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SMEs provide opportunity for Africa to grow its debt market

13.02.2018Kelsey Tanner, Senior Private Equity Analyst, RisCura

Investments into private firms in Africa are funded by a relatively low proportion of debt compared to equity, especially in contrast to developed markets, where debt is more readily available and affordable. This is according to RisCura’s latest private equity update of its Bright Africa report, released in October 2017.

With a relatively small value of assets under management, there is capacity for the development of the private debt market in Africa. The undercapitalisation of traditional lenders, such as banks, and the current uncertain economic environment have led to the development of alternative sources of capital. One such alternative is the private debt market where fund managers provide finance to private businesses seeking credit. These businesses, such as small and medium-sized enterprises (SMEs), which do not fit into the traditional financing paradigm, provide a pool for private debt funds to tap into. A funding supply gap exists because SMEs are not able to access finance through traditional channels and private debt fund managers have limited investment opportunities.

This gap is fast being closed by private debt funds that have taken on the role to provide the necessary capital to SMEs. African funds that are already targeting SMEs with this type of finance include Vantage Capital’s third mezzanine fund with a $280m commitment from investors in 2017, and the Investec Africa Credit Opportunity Fund 1 with a 2015 investor commitment of $226.5m. 

SME owners are largely unaware of private debt as a funding option, how to access it, and its benefits and risks. This problem is compounded as fund managers cannot easily identify businesses that require funding, and therefore rely on potential borrowers to approach them.

Private debt can be accessed through a number of strategies. Private debt funds such as mezzanine and credit opportunity funds are frontrunners in meeting demand from SMEs seeking growth capital and debt refinancing. Advantageous to SMEs is that private debt funds may offer them finance and management support, but often do not pursue a direct ownership interest. Credit opportunity funds have a broad mandate and may involve a range of debt instruments, allowing fund managers to provide solutions that are suited to each individual company. This is critical when deploying capital effectively in diverse business environments.

Research has shown that mezzanine and credit opportunity funds perform well during the contraction and early expansion phases of the business cycle. After two consecutive quarters of GDP contraction, South Africa emerged from recession in the second quarter of 2017. Renewed business confidence, albeit amidst low forecast growth of around 1% in 2018, could make this the opportune time for investment. South Africa’s over two million SMEs could thrive with an improvement to cash flow, working capital and management, thereby helping to realise the National Development Plan’s forecast that the sector will create 90% of jobs by 2030. Funds with dry powder – cash available for investment – can therefore provide liquidity in the early stages of economic recovery when traditional lenders are unprepared and uninterested. This market also offers investors the opportunity to diversify their fixed income exposure away from government bonds and listed credit, to high-yield investments. Mezzanine and credit opportunity funds typically have positively skewed returns, with more unexpected gains than losses.

Due to the broad range of strategies that mezzanine and credit opportunity funds may follow, investors can earn interest income and equity-like returns through convertible debt strategies.  Funds can gain exposure to assets that should predictably recoup principal and generate alpha (excess return relative to a benchmark). Another advantage is that private debt funds can incorporate diversification of investments by country, sector, or rating. Thus, lowering volatility of returns.

The pursuit of high returns, however, is not without risk, as these private debt strategies take a bet that returns exceed losses in the case of SMEs defaulting on payments. Mezzanine and credit opportunity funds often carry a higher premium to compensate for this.

As can be seen from developed markets, a flood of funding into the debt market could lead to private debt funds hastily pursuing even riskier options, such as “distressed debt” (lending to companies on the verge of bankruptcy), resulting in eroding industry returns. This has sparked fears of a “private debt bubble”.

In Africa, however, the debt market is a long way from reaching capacity. Private debt in Africa is expected to have potential over the long-term as an established part of investors’ portfolios. Investors into Africa willing to accept the risk could create real value for SMEs, the key drivers of economic growth. The development of the private debt market is essential to unlocking this potential.

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About the Author

Kelsey Tanner completes independent valuations of private companies across Africa. In her role as senior private equity analyst, she prepares investment valuation reports for private equity industry clients. Kelsey also conducts industry research and compiles reports such as the Bright Africa (Private Equity) and the RisCura SAVCA Private Equity Performance reports, which provide insight into industry returns. Kelsey qualified as a Chartered Accountant (SA) in 2017 after completing her articles in KPMG’s financial services division, where she gained experience in valuation modelling and unlisted instrument valuation. She joined RisCura in February 2017.

