa.
UK leads investment into the continent
According to Ernst & Young, the UK became the clear leader among foreign direct investors in Africa in 2013, with 104 projects, while the US fell from joint first place to second place with 78 projects, a 20% decline from 2012.
South Africa, the third largest investor, directed 63 investment projects into the rest of Africa in 2013, a 16% decline on 2012 but a significant increase from 2008-09 pre-crisis levels, when it registered on average 12 projects a year.
There was a sharp uptake in FDI projects by Spanish and Japanese companies, with increases of 52% and 77%, respectively.
At the same time, intra-African investment is gaining momentum, with African investors nearly tripling their share of FDI projects over the last decade, from 8% in 2003 to 22.8% in 2013. Ernst & Young attributed this growth to strengthening regional integration, the need for improved regional value chains, and African investors’ improved understanding of the market.
“External investors supply long-term capital, skills and technology, and intra-African investment creates a virtuous circle that encourages greater foreign investment,” said Michael Lalor, lead partner of Ernst & Young’s Africa Business Center.
Shift away from extractive industries
The top three FDI sectors in the survey – technology, media and telecoms with 150 projects, retail and consumer products with 131 projects, and financial services with 112 projects – accounted for more than 50% of the total projects in 2013.
Retail and consumer products overtook financial services to become the second-most attractive FDI sector in Africa in 2013, while FDI projects in the continent’s real estate, hospitality and construction sector increased by 63%, making the sector the fifth-most attractive, up three positions from 2012.
On the other hand, for the first time ever, mining and metals exited the top 10 sectors when measured by FDI project numbers.
When asked about the three sectors that would offer the highest growth potential for Africa in the next two years, investors highlighted the rising importance of agriculture, which ranked only marginally behind mining and metals.
Increasingly, infrastructure is also perceived as a key growth sector, as well as consumer-facing industries including financial services, telecommunications and consumer products.
“Although perceptions indicate that resource-driven sectors are expected to remain the industries with the highest potential over the next two years, the actual numbers show that infrastructure and consumer-facing sectors will increase in prominence as the middle class expands and consumer spending on discretionary goods increases,” Lalor said.
Dramatic improvement in perceptions of Africa
Africa’s perceived investment attractiveness relative to other regions in the world has improved dramatically over the past few years, with the overall survey results showing that the continent had jumped from third-last position in 2011 to become the second-most attractive investment destination in the world behind North America.
Sixty percent of survey respondents said that there had been an improvement in Africa’s investment attractiveness over the past year, up four percentage points from last year’s survey.
“The good news in this year’s survey is that perceptions about the continent seem to be shifting,” Ajen said. “For the first time, Africa is seen as the second-most attractive investment destination in the world. It has strong fundamentals to encourage investment, including steady democracy and macroeconomic growth, an improving business environment, rising consumer class, abundant natural resources and infrastructure development.”
However, there remains a stubborn perception gap between those already operating on the continent and those who are not yet present, according to Ernst & Young. For the first time, this year’s survey shows that companies with a presence on the continent perceive Africa to be the most attractive investment destination in the world. In stark contrast, those with no business presence in Africa continue to view the continent as the world’s least attractive investment destination.
Seventy-three percent of those who are already established in the region believe Africa’s attractiveness has improved over the past year, versus 39% of those who are not established.
Urban centres on the rise
Africa’s cities are now emerging as the hotspots of economic and investment activity on the continent, the survey found, with nearly 70% of respondents stressing the significance of cities and urban centres in their investment strategy in Africa.
In terms of perception, city attractiveness closely maps country appeal. In sub-Saharan Africa, half of respondents identified Johannesburg as the most attractive city in which to do business, followed by Cape Town, Nairobi and Lagos. In north Africa, Casablanca, Cairo and Tunis were seen as the top three cities in which to do business.
Survey respondents stressed that in order to attract greater investments, cities needed to focus on infrastructure (77%), consumer base (73%), local labour cost and productivity (73%) and a skilled workforce (73%).
“Africa’s stronger investment attractiveness is best explained by its own sustained growth rates in the context of slower global growth,” Ajen said, adding that the continent’s growth prospects were likely to remain solid “as an urbanizing and rising middle class drives demand for consumer products and improved services”.