Africa Attractiveness Report 2021.

Africa poised for a reset. Are investors forward thinking?

EY Africa Attractiveness Report 2021

 
EY’s Africa Attractiveness Report signals a return to the growth trajectory of foreign direct investment (FDI) to the continent.
 

Executive Summary 

  • Africa's FDI fell sharply by 50% in 2020 due to the COVID-19 pandemic, making it the hardest-hit region globally but the shift from extractives brings new opportunities.
  • Africa's overall GDP contracted by 2.4% in 2020, but is projected to grow by 4.6% in 2021, then averaging 4% up to 2025.
  • AfCFTA opens a new window of opportunity for Africa to harness regional trade links, and enable economies to innovate and grow together by removing artificial trade barriers as it presents a potential income gain of US$450b for Africa by 2035.

Introduction 

B

y examining the attractiveness of Africa as an investment destination, the EY Attractiveness Report offers information in support of investment decisions.

The EY Africa Attractiveness Report 2021 comes at a time when Africa, like the rest of the world was plunged into a recession caused by the pandemic and examines the region’s attractiveness as a foreign investment destination. Overall GDP contracted by 2.4% in 2020, less than the 3.6% contraction in global GDP, 6.7% in the Eurozone, and 4.3% in the Americas.

In this year’s report we look at how the health and economic events of the past two years have impacted countries and sectors, to identify the impact this has had on FDI and what we can expect from these various sectors now and into the future.

EY’s 2021 Attractiveness Report shows that Africa amid global challenges is still an attractive investment destination, with its young population and vast natural resources giving it the potential for enormous growth and innovation. But realizing this potential would require significant investment in education and skills development. It will also require rapid economic reform, good governance, and a stable political landscape and there are promising signs of this in several countries, while others still lag behind.

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Chapter 1

Economic Review

Africa is poised for a multi-speed recovery path, with significant country and regional cluster variances.

Africa, along with the rest of the world, was significantly impacted by the COVID-19 pandemic in 2020 and witnessed one of its worst economic recessions in 50 years. Overall GDP contracted by 2.4% in 2020, less than the 3.6% contraction in global GDP, 6.7% in the Eurozone, and 4.3% in the Americas.

Across Africa, East Africa was most robust, with Tanzania and Ethiopia growing fastest in 2020. Southern Africa was greatly affected, with South Africa registering the highest number of COVID-19 cases in 2020, pushing the economy into deep recession.

Africa is projected to grow by 4.6% in 2021, then averaging 4% up to 2025. Côte d’Ivoire, Morocco, and Kenya are expected to rebound more strongly in 2021.FDI fell sharply by 50% in 2020 due to the COVID-19 pandemic, making it the hardest-hit region globally but the shift from extractives brings new opportunities.

Africa's overall GDP contracted by 2.4% in 2020, but is projected to grow by 4.6% in 2021, then averaging 4% up to 2025.

Africa GDP Growth Projection

4.6%

in 2021, then averaging 4% up to 2025.

Africa is poised for a multi-speed recovery path, with significant country and regional cluster variances.

Africa’s economy will rebound from the impact of the COVID-19 pandemic and achieve a modest recovery this year (2021) … Countries’ liquidity and ability to vaccinate sizable portions of their population will prove pivotal in efforts to secure an economic turnaround.
UN Economic Commission for Africa

East Africa avoided significant pandemic impact, that most of the region’s major economies grew by 2.3% on average, with Kenya seeing a slight GDP contraction for the first time in two decades. Although GDP growth in Ethiopia and Tanzania slowed in 2020, it remained in positive territory and East Africa’s GDP should pick up in 2021.

North Africa was one of the worst-hit by the pandemic, with Morocco registering the 2nd highest COVID-19 cases in Africa. Egypt’s economy proved somewhat resilient, recording a growth of 1.5% in 2020. But COVID-19 disrupted governments’ fiscal consolidation plans as external debt rose a sharp 15% in 2020, to US$129b, and will rise further in 2021. Gross government debt reached 95% of GDP. By contrast, Morocco saw a sharp contraction of 7.1% in 2020 — its first recession in over two decades — this was greatly impacted by the dual shock of the pandemic and severe drought. 

West Africa’s recovery is likely to be led by a rebound in global trade. The region’s largest economies — Ghana and Nigeria — both slowed significantly in 2020. Nigeria is expected to recover in 2021 with an expected growth rate of 3.2%, with oil surging in May 2021 and a recovery in oil demand. Robust growth in oil sector activity in the medium term will also support the country’s growth.

Whereas, Ghana’s COVID-19 Alleviation and Revitalization of Enterprise Support program is predicted to boost GDP growth, projected at 4.8% in 2021. To overcome the fiscal deficit of 11.1% of GDP in 2020, Ghana will borrow US$5b from the capital markets in 2021, which will further increase its debt to over 80% of GDP.