Are African leaders serious about using savings versus debt to better our African economies?

07.11.2017Nthabiseng Moleko, Economics & Statistics Lecturer, Stellenbosch Business School

According to the Nigerian, South African and Kenyan pension regulators we have seen significant growth of pension assets in the last decade. Kenyan assets have increased from 105 billion (Kshs) shillings in 2002 to 700 billion in 2013, the year on year growth remains buoyant with 0.8 percent growth to Kshs 807 billion (2015). The Nigerian economy has seen a similar rise from $7 billion (2008) to $19 billion in 2016, and South Africa's meteoric growth to $207 billion (2016) from $160 billion during the same period. South Africa's Financial Services Board (FSB), Kenyan Retirement Benefits Authority (RBA) and Nigeria's Pension Commission (PC) have established a strong regulatory framework, and asset consultants and managers continue to manage fast growing pension assets in relation to GDP. The Kenyan and Nigerian growth is similar to economies such as Mexico, Spain, France, Italy, China, Brazil and India who have asset to GDP ratios lower than 20%. In the last decade Towers Watson Global Pension Study has identified South Africa as the 11th biggest pension market globally and it has grown considerably over the last decade by 15% to significantly high level of assets at 74% in relation to GDP. The question is - - how is Africa using these funds more strategically to tackle inequality, underdevelopment and joblessness?

             
Source: Authors compilations from World Development Indicators (online), Financial Services Board Annual Reports, 1960-2013

                      
                           Source: Retirements Benefits Authority, 2017

                     
Source: Authors own work (Towers Watson, 2016 and OECD Pension Fund Indicators, 2016)

The increased size of pension assets has fared well for capital market development, showing both increased depth and liquidity of securities markets. The modernisation of infrastructure increased assets for bond and equities, particularly in the long run. Improved regulatory framework is also a consequence of pension asset growth with even some empirical studies attributing it to lowering of transaction costs. When the South African and Kenyan investment allocation by asset class are compared we see signs of large exposure to domestic equities (17.6% and 23%) and bonds (8.5% and 36%), including government securities. It is only in Eastern Africa a sizeable allocation in immovable property at 19% versus South Africa's lower 1.2%. Kenya has allocated an impressive Kshs 150 billion as at December 2015. Alternative investments, which include investments in infrastructure, are an asset class that require significant development for increased allocation in our capital markets. The African Equity Fund and Isibaya Fund, managed by the continent's largest pension fund manager (Public Investment Corporation), allocate a total 2% of the total assets of R37.1 billion into such investment products. Particular emphasis on the development of instrument, bonds and equities (listed and unlisted), project planning and packaging of such facilities is a key requirement in furthering such. The worsening condition of our West, East and Southern African economies must make use of all possible means to transform it, such as using capital markets in particular as an enabler to propelling economic development in greater proportions.

This is all against a backdrop of a slowed economy in the continent's two largest economies, both facing recession with Nigeria -1.5% growth and SA's lacklustre 0.29% growth in 2016. In the same period Kenya has experienced 5.8% growth, however, has the highest jobs crisis amongst the countries. The governments need to make deliberate efforts to put all these economies on higher growth paths. For instance, South Africa's growth has averaged 3% post democracy and at its peak, growth hasn't exceeded 5.6%. Kenya's growth and Nigerian economic growth has grown but neither of these economies have grown sufficiently to absorb unemployed labour, decrease widening inequalities and reduce significant poverty and infrastructure backlogs needed to boost sectorial development. The number of unemployed continue to worsen with the hardest hit being women and youth, ranging from 14.2% an estimated of 28 million people. South Africa's 26.6% with Kenya's staggering 39.1% unemployment levels signal a serious structural crisis. Despite significant growth, all these economies have been unable to match increased growth by absorbing new entrants into the labour market.

