Africa's New Marketplace: from donor target to investment opportunity
Historically, the West has viewed Africa as little more than a target for philanthropy. Even today sub-Saharan Africa continues to be the largest recipient of aid from the OEDC and the largest recipient of U.S. foundation money, according to the Hudson Institute’s Index of Global Philanthropy and Remittances. But while the good intentions behind these charitable flows may be laudable, their impact has been less than desirable. Fortunately, thanks to real changes taking place in Africa, the continent’s narrative has shifted from donor target to investment opportunity.
Lionized as the last investment frontier and one of the fastest-growing economic regions in the world, Africa is breaking from its tumultuous past. Western businesses have historically avoided investing in African markets, deterred by poverty, corruption, and conflict. But the winds seem to have changed. Driven by systemic changes and favorable economic trends, businesses the world over are taking notice of opportunities in Africa. Proctor and Gamble, Cummins, IBM, General Motors, and General Electric are all expanding their operations in Africa due to its high growth markets. And according to the Wall Street Journal, U.S. companies invested more than $48.5 billion in Africa in the decade through 2011, more than companies from any other nation did.
This recent activity has come about thanks to increased political and economic stability in the region. According to Oxford economist Paul Collier, Africa’s situation began to change in 1995 when, “macroeconomic reforms tamed inflation and opened economies to international trade.” In 2007, Nigeria’s former finance minister Ngozi Okonjo-Iweala echoed Collier’s assessment in a TED Talk, saying that there has been a clear upward trend in governance in 28 African countries and that the number of civil conflicts had declined from the 1990s dropping from 12 to three or four. More recently, the 2013 Mo Ibrahim Index of Africa Governance reported that 94% of people living in sub Saharan Africa live in a country where governance has seen an improvement since 2000.
Consequently, the continent has gained upward economic momentum at 5 percent average growth. The African economy even remained remarkably resilient through the global recession. African growth slowed briefly to 2 percent growth before recovering to pre-recession levels. Today, Africa is the second fastest-growing economic region in the world next to Asia, and its robust growth rates are now higher than the OECD average. GDP levels continue to rise with projections likely to approach 6 percent growth in the near future and 10 years out are expected to top $2.6 trillion.
Most of this growth has been fueled by Nigeria and South Africa, which account for 56 percent of sub-Saharan Africa’s GDP and are growing at 6.5 and 2.5 percent respectively. Still, McKinsey Global Institute pointed out that 28 percent of countries have achieved growth rates at or above 6 percent with 60 percent holding rates of over 4 percent. Among sub-Saharan Africa’s top performers are Republic of Congo, Ethiopia, Botswana, Mozambique, Nigeria, Tanzania, Malawi, Ghana, Rwanda, Zambia, Uganda, and Seychelles. Regionally, West Africa has seen the highest growth rates at 6.5 percent followed by East Africa at 6.4 percent. Such robust growth rates remain competitive with (and in some cases outperform) the BRICs.
Looking forward, economists believe that Africa’s growth levels will continue to rise and rival even the Asian Tigers. However, in order to sustain these growth rates, Africans will have to continue to build infrastructure, implement responsible economic policies, foster political stability, and curb disease as well as poverty. Nevertheless, Africa’s recent economic growth has helped prime an environment ripe for business.
According to a 2013 report by Ernst and Young, sub-Saharan Africa’s global share of FDI increased from 3.2% in 2007 to 5.6% in 2012. It should also be noted that Africa now ranks ahead of five other regions (former Soviet States, Eastern Europe, Western Europe, the Middle East and Central America) in terms of investor perceptions according to the same report. These encouraging numbers must be approach with some caution, however. Each of Africa’s countries, according to Johannesburg banking executive Euvin Naidoo, “have a unique value proposition—You can make money; you can lose money.”
One particularly promising prospect is Nigeria, which has emerged as one of Africa’s top reformers. Prior to 2003, a single Nigerian telecom firm was able to develop only 4,500 landlines during its entire existence, but after liberalizing reforms were implemented the number of GSM landlines jumped to 32 million. Today, Nigeria’s telecom market is the 2nd fastest growing in the world next to China’s and is attracting $1 billion a year in telecom investments.
Nigeria has made headway with its fiscal policy as well. The country detached its budget from the volatile oil prices, and as a result, Nigeria increased its monetary reserves. In fact, the country was able to save $27 billion. Moreover, Nigerians have since reduced their inflation rate from 28 percent to 11 percent.
Another top reformer in Africa is the Western business darling, Rwanda. This Land of a Thousand Hills, has been hailed by Foreign Policy as the “world’s best-kept secret for business.”1 Overcoming incredible odds, Rwanda is emerging as a leading model for economic development in Africa. Rwandan president Paul Kagame’s commitment to stabilize Rwanda’s politics, develop its economy, and strengthen its society is creating impressive results. In 2009, government-led efforts to improve business conditions enabled Rwanda to surge 76 spots up the World Bank’s Doing Business ranking. Moreover, this small, landlocked, and densely populated country has sustained economic growth levels around 7 percent from 1999-2009.
Today, Africa offers high rates of return and exciting opportunities for investors with the future offering long-term paybacks accentuated by recent trends. And while Africa may not be the place for conservative investors, returns in Africa do outweigh the risks. Africa’s marketplace not only satisfies investor appetites, but also increases and distributes much needed capital across the continent. African entrepreneurs and foreign investors alike will face obstacles alongside the continent’s coming prosperity, but investments in Africa offer returns unlike anywhere else in the world (65-70 percent higher than Asia by some estimates). And in this case, the investments are not only economic, but social as well.
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