Growth in Southern Africa region is expected to rebound over the medium term, after it was severely impacted by the COVID-19 pandemic in 2020. South Africa recorded the highest number of cases and fell into a deep recession that saw its GDP shrink by 7% — the steepest fall in over a century. Though despite this, its GDP is projected to grow by 4.8% in 2021, being supported by higher commodity prices and a stronger currency.

However, the fourth COVID-19 wave, slow vaccination rates (only 23.1% of the population is currently fully vaccinated*) and electricity outages pose significant risks to growth. The high unemployment rate (projected to reach 33% in 1Q2022) and rising public debt (projected to jump to an unprecedented 94% of GDP by 2025 from 71% in 2020) are key risks to growth. Of greater concern, recent unrest ignited by the former President’s incarceration, resulting in widescale looting across two provinces, has led to a downward revision of growth estimates to –3.5%.

Mozambique’s GDP contracted by 1.3% in 2020 due to supply chain disruptions. Mozambique was one of the six African countries in debt distress in 2020, with debt mounting to 120% of GDP. Though its GDP is also projected to recover slowly — to 1% in 2021, before rising to 3.6% in 2022 and up to 7% by 2025.

Central Africa struggles with falling crude oil production that in 2020, Angola’s – the largest economy in Central Africa – economy shrunk further by 5.2% due to COVID-19-related restrictions, a slump in oil prices, and falling oil output.

In 2021, Angola is expected to turn the corner and record growth of 1%. However, the recovery is expected to be slow, as crude oil production in the country declined further in 1H21 and failed to meet OPEC targets.

French-speaking sub-Saharan Africa (FSSA) should rebound strongly. The region — with Côte d’Ivoire and Senegal the main investment destinations — saw a sharp slowdown in growth in 2020. Côte d’Ivoire avoided an economic contraction, with GDP up 1.2%. With the implementation of the National Development Plan (PND) 2021–25, strong agricultural output, and efforts to maintain a stable political regime, Côte d’Ivoire should rebound sharply, with GDP growing 5.9% in 2021 and 7.1% in 2022.

Senegal, on the other hand, contracted by 0.7% due to a slowdown in exports and tourist numbers. Although government debt spiked in 2020, debt levels remain moderate. Senegal has implemented a similar long-term recovery plan — Emerging Senegal Plan (ESP) — which will gradually drive the country’s GDP growth to a projected 9.3% in 2023, as it is further stimulated by private consumption and investment.

Africa, amid global challenges is still one of the most attractive investment destinations with natural resources, giving it the potential for enormous growth and innovation. But realizing this potential would require significant investment in education and skills development. It will also require rapid economic reform, good governance, and a stable political landscape and there are promising signs of this in several countries, while others still lag behind.

One of the most promising developments is the African Continental Free Trade Area (AfCFTA) which has the potential to create the biggest free trade area in the world, cutting red tape and boosting trade throughout the continent. AfCFTA also presents a potential income gain for Africa of US$450b by 2035, though to achieve these goals, political will, and buy-in across the continent is required.

In the wake of the COVID-19 pandemic, most African countries announced fiscal stimulus investments ranging from 0.02% of GDP in Sudan to 10.4% of GDP in South Africa. The African Development Bank (AfDB) estimates that Africa needs additional financing of US$154b in 2020–21 to rebound properly from the COVID-19 pandemic.

This financing gap has pushed six African countries into debt distress, and many more are at risk of following suit, but in the short to medium term, it is important to contain rising debt-to-GDP levels to stabilize or, even better, reduce debt servicing costs, leaving more funds to drive poverty alleviation programs.

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Chapter 2

FDI Highlights

FDI in Africa declined by 50% due to the economic and health crises caused by the pandemic.

Africa’s FDI halved in 2020, making it the hardest-hit region globally. It trailed all other emerging markets, as well as the key mature regions — Europe (–23%) and North America (–19%). Only Asia-Pacific’s decline was close (–43%). This can primarily be ascribed to its large resource-export-dependent economies, which felt the impact of commodity price declines and rapidly decreasing demand, particularly from China, causing them to fall into recession.

While FDI fell sharply in 2020, this is only half of the story. Rising investment into sectors outside the traditional extractive industries is creating more sustainable long-term growth.

  • The share of FDI into the service sectors (including business services, telecommunications, media and technology, financial services, and consumer) is rising rapidly, supporting sustainable job creation over time.

FDI reached a five-year low in 2020 (as per our FDI score* — based on projects, jobs created and capital invested), after peaking in 2019. FDI in Africa declined by 50% in 2020 due to the economic and health crises caused by the pandemic.