The total infrastructure backlog estimations made by the African Development Bank were projected at $93 billion per annum. With investment in productive investment and absorbing local labour we can begin to make a positive dent in poverty and unemployment. Public investment is inadequate to meet the financing requirements estimated at 10% of our economic output per annum. Labour intensive growth is what is required for our economies. However, we cannot be further indebted to Bretton Woods institutions in the process. Already soaring debt to GDP ratio's and heavily priced servicing costs places high levels of opportunity costs on the option of borrowing and servicing debt. The question is, where will the finance required to promote productive growth be drawn from? Increased investment must be in capital formation, making investment in machinery, equipment, and industrial infrastructure, logistics support through the construction of railways, ports, roads, and investment in other such infrastructure that will unlock the economy in regions that could be developed as economic hubs.

Is it true that investment in infrastructure is a risky investment?

The sole purpose of pension regulators is to ensure that there is a conducive environment to investments but limiting risky and reckless investments of pensioners. Curtailing the ability to act as a watchdog from looting and enforcing limitations on asset classes for optimal returns is crucial. This is to protect the pensioners' interest. However, is has been shown in countries such as Canada, the USA and Australia that have invested up to 15% of total public pension assets in infrastructure investments. These investments using non-traditional financing mechanisms have shown significant returns in other countries, whilst developing the economy has yielded positive returns. In a global pension assets study by Harith & Preqin, more than three quarters of infrastructure portfolio performance of infrastructure assets has met expectations. It exceeds 90% when including portfolios that have exceeded performance. The argument that targeted investment do not hold returns equivalent to other asset classes is unjustified as they do not perform differently from non-targeted investments.

The fears of weak state capacity, poor planning and weak governance of institutions and political meddling are seen as hindrances to securing not only foreign but even curtailing attempts to increase domestic savings as investment for domestic infrastructure. It must be stated though that infrastructure projects such as toll roads, power distribution and transmission facilities are able to generate operating cash flows. In order to ensure changes in investment behaviour and patterns, contract law and methods for recourse coupled with a strong regulatory capacity in infrastructure are required. The regulatory capacity in East African economies (including Kenya) and South Africa do not restrict investment, however in other countries pension fund regulation must reduce fragmentation and not be a constraint in diversifying assets. Secondly, governance concerns over agencies and their ability to collect payments for infrastructure services can only be quelled by building strong institutions and developing a track record of success. It has to be the state that quells the notion that there lack investable products, thus restricting investments. We have seen in South Africa how investment in institutional capacity from as far back as 1959 with the FSB's establishment has led to the development of a strong regulator, and one of the biggest pension market globally. It shows the state has to deliberately channel resources into development of project planning, project packaging and in the development of investable products using its institutions.

The task of improving the marginal productivity of capital requires innovation in our capital markets. Pension funds are a long term supply of funds to capital markets and offer the opportunity of diversifying risk and also heeding against investment risk as an asset class.

Economic estimations show that the size of the informal economy ranges from 10-50% of our African economies with a sizeable portion of our economy not contributing to formal pension schemes. Economic growth that is underpinned by increased labour productivity and employment will see the size of pension funds surely increase. But the strength of the relationship between pension funds and growth is strengthened if capital markets are developed with the intention of further driving growth.

Capital markets can also offer solutions that respond to the constraints of jobless growth, particularly in our emerging markets or developing economies. Life insurance companies, pension fund managers and the wider financial services sector should be encouraged to play a greater role in the provision of capital to drive continental growth. In time, the increased savings effect from pension funds will trickle in greater proportions through capital markets and grow the entire economy.

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About The Author

Nthabiseng Moleko is a Faculty member at the University of Stellenbosch Business School and teaches Economics and Statistics to postgraduate and Masters students. As a former Chief Executive Officer at JoGEDA, Project Manager and Researcher at ECSECC she has worked extensively in the economic development landscape.  At ECSECC she contributed to the development of various policies that contributed to the policy aspects of economic development in South Africa working with regulators, policy makers, national and regional government. The transition from a policy research think tank at ECSECC to a development agency in JoGEDA enabled her to be involved in several regional projects in South Africa. She started her career in the credit team at a highly rated specialist institutional fixed income boutique asset management firm, Futuregrowth Asset Management. Nthabiseng obtained her Bachelor of Business Science (Honours) degree in Economics at the University of Cape Town. Thereafter she obtained a Masters in Development Finance from the University of Stellenbosch Business School (USB). She is currently completing her PhD in Development Finance from the USB with the topic centred around pension funds, savings, capital market development, the Public Investment Corporation and growth.   Her research encompasses several time series analysis using econometrics to understand financial services, namely pension funds and capital markets contribution to economic growth.  She seeks to understand how financial development in Africa can be better used to aid economic development.

