Foreign direct investment in Sub Saharan Africa on the rise

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
The United Kingdom became the clear leader in 2013 with 104 projects, while the United States fell from joint first place to second place with 78 projects, a 20 percent decline from last year. South Africa, the third largest investor, directed 63 investment projects into the rest of Africa, a 16 percent decline on last year but a significant increase from pre-crisis levels when it registered on average twelve projects. There was a sharp uptake in FDI projects by Spanish and Japanese companies with increases of 52 percent and 77 percent, respectively.

Intra-African investment is gaining momentum. African investors nearly tripled their share of FDI projects over the last decade, from 8 percent in 2003 to 22.8 percent in 2013. This growth is fueled by the need for improved regional value chains and strengthening regional integration. Another driver of growth is the African investors’ understanding of the market and of the potential opportunities and challenges.

Michael Lalor, EY’s Lead Partner Africa Business Center, comments, “External investors supply long-term capital, skills and technology, and intra-African investment creates a virtuous circle that encourages greater foreign investment.”

Significant shift away from extractive industries towards consumer related sectors
The top three sectors – technology, media and telecoms (TMT) with 150 projects, retail and consumer products (RCP) with 131 projects and financial services with 112 projects — accounted for more than 50 percent of the total projects in 2013. During the year, RCP overtook financial services to become the second most attractive sector in Africa.

FDI projects in the real estate, hospitality and construction sector increased by 63 percent, making the sector the fifth most attractive, up three positions from 2012. On the other hand, for the first time ever in 2013, mining and metals exited the top ten 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.

Michael comments, “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.”

Dramatic improvement in perceptions of Africa
Africa’s perceived attractiveness relative to other regions has improved dramatically over the past few years. The overall survey results show that Africa has moved 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.

Ajen comments, “The good news in this year’s survey is that perceptions about the continent seem to be shifting. 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. 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 still 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 percent who are not established.

Urban centers
Africa’s cities are now emerging as the hotspots of economic and investment activity on the continent. Nearly 70 percent of respondents stressed the significance of cities and urban centers in their investment strategy in Africa.

In terms of perception, city attractiveness closely maps country appeal. In SSA, half of the respondents quote Johannesburg as the most attractive city in which to do business, ahead of Cape Town. Nairobi and Lagos are ranked as third and fourth most attractive cities, respectively. In North Africa, Casablanca, Cairo and Tunis are perceived as the top three cities in which to do business.

Investors highlighted that in order to attract greater investments, cities need to focus on the following critical factors: infrastructure (77 percent), consumer base (73 percent), local labor cost and productivity (73%) and a skilled workforce (73 percent).

Looking ahead
Ajen concludes, “Africa’s stronger investment attractiveness is best explained by its own sustained growth rates in the context of slower global growth. Africa’s growth prospects are likely to remain solid, as an urbanizing and rising middle class drives demand for consumer products and improved services.”