By Rajesh Ramsundhar, Head of Investor Services at Standard Bank Group
Foreign Direct Investment (FDI) flows to Africa have evolved over the past decades and remain crucial to helping the continent get on the path towards long-term sustainability and growth.
Investment into key sectors, both intracontinental and from abroad, generates opportunities for employment, market growth, and community development. It is especially important for the transfer of knowledge and technology, the enhancement of competitiveness and entrepreneurship, and the increase of overall productivity in local economies.
FDI to African countries hit a record $83 billion in 2021, according to UNCTAD’s World Investment Report 2022. This was more than double the amount reported in 2020 at the onset of the COVID-19 pandemic, which heavily disrupted investment flows to the continent. Despite this growth, investment flows to Africa account for only 5.2% of global FDI.
Understanding the FDI landscape in Africa – by examining who invests, why they invest, what they invest in, and the challenges they experience – is imperative to stimulating attractiveness in the market and increasing investment flows to the continent.
Unpacking Africa’s FDI Environment
Toward the end of 2021, Standard Bank led an industry-wide benchmarking campaign to map out the case and path for investing in Africa’s markets. Run by the ValueExchange and supported by BNY Mellon, MIDA, AVCA, SAVCA and Global Custodian, the campaign was designed to demystify the African markets for global investors and bring them one step closer to investing.
The campaign sought the insights of over 225 investors and their intermediary providers from North America, Europe, Africa, and the Asia-Pacific. The participants comprised institutional investors, banks and broker-dealers, fund managers, and wealth managers.
The recently published results show that 44% of campaign respondents are actively investing in Africa, 34% of the respondents are looking to increase their investment and 48% of the investors are looking to start investing in Africa. Interestingly, 78% of African strategic investor respondents are invested in the continent through cross-border flows.
Institutional investors make up the largest part of global Africa flows, according to the findings, with investment vehicles like institutional mandates, mutual funds, proprietary mandates, and private trusts primarily driving foreign direct investment into the continent.
In the last decade especially, Environmental, Social and Governance (ESG) considerations have become a business imperative for foreign investees, resulting in increased investment uptake on the continent for ESG-focused mandates, particularly in the renewable energy sector. Consequently, ESG and impact investing were noted as some of the key drivers for investment inflows from Europe and the Asia-Pacific.
On the other hand, North American investors into Africa were driven by opportunities for diversification in their portfolios as well as attractive investment returns and valuations. African businesses are still trading at attractive valuations, with increased appeal for foreign investors resulting from a weakening exchange rate and discounts on their intrinsic value.
This provides opportunities for investors to make bold, strategic decisions that capitalise on the current downturn to realise greater returns in the long term and create value for local communities.
The results of the campaign show that Africa, above all, is a fintech region: the sectors that appeal the most to both local and foreign investors are technology (top-rated); health; telecommunications; infrastructure; financial services; and agriculture.
According to KPMG, 2021 was a record year for fintech investment in Africa, with over US$1.6bn invested across 153 deals, twice the value of the previous year and representing a 50% increase in transaction numbers. The spread of smartphones across the continent is mostly responsible for this uptake, with digital services in payments and transfers increasing in demand.
Overcoming the Challenges Preventing FDI Uptake in Africa
Many African countries have since the turn of the century worked to overcome regulatory barriers to create an enabling, business-friendly environment to promote both local investment and FDI. This has resulted in the scaling down of bureaucratic obstacles, an uptake of privatization programmes, and aggressive investment drives.
However, many potential investors still discount the continent as an investment location.
Some of the key challenges, according to respondents, were managing market risk and returns (including hedging); the economic climate and political dynamics; and a lack of understanding of the regulatory and legal landscape. Top-of-mind for new investors shying away from the African market was socio-political factors which they believed would increase risk in their portfolios. Currency controls and regulatory frameworks were also found to be major inhibitors for new investors. For existing investors, a large majority argued that forex restrictions, currency controls, and market liquidity were some of the main reasons they chose to limit additional investment flows into the continent.
Despite these challenges, 53% of respondents see local market reforms as the key trigger to increased investment flows. This is by no means a silver bullet but can in time create a more enabling environment for foreign direct investment into the continent.
Africa has enormous potential for investment, both local and foreign.
Foreign investors remain enticed by the continent’s technology and services industries and there is a growing interest in infrastructure projects across the region. Locally, the African Continental Free Trade Agreement should play a major role in developing intra-regional trade which will require the setting up of manufacturing capabilities and infrastructure. This is turn will drive growth in investment from both local and foreign investors.
The investment climate in Africa is ripe for stimulating broad‑based sustainable development and can offer attractive returns to the investors that take up the investments. It does however come with a level of complexity and challenge and therefore requires investors that are resilient, patient and ultimately in it for the long term.