Unlocking infrastructure potential in Africa: The role of sovereign wealth funds

29.06.2017Seedwell Hove, Senior Macroeconomist, Quantum Global Research Lab

This post was originally published on the Quantum Global Group website.

Sovereign wealth funds (SWFs) are increasingly becoming major sources of finance in many countries. Commonly established from balance of payments surpluses, foreign currency reserves and fiscal surpluses, global SWF assets under management have grown rapidly in recent years, topping US$7.2 trillion in 2015, more than double the asset base in 2008. African countries have joined the international trend in establishing SWF in recent years, with assets under management now over US$159 billion (6.4 percent of Africa's GDP). The rapid growth of SWFs in Africa has been catalysed by high commodity prices from the early 2000s till 2014, coupled with the recent discoveries of oil, gas and solid minerals in countries like Ghana, Kenya and Tanzania. Despite the plunge in commodity prices since 2014, SWFs continue to increase both in number and in assets under management.

At the same time, Africa has huge infrastructure gaps which are constraining growth. The World Bank estimates that about US$93 billion is required annually to meet the continent's infrastructure needs, but only half of that amount is currently being met. Booming population growth and increasing life expectancy across the continent is pushing up demand for utilities such as water, power, roads and telecommunications, which few countries are providing in sufficient quantities. About 19 percent of roads in Sub-Saharan Africa are paved, compared with 27 percent in Latin America and 43 percent in South Asia. Some 57 percent of the population in Africa lack access to electricity and about 30 countries face regular baseload power shortages, resulting in the payment of high premiums for emergency power. The proportion of people with access to improved water sources is 68 percent in SSA compared with 94 percent in East Asia and 95 percent in Latin America. Inadequate infrastructure is raising the cost of doing business, hindering trade integration and constraining growth. The poor state of infrastructure is estimated to reduce growth by two percentage points every year and cut business productivity by as much as 40 percent. Africa's firms lose five percent of their sales due to power outages and this figure rises to 20 percent for firms in the informal sector.

Accelerating Africa's growth hinges on closing the infrastructure gap, yet mobilizing finance for infrastructure development remains a daunting challenge.

The scope for financing infrastructure from traditional sources such as public revenues, banks and debt markets is limited, especially after the global financial crisis. Thus Africa needs new sources of finance for infrastructure, and sovereign wealth funds can contribute significantly in financing infrastructure.

SWFs are well positioned to finance infrastructure, for several reasons. First, they have a long-term investment horizon, and can provide long-term capital which is necessary for infrastructure financing. Second, they usually have limited or sometimes no explicit liabilities (since they are usually drawn from the fiscus), in contrast to other institutional investors such as pension funds. Third, infrastructure provides reasonably higher and inflation-protected yields, coupled with lower correlation to other financial assets, which implies lower risk. Fourth, once constructed, infrastructure assets are less vulnerable to economic downturns compared with other assets which are pro cyclical. Given Africa's demographics and infrastructure financing gaps, channeling SWF resources towards infrastructure is a positive step towards building above-ground assets for future generations.

Asset allocation of African SWFs is largely determined by their mandates, which include economic stabilization, intergenerational savings accumulation, buffers against economic shocks, wealth diversification and economic development (e.g. infrastructure and industrial development). In addition, economic outlook, fiscal situation, market trends, investment beliefs, regulations, risk appetite and liability considerations also influence investment decisions of SWFs. Our analysis suggests that allocating about 20 percent of the current African sovereign wealth funds could cover Africa's annual infrastructure financing gap atleast for a year, assuming no inefficiencies. Allocating about 15 percent of African SWFs could close the energy financing gap while the water and sanitation financing gap could be covered by an allocation of 8.4 percent of Africa sovereign wealth funds. For a sample of countries which have established SWF, there is positive correlation between SWF assets and access to electricity, suggesting that SWF can make a difference in infrastructure development.

