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EY’s Attractiveness Program Africa

May 2017

Connectivity redefined

Economic Overview

Africa’s growth will improve off 2016 – the worst year for the continent in nearly 20 years.

  • Africa’s growth will improve following 2016.
  • Selected key economies will continue excelling.

Low growth was largely driven by external factors, particularly oil prices, which meant two of the largest three economies in Sub-Saharan African (SSA) i.e. Nigeria and Angola had to accept lower receipts for their exports.

As a result, both economies fell into recession, with Nigeria hit particularly hard, as the nation dealt not only with reduced terms of trade, but with lower production levels as a result of domestic insurgency.

South Africa’s growth in 2016 was only marginally positive (0.3%), while Angola’s growth for the year is likely to be flat. All three of these economies are expected to grow more strongly in the year ahead, although each one is dependent on a combination of global commodity price recovery, and structural economic reform.

EY - Economic overview

At the other end of the spectrum, Cote d’Ivoire remains one of the fastest growing countries globally, although once again, highly dependent on commodity (cocoa) prices, and its ability to manage internal conflict. Staying in West Africa, Ghana’s prospects are also looking increasingly promising, with a newly elected administration promising to manage the public purse more prudently.

East Africa remains the most buoyant of all, with the four key economies (Kenya, Ethiopia, Tanzania, and Uganda) all poised for growth of 6%+ for the rest of the decade.

EY - Economic overview

For most of the sub-continent, inflation has peaked and is declining, allowing the space for central banks to ease interest rates. This in itself will add stimulus to economic growth, and should interest rates at the very least remain stable, consumer disposable income will support even stronger growth through 2017.

However, there are a number of risks that need to be managed. Countries with high and rising twin fiscal and trade deficits remain at risk of currency devaluation. This becomes all the more evident where national debt levels are either rising too rapidly or are already at high levels.

Mozambique is the most notable example, although this has not impacted its growth outlook.

Commodity prices are also key to growth assumptions. Oil prices have fallen back to US$50 after trading at US$55 in the first two months of 2017. Price moves will depend on OPEC’s ability to get member countries to stick to agree to production levels. China remains critical to commodity prices more broadly, as its recent slowdown has already illustrated. Given these unknowns, policy certainty and economic reform are critical to stimulating growth and reducing the impact of exogenous influences.

By 2030 Africa remains on track to be a US$3t economy. To achieve that will require accelerating diversification initiatives and thereby boosting resilience to external shocks.

Executive summary

EY - Executive summary

FDI in Africa in 2016

Africa’s uneven FDI picture reflects global uncertainty

The global political, economic and investment landscape has entered an exceptional period of transition. Some of the factors contributing to investor uncertainty include:

  • The UK vote to leave the European Union (EU)
  • The election of Donald Trump as the US President
  • Heightened political uncertainty in Europe
  • China’s entry into a new phase of slower economic growth
  • The end of the commodity super-cycle
At the same time, with the ongoing Fourth Industrial Revolution and technologies such as the Internet of Things, set to disrupt existing business models and create new ones, the global cross-border investment landscape is poised for tremendous change.

Looking at Africa, 2016 marked the worst year for economic growth across SSA in over 20 years. However, this overall slowdown in growth masks a significant variance in economic performance across different African economies. Even as SSA’s three largest economies — Nigeria, South Africa and Angola — saw sharp downward revisions in growth forecasts, a diverse group of the second tier economies in Africa — including Cote d’Ivoire, Senegal, Ethiopia, Kenya, Tanzania, Mozambique and Egypt — are expected to sustain high growth rates over the next five years.

As anticipated in our recent 2016 year-end report, heightened geopolitical uncertainty and “multispeed” growth across Africa did indeed present a mixed FDI picture for the continent. On the more negative side in 2016, Africa attracted 676 FDI projects, which was down 12.3% from the previous year. These FDI projects created 129,150 jobs across the continent, a decline of 13.1% from 2015.

More positively though, in terms of capital investments, the flow of FDI into Africa recovered in 2016 after a dip in 2015. During 2016, capital investment into Africa rose 31.9%. Investment per project averaged US$139m, against US$92.5m in 2015. This surge was driven by several large, capital intensive projects in the real estate, hospitality and construction (RHC), and transport & logistics sectors. The continent’s share of global FDI capital flows increased to 11.4%, up from 9.4% in 2015. That made Africa the second fastest growing destination when measured by FDI capital.

EY - FDI in Africa in 2016

This somewhat mixed picture is not surprising to us. We believe that investor sentiment toward Africa is likely to remain somewhat softer over the next few years. From our point of view, this has far less to do with Africa’s fundamentals than it does with a world characterised by heightened geopolitical uncertainty and greater risk aversion.

Companies already doing business in Africa will continue to invest, but will probably exercise a greater degree of caution and be more discerning. We are still of the opinion that any shorter term shifts in FDI levels will be cyclical rather than structural. We also anticipate that the evolution of FDI — increasing diversification in terms of sources, destinations and sectors — will continue. Over the longer-term, as economic recovery slowly gathers pace and as many African economies continue to mature, we also anticipate that levels of FDI will remain robust and will continue to grow.