In 2020, job creation and capital investments into the continent were less than half of five-year average levels. Despite this Africa is still an attractive investment destination, with its young population and vast natural resources giving it the potential for enormous growth and innovation.

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Chapter 3

FDI by source (region and country)

Africa is playing a greater role in investing across its borders, despite the 2020 setback.

The western world still accounts for nearly ¾ of Africa’s FDI, but with three prominent developing market investors emerging, that in 2020, France was the largest FDI investor in Africa by FDI projects, followed by the US, the UK, and China.

Cross-border investments across Africa have also gained traction over the last five years, with South Africa the largest investor into the rest of the continent. In 2020, the country announced two large-scale projects in Nigeria in the communications sector, worth US$2.5b, creating around 800 jobs. Over the last five years, Morocco attracted large capital inflows, but this slowed in 2020, with FDI investment falling to US$69m after the pandemic’s onset.

France and the US were Africa’s largest investors in the last two years — measured by FDI projects — overtaking China, which had been the largest investor in 2018. But in capital investment, China still leads.

Emerging market investors in Africa are becoming more prominent and accounted for 38% of all projects, with 50% of all jobs created and more than half of the total capital investment between 2016 and 2020. Mature market investors, on the other hand, were less capital intensive.

China was the largest investor in Africa during the five-year period by jobs and capital, but only third in terms of number of projects. During the period, the country announced large investments in Egypt, South Africa, Nigeria, and Kenya. Russia, though a much smaller investor in terms of projects, brought capital-intensive projects, especially in Egypt’s energy sector. Between 2016 and 2020, Russia’s capital investments were the second-highest into Africa, behind China. 

Southern Africa regained its lead as the largest FDI hub in Africa, with South Africa’s more diversified economy attracting the most investment.

Through the last decade, a few major FDI hubs have emerged. This played out again in 2020, where; Morocco and Egypt attracted most of the investment in the North; South Africa is the key hub in the Southern region; Kenya in the East; Nigeria and Ghana in the West; Angola in the Central region; Côte d’Ivoire in FSSA.

South Africa outpaced rivals Morocco and Egypt aided by its more diversified economy.

Measuring project numbers, jobs and capital investment, Egypt forfeited its FDI lead to South Africa, and the country was also outpaced by Morocco and Nigeria. 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. South Africa received two large investments, including the acquisition of Pioneer Foods by US-based PepsiCo and Google’s investment in an undersea fibre-optic cable to boost internet speed in the country.

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Chapter 4

FDI by sector

FDI is shifting away from extractive industries as an increased global focus on environmental sustainability requires a step change across the corporate world.

FDI is shifting away from extractives towards more service-based investments. Though extractives accounted for a considerable portion of inbound capital (31%) between 2016 and 2020, they rank low in comparison with both services and industry in project numbers (7%) and the share of jobs created (11%). Over the last five years, service-based sectors received the highest capital investment (45%), amounting to US$158b) of the three industry groups, created more jobs (55%, 0.4m), and accounted for (69%) of Africa’s FDI projects.

Service-based sectors remain the major focus for investors (encompassing business services, telecoms, media and technology, financial services, and consumer and retail). Business services saw elevated levels of inward investment, as urbanizing populations and rising consumer demand stimulates corporate activity.

The sector received the highest number of FDI projects, although total capital investment and number of jobs created remained low, given the low capital intensity of the sector. Remote working and hybrid work models implemented due to the COVID-19 pandemic significantly raised the demand for transformative business solutions in Africa, as it did in other parts of the world.

After business services, the telecoms and technology sectors received the most FDI projects in 2020, driven by Africa’s increasing pace of digitization and modernization 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.

Technology investments received a considerable number of FDI projects in 2020, although the size of the projects remains small. Investments are concentrated in regional tech hubs (including Cape Town, Lagos, Cairo, and Nairobi), supported by strong venture capital ecosystems and the presence of large tech companies.

Investment in renewables shifts from North to South. Africa is undergoing an energy transition and has made great progress in developing solar and wind power. The sector attracted the second-highest capital in 2020, with large investments announced in Zambia and South Africa. As the push toward rural electrification, while achieving sustainable goals and diversifying the energy mix continues, investments into renewables have surged.

It was recently announced at COP26 that South Africa has been awarded an $8.5bn investment to facilitate the move of the country from being one the highest consumers of coal-based energy to leveraging alternative energy, in the fight against climate change. South Africa is one of the most carbon-intensive countries in the world.

According to the World Bank, its C02 emissions per capita were 7.5 metric tons in 2018, significantly higher than the global average of 4.5 tons and twice that of middle-income economies of 3.7 tons. In 2020, 86% of South Africa’s electricity came from coal, which is locally sourced, compared to the global average of 34%.  This, coupled with the fact that it is a highly unequal and debt-burdened economy, makes it a perfect test case for the application of concessional green financing from developed countries.