There are many opportunities for investing in Africa's infrastructure. Africa has abundant natural resources (10 percent of world reserves of oil, 40 percent of gold, 80-90 percent of chromium and the platinum group of minerals and agriculture resources which provide opportunities for infrastructure investments in resources and industrial beneficiation sectors. The continent is also undergoing rapid urbanization, with relatively young labour force and growing middle class which provide opportunities in real estate, telecommunications, energy and water and sanitation sectors. Africa's population will more than double to about 2.4 billion by 2050, representing growing future demand for infrastructure. Estimates suggest that demand for energy in Africa will grow at 6 percent per year to 3 100 terawatt hours (TWh), while transport volumes will increase by 6-8 times the current amount by 2040. Returns on investments in Africa have been considered to be higher than in other developing regions, which could be the case for infrastructure investments, considering existing infrastructure funding gaps, especially in energy, transport and water and sanitation. While opportunities for infrastructure investments in Africa are immense, there are also some risks to consider. For instance, political risks (e.g. arising from change of governments), currency fluctuations, commodity price fluctuations, financing risks and lack of high quality data to measure and manage risks.

SWF can certainly play an important role in financing infrastructure development in Africa. For this to be possible, African SWFs need to have clear objectives and ensure that their investment strategies are consistent with their set mandates. SWF can make efforts to allocate a sizeable portion of assets towards infrastructure investments or create a sub-entity with a specified mandate towards infrastructure investment, as exemplified by Ghana, Nigeria and Angola. African governments can also promote infrastructure investment by demonstrating commitment to investor protection in terms of property rights, stable legal systems, zero tolerance on corruption and upholding of legitimate projects after political transitions. This is important specially to attract other SWFs outside Africa or private investors. Institutional investors often raise concerns of liquidity and risks in infrastructure investments. As such, there is need to design financial instruments which are liquid and credit enhanced, with investment grade ratings to incentivise SWF to invest their huge resources in infrastructure. Improving infrastructure project preparation and packaging could also be helpful in attracting SWF into infrastructure investments. It is also important to address data gaps to help improve the measurement and management of risks in infrastructure investments and unlock more funding into infrastructure in Africa.

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About the Author

Seedwell Hove  is currently Senior Economist at Quantum Global Research Lab, a research center specialized in the delivery of bottom-up econometric models of African economies and macro-economic policy analysis  that support the development of innovative economic policy and sustainable investments. Seedwell and the Research Lab's global office are based in Zurich, Switzerland. Prior to joining this position, he worked at the World Bank between 2012 and 2015, and before this assignment, he taught Economics for nearly 2 years at the University of Capetown. Early in his career, Seedwell worked as treasury dealer at Infrastructure Development Bank (formerly Zimbabwe Development Bank) and then at Reserve Bank of Zimbabwe. Relatively to his academic background, Seedwell Hove holds a Ph.D. in Economics from Cape Town University and a Master's degree from the University of Zimbabwe.

Pension funds can play a pivotal role in African aspirations for 2063

19.06.2017Gerald Gondo, Business Development Executive, RisCura Africa

African equities have recently faced strong headwinds, despite the positive fundamental growth prospects presented by the continent, writes RisCura Africa's Business Development Executive, Gerald Gondo.

If one considers the negative return profiles of a number of the African equity indices over the last two years, it would not be surprising if investors questioned the much-vaunted tag-lines of "Africa rising" and "demographic dividend". Should they retain their confidence that Africa will master its short-term challenges and look to the long-term prospects?

An important element of the African investment case is the oft-cited demographic dividend - referring to a period where a country's workforce is young, willing and able to be integrated into the economy and thus continue its economic growth. But, other elements such as rising disposable income, urbanisation, untapped resources and agriculture also reinforce the need to look beyond short-term challenges and rather to calibrate one's expectations towards the long-term. These drivers are set to continue to develop and arguably present the prospect of compelling organic growth waiting to be unlocked.

The questions investors should be asking are who and how will Africa unlock this growth?

African governments and policy-makers appear quite clear and resolute in their outlook. Evidence of this is the 28th African Union (AU) Summit held in Addis Ababa, Ethiopia in January 2017 whose theme was, "Harnessing the Demographic Dividend through Investments in Youth".

