The ideal time to invest in Africa is now. Yet foreign investors are not rushing to the continent, as one would expect, because decisions to invest abroad are often structured in a methodical and very thorough manner. Too much risk is one of the factors mentioned. Risk and profit are Siamese twins: high-risk investments are often associated with higher profits, and Africa is the most profitable region in the world. A report by the United Nations Conference on Trade and Development indicates that between 2006 and 2011, Africa had the highest rate of return on foreign direct investment at 14 percent, compared with 9.1 percent in Asia and 8.9 percent in Latin America and the Caribbean. The global rate is 7.1 percent. There are many examples of companies making very healthy profits in Africa: in 2017, Sonatrach’s oil and gas business alone had a turnover of US$33.2 billion; the MTN Group had a turnover of about US$10 billion; and the Dangote Group had a turnover of US$4.1 billion. Various factors make Africa’s profitability prospects brighter and make it imperative for European, North American, Asian and Latin American companies to invest in the continent and thus contribute to its socio-economic progress.
The prospects for economic growth in Africa are among the most promising in the world. Six of the 12 fastest growing countries in the world are in Africa (Ethiopia, Côte d’Ivoire, Democratic Republic of Congo, Mozambique, Tanzania, and Rwanda). Moreover, according to the IMF, between 2018 and 2023, Africa’s growth prospects will be among the best in the world. The good news is that sectors where foreign firms could have a comparative advantage, such as banking, telecommunications, and infrastructure, are among the drivers of Africa’s current economic growth – creating clear investment opportunities for these firms.
In the face of an aging population in most other parts of the world, Africa’s young and growing population is a fantastic market. The continent’s population is projected to quadruple from 1.19 billion in 2015 to 4.39 billion by 2100. The year 2015 alone saw 200 million Africans enter the consumer goods market. Optimizing a booming market of this size calls for concrete measures to ensure the structural transformation of Africa’s economy.
Africa’s young population contributes to the abundance of labor, which represents one of the most important potentials for labor-intensive industrialization, and lowers production costs, resulting in profits that far exceed the cost of doing business on the continent. The hourly wage in Africa is less than 50 cents per hour (for example, $0.27 in Mozambique, $0.34 in Nigeria, and $1.62 in Morocco), compared with $10.49 in the United Kingdom, $7.25 in the United States, and $6.57 in Japan. The participation of more foreign firms can help raise wages in Africa, improve labor market efficiency, and generate additional resources for the benefit of those left behind because of their age.
Africa’s large reserves of natural resources offer hope for a promising future for value chain development. The agriculture and extractive industries sectors are the backbone of national, regional, and global value chains. Africa is home to 60% of the world’s uncultivated arable land. In 2015, the continent produced 13% of the world’s oil, up from 9% in 1998. The growth in oil and natural gas production between 1980 and 2012 has seen a remarkable trend: oil production increased from 53.4 billion barrels to 130.3 billion barrels; and natural gas production from six trillion cubic meters in 1980 to 14.5 trillion cubic meters in 2012. By the end of 2012, Africa also controlled 53.9 percent of the world’s diamond resources. In 2017, the Democratic Republic of Congo alone accounted for 58% of the world’s cobalt (a material used in the production of electronic components) while in 2016 South Africa accounted for 69.6% of the world’s platinum production (used in the manufacture of catalytic converters and other products). Active investment in adding value to these products, among other extractive activities, will determine global economic activity over the next five decades.
Finally, internal developments in individual countries lend credence to the idea that Africa’s economic transformation agenda is indeed underway. Greater macroeconomic prudence and improved global governance are some of these developments. For example, the Ibrahim Index of African Governance 2017 shows that Africa’s overall governance index has improved at an annual rate of 1.4 percent since 2007, an increase of more than 5 percent in at least 12 countries (including Côte d’Ivoire, Tunisia, Rwanda, and Ethiopia). These developments are helping to mitigate the risk perceptions of many investors on the continent.
African governments should build on this positive trend to maximize foreign investment. This means, among other things, eliminating corruption; improving security and safety; strengthening the macroeconomic environment; investing in quality education and the development of skills in science, technology, and innovation; and avoiding the “race to the bottom” syndrome of granting unnecessary tax exemptions and waivers to foreign companies.
For foreign investors, investing in Africa is good business and a viable corporate strategy. Governments and the private sector in advanced and emerging economies should seize these new profitable investment opportunities on the fly. A key measure for attracting FDI is to use official development assistance to take advantage of Africa’s investment climate and eliminate its risks. The operation of the Japanese agency Nippon Export and Investment Insurance (NEXI) to insure a production unit in Ghana is a commendable initiative that should be pursued on a larger scale and supported by other actors.
Achieving Sustainable Development Goals (SDGs) in Africa provides investment opportunities for foreign companies. There is no shortage of good examples: Sumitomo Chemical’s mosquito net technology helps fight malaria; seawater desalination technology from Sonatrach, JGC, and Hitachi accelerates access to safe drinking water; and weather index-based insurance from Commodity Risk Management Group and Sompo Japan Niponkoa helps mitigate the effects of climate change. In Africa, each SDO provides business solutions and investment opportunities for foreign companies.
The United Nations Development Program (UNDP) works with African governments and private sector actors to eliminate risk and improve the continent’s investment climate. Some of UNDP’s efforts include developing strategies and establishing industrial clusters, promoting special economic zones, expanding access to energy, mobilizing and raising awareness for value chain development in countries, and supporting investment promotion through the International Conference on Emerging Africa.
The ideal time to invest in Africa is now!
By AyodeleOdusola, Chief Economist, UNDP Regional Bureau for Africa