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. 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.

Investments in the consumer and retail sector were weak in 2020 due to subdued consumer demand and supply chain disruption caused by the pandemic. South Africa and Egypt are the main FDI destinations in this sector, in line with their larger and more formal economies. While many foreign investors scaled down operations in Africa in 2020, there were investors that took the weak market conditions as an opportunity to expand their presence in the continent.

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Chapter 5

Assessing Africa’s FDI leaders and laggards

In 2020, while Nigeria, South Africa and Morocco received the most FDI capital in absolute terms, when measured relative to their economies, they were outpaced by countries such as Mozambique and Zambia.

In 2020, while Nigeria, South Africa and Morocco received the most FDI capital in absolute terms, when measured relative to their economies, they were outpaced by countries such as Mozambique and Zambia. The ten economies that received the highest proportion of FDI capital (relative to GDP) are Angola, Mozambique, Zambia, Guinea, Mali, DRC, Gabon, Rwanda, Madagascar and Morocco.

Nigeria was among the top 10 economies improving the most across three or more areas as indicated by the Doing Business 2020 report. In 2020, Nigeria recorded the highest FDI by capital, worth US6.6b and representing 23% of the total. South Africa was second on this measure, accounting for 13%.

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Chapter 6

Now, next and beyond: resetting the future for accelerated growth

The launch of AfCFTA brings a new window of opportunity for Africa to harness regional trade links, and enable economies to innovate and grow together by removing artificial trade barriers.

Now – COVID-19 has significantly impacted the socio-economic progress made by Africa in the last decade, pushing an estimated 30 million people into extreme poverty. Therefore, swift measures are needed for a speedy Africa-wide vaccination campaign to support economic recovery.

Next – Africa is reforming to attract more investment and concrete action plans are needed to bridge the gap. Resilience plans, an improved business climate, and a successful AfCFTA rollout are key to unlocking growth. Nigeria is one country that has improved strongly in the Doing Business 2020 report. But that still leaves it with significant scope to continue making business-friendly reforms; it currently ranks 131 out of 184 countries globally. Overall, 25% of reforms recorded by Doing Business 2020 came from sub-Saharan Africa. However, most of the continent still sits in the third and fourth percentiles on the index, and therefore have among the lowest ease of doing business scores globally, indicating that significant additional work is still required.

Beyond – For long-term success, Africa should enhance technology investment, health care access, and infrastructure development to stimulate economic activity, create employment, bolster supply chains and expand health care access. Additionally, Africa requires robust regional infrastructure to speed up the implementation of the AfCFTA. To this end, there is a strong need to attract the private sector through PPPs and private sector projects.

AfCFTA represents a tremendous opportunity for Africa to stimulate stagnant growth, reduce poverty and inequality levels, cut red tape, and increase employment and skilling opportunities. According to the World Bank, once completely implemented, it has the potential to:

  • Lift 30m Africans out of extreme poverty and boost income levels of 68m individuals who live on less than US$5.50 a day
  • Raise Africa’s income by as much as US$450b by 2035 (up by 7%)
  • Increase Africa’s exports by US$560b, mainly in manufacturing
  • Boost wages for women (by 10.5%) and men (by 9.9%)
  • Increase wages for skilled workers (by 9.8%) and unskilled workers (by 10.3%)
  • Reduce red tape and simplify customs, resulting in an income gain of US$292b of the total income benefits of US$450b
  • Increase intra-regional trade by 52% by 2022

But for AfCFTA to provide these benefits will require buy-in and participation of all the signatory countries. Some fear that countries with established manufacturing bases (including South Africa and Kenya) will benefit disproportionally, while smaller frontier markets will struggle to find competitive advantage, and therefore face greater levels of stagnation. There is a sense that greater leveling of the playfields is required for the pact to really make significant impact in poverty reduction.

Realizing Africa’s potential for enormous growth and innovation given it’s young population and vast natural resources, will require significant investment in education and skills development.

Sandile Hlophe

EY Africa Government and Infrastructure Leader

Summary

Realising Africa’s potential for enormous growth and innovation given it’s young population and vast natural resources, will require significant investment into economic reform, education, healthcare and digital skills development. Africa is still an attractive investment destination, but requires enhanced economic reforms, good governance and a stable political landscape to continue attracting FDI. There is no shortage of ideas —what Africa really needs now is action, a reset. To move forward, fast we need strong resilience plans, an improved business climate, a successful COVID-19 vaccination rollout and the accelerated implementation of AfCFTA. This together with a new social compact between government and business, partnering in designing and implementing economic recovery plans.