This was perhaps a clarion call by Africa's leadership to revisit its investment case by focussing on possibly its most durable and resilient growth proponent - its youth.

Turning to the AU's "African Aspirations for 2063" - six aspirations aimed at realising the continent's potential by 2063 - Aspiration 1 reads as follows:"A prosperous Africa based on inclusive growth and sustainable development. We are determined to eradicate poverty in one generation and build shared prosperity through social and economic transformation of the continent."

Critical to making in-roads in achieving this aspiration requires African governments, policy-makers, and regulators to undertake a critical review of inhibitors to effective inclusive growth and sustainable development. Deepening, integrating and developing African capital markets is an obvious and immediate area to target.

According to a Milken Institute - Centre for Financial Markets study, "Capital Markets in the East African Community - Developing the Buyside", these markets are fundamental to economic growth because they help to channel domestic savings in a more productive way. Thereby enabling the private sector to invest, produce and create jobs. African pension funds have been cited as a growing pool of assets that can and should be channelled towards deepening capital markets.

At RisCura, we continue to observe and record the growing asset bases of African pension funds due to rising incomes, with emphasis on the need for these funds to look to diversify their investments away from traditional investments. Particular focus is given to the continued elevated levels of exposure that many African pension funds still have to government fixed income securities, which could largely be attributed to static regulation.

A separate Milken institute study in East African pension funds found that "preferential treatment generally given to government securities through regulatory approaches - specifically, relatively high portfolio ceilings - may induce funds to over allocate to this asset class at the expense of others."

If Africa is to progress towards achieving Aspiration 1, alongside the remaining six and equally important Aspirations, the pace of capital market reforms needs to be accelerated. RisCura has previously noted several major African countries have revised pension regulations in recent years, with many either considering or actually revising rules around investments such as allowing investments into private equity and non-traditional asset classes. However, the pace of revision remains slow.

Deepening of capital markets may take time, but the channelling of savings towards productive sectors of the economy is not limited only to listed capital markets. Allocations to private equity and infrastructure as alternative assets classes through the burgeoning African private equity and infrastructure funds, will serve as critical interventions to accelerating economic development in Africa.

Regulatory reform will serve as a powerful driver for increased investment that deepen and develop African capital markets. African pension funds and institutional investors have an important and critical role to play in assisting Africa (through prudent channelling of savings) with projects and initiatives that can accelerate the fulfilment of Aspiration 1.

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About the Author

Gerald Gondo serves as an Executive within RisCura Africa and is responsible for Business Development. Prior to joining RisCura, Gerald was also a founding partner of a specialist investment advisory and investment management business (Atria Africa) based in Mauritius. Gerald's passion to have first-hand experience in investing in Africa led him to join a leading pan-African asset manager (Imara Asset Management) where he had dual responsibility of being lead analyst on listed equities in Egypt, Morocco, Zambia and Mauritius whilst also building the fixed income capability of Imara Asset Management in Zimbabwe. He started his career in private equity investment in Sub-Saharan Africa (Business Partners) and has also worked as a credit analyst for a highly-rated specialist institutional fixed income boutique (Futuregrowth Asset Management), where he was responsible for credit analysis for corporate credit and securitisation issuances within South Africa.

Understanding investment and financial flows in Africa

19.06.2017Kudzai Goremusandu, Financial Consultant, Africa Leadership Insights Institute

This post was originally posted on the NewsDay website.

According to the African Economic report 2016, Africa attracted an estimated $208,3 billion of external finance - foreign investment, trade, aid, remittances and other sources in 2015, the figure was 1,8% lower than the previous year. Falling commodity prices, particularly for oil and metals, were one of the key causes for the 2015 fall.

The total sum was projected to rise again to $226,5 billion in 2016. Portfolio equity and commercial bank credit flows dried up, reflecting tightening global liquidity and a market sentiment wary of risks. Rising remittances and increased official development assistance largely kept the figure up. African governments have to stabilise financial inflows in the short term and use them for sustained economic diversification for the longer term.

