EY’s Africa Attractiveness Report predicts a return to the growth trajectory of foreign direct investment (FDI) to the continent.
While Africa’s FDI fell sharply by 50% in 2020 due to the COVID-19 pandemic, making it the hardest-hit region globally, the core factors behind its investment appeal remain intact.
This is the overarching view of EY’s latest Africa Attractiveness Report, which examines the attractiveness of Africa as an investment destination.
It looks at how the health and economic events of the past two years have impacted countries and sectors across the continent, the impact this has had on FDI and expectations for the future.
The report says the African political environment has stabilised over the last few years and favourable demographics could be lucrative.
Sound economic and investment policies coupled with ongoing economic diversification can enhance Africa’s attractiveness to investors.
Africa’s overall GDP contracted by 2.4% in 2020, but is projected to grow by 4.6% in 2021, and then average 4% up to 2025.
With its young population and vast natural resources giving it the potential for enormous growth and innovation, Africa is still an attractive investment destination and the shift from extractives brings new opportunities.
AfCFTA (African Continental Free Trade Area) also opens a new window of opportunity for the continent to harness regional trade links and presents a potential income gain of US$450b for Africa by 2035.
The deal aims to bring 30-million people out of poverty, raise the incomes of 68-million individuals, cut red tape and simplify customs and tariffs.
According to EY Africa CEO, Ajen Sita “Rising investment into sectors outside the traditional extractive industries is creating more sustainable long-term growth.”
Sita cites rapidly rising FDI into service sectors including business services, telecoms, media, technology, financial services and consumer services as those sectors will enable sustainable job creation over time.
“Realising Africa’s potential for enormous growth and innovation, given its young population and vast natural resources, will require significant investment into economic reform, education, healthcare and digital skills development,” says EY Africa Government and Infrastructure Leader, Sandile Hlophe.
Africa is home to the youngest population in the world, with a median age of less than 20 years, and 70% of the population is under the age of 30.
“The road to recovery will be difficult, but a few key catalysts can be harnessed to accelerate growth,” Hlophe says.
“We believe that private sector involvement, slowly recovering trade, rising commodity and crude prices, rebounding tourism and strong agricultural output will determine Africa’s recovery prospects.”
Chairman of the LEX Africa Alliance, Pieter Steyn, notes that it is significant that 54 African countries have signed the AfCFTA treaty and 40 have ratified it. “There has been noteworthy African political will to implement the AfCFTA and the January 2022 launch of the Pan-African Payment and Settlement System (PAPSS) shows that implementation is happening”. The PAPSS is expected to save Africans more than USD 5 billion annually in payment transaction costs and will facilitate quicker intra-African payments.
“Active private sector involvement and a robust and transparent legal framework will however be vital to the AfCFTA’s success” Steyn says. He notes that the AfCFTA covers not just trade in goods but also trade in services and protocols on competition/antitrust law, intellectual property rights and investment policies and incentives. Actively promoting good governance, the rule of law and speedy dispute resolution is necessary says Steyn. “Lawyers have an important role to play”.
Recovery in sight
Southern Africa was hardest hit in 2020 but will slowly recover, conditional on an accelerated COVID vaccine rollout and continued focus on fiscal consolidation.
East Africa remained resilient, continuing its trajectory as the fastest-growing region in Africa in 2020, with the region’s major economies growing by 2.3% on average.
Kenya saw a slight GDP contraction for the first time in two decades, but its growth is expected to rebound to 5% next year.
North Africa was one of the worst hit by the pandemic, although Egypt’s economy proved somewhat resilient, recording a growth of 1.5% in 2020.
By contrast, Morocco saw a sharp contraction of 7.1% in 2020 — its first recession in over two decades — impacted by the dual shock of the pandemic and severe drought, says the EY report.
GDP growth in Egypt is expected to rebound to 4.1% in 2021 on account of strong capital expenditure and reviving exports.
Morocco’s GDP is projected to record a strong 5.8% recovery in 2021, supported by a rebound in agricultural output, a successful vaccination rollout, and higher automotive parts and phosphate exports.
Growth across West Africa was affected by sharp declines in global trade, lower commodity prices and muted capital flows.
The region’s largest economies – Ghana and Nigeria – both slowed significantly. Nigeria was impacted by falling crude prices and oil exports, which constitute 80% of its exports, according to the report.
It says France was the largest investor into Africa in 2020, followed by the US, the UK and China based on FDI project numbers.
Over the past five years, cross-border investment within Africa has gained traction, with South Africa being the largest investor into the rest of the continent.
In 2020, the country announced two large-scale investment projects into Nigeria in the communications sector, worth $2.5bn.
While Nigeria, South Africa and Morocco received the most FDI capital in absolute terms, they were outpaced by countries such as Mozambique and Zambia, when measured relative to their economies.
The ten economies that received the highest proportion of FDI capital relative to GDP were Angola, Mozambique, Zambia, Guinea, Mali, DRC, Gabon, Rwanda, Madagascar and Morocco.
The EY report showed that South Africa received the most projects in the continent in 2020, followed by Morocco and Nigeria. On a country basis, South Africa had the highest FDI score of 31.1 points, followed by Morocco at 17.7 points and Nigeria at 17.5 points.
Though South Africa attracted more projects, Nigeria received the highest capital investment, with FDI valued at $6.6 billion in 2020.
South Africa is less reliant on resource-based industries, and more driven by services and technology sectors, helping it attract more projects during the pandemic, said the report.
In general, the share of extractives FDI has been declining as the continent shifts focus to technology, manufacturing and services capabilities to stimulate growth.
Nevertheless, many countries, including Nigeria, Angola and the Democratic Republic of the Congo (DRC) remain heavily reliant on one key commodity.
Business services saw elevated levels of inward investment as urbanising populations and rising consumer demand stimulated corporate activity.
After business services, the telecoms and technology sectors received the most FDI projects in 2020, driven by Africa’s increasing pace of digitisation and modernisation of telecoms networks.
The telecoms sector received the highest capital investment totaling around US$8.5b, with the largest investments focused on Nigeria and South Africa.
Investments in financial services, which once flourished with FDI inflows aimed at the digital payments space, took a hit in 2020, due to market saturation as well as slowing growth.
The report says fintech remains the largest beneficiary of investments across financial services, attracting 33% of total tech start-up investments in 2020.
Nigeria remains a primary hotspot for FinTech funding, attracting large investments from US-based investors.
A substantial portion of Africa’s population remains unbanked and financially excluded from the economy, creating enormous potential for investors, once growth resumes post-COVID-19.
In conclusion LEX Africa’s Steyn says “Africa remains a continent with great opportunities notwithstanding various challenges”. He however cautions against speaking generally of “Africa”. “One must always bear in mind that Africa consists of 55 sovereign states with huge diversity and differences between individual countries and regions. Investors must not adopt a “one shoe fits all” approach but rather tailor their investments to local conditions and realities”.