Of Investments and Trade in Africa

A while ago, a group of my friends (from very diverse backgrounds) were having an e-discussion on Africa’s Investment potential. One school of thought proposed that Oil is the driving factor for many of Africa’s Investment Alternatives – a thought that was then quickly dispelled as not mostly true. Whereas that may be the case for Nigeria et al, it remains largely not necessarily true for a vast majority of the African States.

 

One of my friends then said:

I don’t disagree that these emerging economies could be a boon for the astute investor, but not because of the price of oil. 

 

And this was my response to that:

I totally believe in Africa’s Investment growth potential. I refuse to let the hyper-inflation in Zimbabwe, one lonely isolated and mismanaged economy, serve as a bench-mark for “Investment Environments in Africa” to the rest of the world.

And, I do agree that direct growth of investments in Africa has more do than just the price of oil. The versatile nature of contributors to growth ranging from mining, tourism, agriculture etc can help in dispelling this claim

That Investment opportunities in Africa have expanded over the past few years is no longer a matter of conjecture but rather an issue that a lot of analysts, venture capitalists and investors at large are exploring with a lot of gusto. For a continent that was often synonymous with political strife, ethnocentric skirmishes, disease and immense poverty, this paradigm shift is at the very least, very impressive.

A few Statistics;  In a United Nations Conference on Trade and Development (UNCTAD) report, Africa Recovery, it emerges that the profitability of foreign companies in Africa has been consistently higher than in most other regions in the world. Annual average FDI inflows rose from $ 1.9B in 1983 -87 to 3.1B in 1988-92, and then doubled to 6B in 1993-97.

In my opinion, inasmuch as this is a debatable stand point, when examined in the context of unique macro conditions of each particular region, expected rates of return on FDI vs. actual return, forecasted vs. real GDP, then we can lend credibility to that statement.

It has also emerged that a lot of Multinational Companies (MNCs) are setting base in Africa due to these very reasons. The scope is so high that studies are now being done on the effect of MNCs in Africa/ developing nations. We also have evidence of African based mining, food processing etc companies expanding into other countries leading to outward inflows of FDI up to $ 43B annually.

I can think of a few reasons that could help explain the rise in investment avenues and/or opportunities in Africa:

1. Macro – economic stability.

In a global economy plagued with negative to stagnated growth, even among G20 Nations, there has been a noticeable positive and consistent economic outlook in African nations (some). The trickle down effect may be negligible due to the strides that have yet to be made, but this does not negate the sustainable growth nonetheless.

2.  Re-shaping of political legal environments.

 

Private investments are directly co-related to the legal structure in a country. Efforts are being expended towards achieving a “free and fair” business environment that will then foster investment programs and initiatives.

3.  Regional integration

e.g. the African Union, East African Community etc. These have greatly increased the synergistic capabilities of individual member states through collective bargaining agreements, lifting of trade of trade barriers and providing a united front concerning economic fronts to some extent.

4.  A very educated workforce:

A lot of investment management professionals are educated in the USA and Europe and then return to their countries bringing with them fresh perspectives and outlooks, global mindsets and best practices that have virtually turned around private investment firms in many nations.

Whereas significant strides have been made in my opinion a core issue that still need to be re-examined is in regard to taxation. A major problem of doing business in Africa is:

Multiple taxation.

An importer will pay import duty and stamp duty then customs tax. At selling you will then have to pay a VAT (Value Added Tax) which is an average of 15% for most regions. That is the very least, and in most cases depending on the jurisdiction you are carrying out your business, you ma have to pay Local County or City Council Taxes. I feel that the taxation system can be better streamlined to allow revenue for governments while still encouraging investments and trade.

Indexing of Investment Funds

In investments, one major issue would be the fact that most Capital Markets in Africa with the exception to the Johannesburg Stock Exchange (JSE) have their investments funds and avenues indexed to a single measure which may not accurately reflect performance of portfolios. However, this may very well change with time. Many Capital Markets are now working on developing Indexes that will be reflective of different sectors and I can see how this is going to make these markets even more robust.

On a macro- level, what is really pushing investment growth in Africa is the tailoring of Funds to meet regional needs. Mutual Funds, to include Unit Investment Trusts have grown three fold in the past ten years. Why? People are familiar with this kind of Investment Avenue. Introducing this from a professional perspective makes it more “acceptable”.

I also see great potential for a Futures Trading Market in Africa – an area that has largely not been explored. Maybe one of these fine days, I shall be on the forefront to spearheading the creation and development of one.

The bottom line therefore still remains the creation of a free market based economy in the region. The African Growth and Opportunity Act (AGOA) was very instrumental to this end. This was basically a subtitle to the Trade and Development Act of 2000 aimed at creating incentives for African Countries to further their efforts towards market based economies. A lot of benefits were accrued by countries that actively harnessed the provisions of this Act – but that is something I will discuss at a later posting.

I see even more growth in the African Region. The Astute Investor already knows that and is actively harnessing the little gains right now.

 

Former UN Secretary General Kofi Annan said:

Africa’s Profitability is one of the best kept secrets in today’s world economy

 

That may very well be a phenomenon that is fast changing!