Flows of finance into Africa - foreign direct investment, portfolio equity and bonds, commercial bank, bilateral and multilateral bank credit, official development assistance and public domestic revenues - have remained broadly stable despite weak conditions in other parts of the world. Foreign Direct Investment (FDI) into Africa grew steadily from 2007 to 2013. In 2014, however, FDI fell back to $49,4 billion, but increased to $57,5 billion in 2015, according to International Monetary Fund (IMF) report 2015 estimates. Africa has attracted investment from industrialised countries such as France, the United Kingdom and the United States and emerging economies such as China, India, South Africa, and United Arab Emirates. Investment is still mainly directed at resource-rich countries, but non-resource-rich countries are becoming more attractive. The extractive sector, infrastructure and consumer-oriented industries are the main draws for investment.

Africa's pattern in foreign direct investment (FDI) inflows

While the European Union countries and the United States remain the largest investors in Africa, the emerging economies are a vital source too. Foreign investment into Africa increased by 16% from to $57,5 billion in 2015, according to IMF figures. Flows to North Africa reversed a downward trend, as investment increased by 20% from $17,2 billion in 2014 to $20,7 billion in 2015. East Africa has seen higher FDI since 2010. In 2015, the figure rose 16% to $8,9 billion in 2015 from $7,7 billion the previous year. For West Africa investment rose from $9,3 billion to $9,7 billion.

Central Africa saw a decline from $6,6 billion in 2014 to $5,4 billion. Southern Africa received $12,9 billion of FDI in 2015 against $8,7 billion in 2014, and $11,4 billion in 2013.

The leading African investment destinations in 2015 were: Egypt ($10,2 billion), Mozambique ($4,7 billion), Morocco ($4,2 billion), South Africa ($3,6 billion), Ghana ($2,5 billion), the Democratic Republic of the Congo ($2,5 billion), Zambia ($2,4 billion), Tanzania ($2,3 billion), Ethiopia ($2,1 billion), Guinea ($1,9 billion), and Kenya ($1,9 billion).

Without Egypt, investment to North Africa would have dropped. FDI to Egypt increased from $5,5 billion in 2014 to $10,2 billion in 2015. United Arab Emirates investors have played an important role in Egypt's recovery. Flows into Morocco fell to $4,2 billion in 2015 from $4,7 billion in 2014. But Morocco became the third largest recipient of foreign investment in Africa in 2015.

Potential growth areas of foreign direct investment (FDI) in africa

Consumer-oriented sectors in Africa attract growing foreign investment

Resource-rich countries still get the most foreign investment, but countries with no major commodities to rely on are taking a larger share of FDI. Countries that are not resource-rich received an estimated 37% of Africa's FDI in 2015, compared to 30% in 2010. Several countries without significant resources are attracting investors, including Kenya, Tanzania and Uganda, reflecting the shift towards consumer goods. Kenya is becoming an East African business hub for manufacturing, transport, services and information and communications technology (ICT). Investment is starting to diversify into consumer-market oriented industries, including ICT, retail, food and financial services.

African cities are future hubs of investment

With urbanisation, African cities are growing consumer markets increasingly targeted by foreign investors.

Disposable income and spending power in Africa's major cities will grow according to Oxford Economics, 2015, Future Trends and Market Opportunities in the World's Largest 750 Cities. Forecasts show that the gross domestic product of major cities is increasing. The most important ones will be Cairo, Cape Town, Johannesburg, Lagos and Luanda. This ranking reflects the quality of the business climate, infrastructure and logistics, and availability of skilled workers.

A recent surge in infrastructure investment indicates that states are investing in transport corridors to connect urban agglomerations and transform them into urban clusters. Examples include the Greater Ibadan-Lagos-Accra urban corridor, the Maputo Development Corridor, and the Northern Corridor between East and Central Africa. These investments will surge with deeper market integration through reduced transport and trade costs. They will also foster competition and productivity, which will make African hubs more attractive for foreign investors.

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About the Author

Kudzai Goremusandu is a strategic, innovative, dynamic, goal getter, enterprising management and financial consultant. He is the founder of Africa Leadership Insights Institute. Kudzai holds an award for effective media communication from the University of Zimbabwe. Kudzai is based in Harare, Zimbabwe. He can be contacted at kgoremusandu[at]gmail.com.

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