Fast forward to 2011 and the prospects of Foreign Direct Investment (FDI) into Africa still face similar challenges. According to a KPMG survey, potential investors in Africa view a reduction in political instability, a willingness of African governments to reduce corruption and a clear macroeconomic direction as essential to attracting investment.
Recent global events have exacerbated the case for Africa. Domestic crises and natural disasters relating to floods in the United States and Australia, earthquakes in China and Japan, as well as the subsequent tsunami in Japan, have kept investors focused on the situation at home. Other issues which Africa needs to contend with in trying to attract investment, include the worldwide recession and its challenge of unemployment, low interest rate regimes to promote growth in the developed countries, sovereign debt issues in Europe, global imbalances, currency volatility and the omnipresent impact of climate change.
It is important to note that there are different forms of foreign investment into Africa, the first being investors that provide funding for infrastructure development and real economic growth. This form of capital flow is arguably more appropriate and development-friendly for emerging economies than portfolio flows. According to a United Nations Conference on Trade and Development report, 2011, FDI flows to Africa declined by 36%, mostly because of the global recession. This resulted in the widening of the gap in funding requirements for Africa and its infrastructural development.
Then there is the foreign investor pursuing yield through the various African bond and equity markets. These are investors seeking higher returns, escaping the low interest rate regimes currently in place in most developed countries. In South Africa, for example, foreign investors, lured by slowing inflation, a stronger rand and higher interest rates, channelled an estimated R97 billion into stocks and bonds through the JSE in 2010.
So far this year, foreign investors have been net buyers of South African equities, showing a continued interest and appetite. However, in the process, these foreign investors accept more short-term volatility, but how much volatility the investors are willing to accept depends on their risk tolerance. The civil unrest and uncertainty in North Africa, and rising tensions heading southwards, make the foreign investor retreat to “safe” investments, such as gold, despite the yield opportunity presented by the higher interest rates in emerging markets.
Regardless of the challenges, there are some good news and many positives. Initiatives that focus on a collaborative approach and economic integration in Africa through bodies such as New Partnership for Africa's Development (NEPAD), African Union (AU) and African Peer Review Mechanism (APRM) are all positive steps. The key is ensuring that the initiatives pay a dividend in attracting FDI to the continent. African countries are therefore beginning to understand the importance of trade between themselves and efficiently managing the process. There is also the acknowledgment that to close the funding gap in FDI requirements, African governments will have to partner with private capital. Hence the need to create a business environment that is conducive to investment and protects investor interests.
Increased demand for commodities from China, a rise in commodity prices and the showcasing of Africa's abilities in the 2010 FIFA Soccer World Cup are some factors that might assist in creating increased interest in Africa. There is the realisation that to invest in Africa, the investor must assess the risk on an opportunity by opportunity, case by case and country by country basis.
The challenge for Africa is to present opportunities that are too good for the investor to ignore. Information is now better and more readily available compared to 10 years ago, making investors seemingly more sophisticated and better informed to make decisions and influencing how investors perceive Africa.
To speak of the opportunity cost of not investing in Africa, without speaking of politics, would be foolhardy. Promises of young democracies budding from the unrest in the north and pressure mounting on undemocratic regimes are proof that the people of Africa are indeed taking the tentative steps forward in making Africa the “place to be” for investors. asa
Ruth Rudo Njawaya, BCom, CIA, is Senior Manager: Financial Risk Management at KPMG Services (Proprietary) Limited.