EY - FDI in Africa in 2016

More FDI flows to the hub economies, with new clusters emerging in East and West Africa

Over the past year, foreign investors tended to gravitate toward the larger, more diverse economies in Africa. These include South Africa in the south, Morocco and Egypt in the north, Nigeria in the west and Kenya in the east.

Collectively, these markets attracted 58% of the continent’s total FDI projects in 2016. Given that these markets are the dominant anchor economies in their respective regions, they provide investors with greater scale and relatively more mature markets.

With a 6.9% increase in FDI projects from 2015, South Africa maintained its position as the continent’s leader from an FDI projects perspective. There was a strong pick-up in FDI activity in the consumer products and retail (CPR) sector, where projects more than doubled from 19 in 2015 to 41 in 2016. For instance, in April 2016, Nestlé officially inaugurated its instant coffee factory in KwaZulu-Natal after investing ZAR1.2b (US$87.4m) in the plant’s expansion.

Even as its economy remains under pressure, South Africa retains its appeal as a launch pad for growing across the continent.

Africa’s hub economies account for the majority of FDI

EY - Africa’s hub economies account for the majority of FDI

Attractiveness Index

Introduced in 2016, the Africa Attractiveness Index (AAI) measures the relative investment attractiveness of 46 African economies based on a balanced set of shorter and longer-term focused metrics.

EY Africa Attractiveness Index 2017 country ranking – top 10

1. Morocco
2. Kenya
2. South Africa
4. Ghana
5. Tanzania

6. Uganda
7. Cote d’Ivoire
8. Mauritius
9. Senegal
10. Botswana

Africa’s “next-generation” sectors continue drawing investor attention

Foreign investors into Africa continue to seek the “next wave” of sectors beyond consumer-facing ones. With a 20.9% increase in FDI projects, transport & logistics became the fifth largest sector in 2016. The sector also ranked second by FDI investment and was the fourth largest contributor to FDI jobs. By source, the US directed more than 23% of the projects. Morocco was the largest destination, with 12 FDI projects, up fourfold from 3 in 2015, followed by South Africa, Mozambique and Egypt.

Global transport and logistics providers see an opportunity to act as “connectors” for Africans and markets, considering the relatively underdeveloped state of infrastructure. In 2016, RHC accounted for more than 40% of the capital investment into Africa on the back of several large-ticket projects, including a US$20b investment by China Fortune Land Development Co. Ltd. to develop the second phase of Egypt’s new administrative capital.

Investor interest in the automotive sector is also stronger, on the back of rapid urbanisation, improving infrastructure, road connectivity and favourable government policies. Though traditionally an import market, the continent is now seeing the launch of products as well as expansion of manufacturing and retail presence. In 2016, automotive FDI projects increased 6.5% compared to 2015. Morocco retained the top spot for investment (14 FDI projects), followed by South Africa, Algeria, Tunisia and Nigeria.

What does this all mean?

Primary forces of disruption and implications for Africa

  • Integration of African countries into the global economy has increased in recent years.
  • Accelerating regional integration is key to promoting greater levels of regional investment and trade.
  • This needs to be enabled by sufficient infrastructure development focused on connecting Africa with itself.
  • Africa’s young and growing population can become a powerful growth engine globally. To achieve this potential, inclusive growth must be accelerated by promoting entrepreneurship and aggressively investing in education, health care and general welfare.
  • Digital technologies offer an immediate transformative potential for Africa by helping to transcend many of the physical boundaries and barriers that currently hamper trade, commerce, communication, service delivery, and human development.

For businesses

  • As regional integration speeds up, any strategy around African growth opportunities must involve positioning oneself at key hubs.
  • The strategies should involve thinking in less conventional ways, both below the country level and beyond the country level.
  • Businesses could take advantage of the infrastructure gap in Africa, to ply their capital, innovation and expertise.
  • The private sector should take a more proactive role in addressing the structural challenges to enhancing business services and providing opportunities for innovation and competition.
  • For organisations genuinely committed to shared value and collaborative partnerships, the promotion of local content and enterprise development should be a key business priority.
  • Businesses can capture tremendous upside from the digital opportunity in Africa but they will need to be agile and flexible to do so.
  • Digital technologies can help businesses in the continent improve productivity, enhance existing products and services and develop new products. However, this may require collaboration with organisations from other sectors.
  • Corporations and investors can play a key role in building a booming tech community across Africa through their support of local hubs and by easing access to capital to tech-enabled businesses.

For governments

  • Increased intra-Africa trade and the development of robust domestic markets will be key to sustainable growth, but this will require unprecedented collaborative leadership across governments to transform the promise of regional integration into a reality.
  • Institutions such as the Africa Development Bank and the African Union, must take the lead in investing in cross-border infrastructure such as connecting regional power systems, railway networks, air and maritime transportation.
  • Governance must be tightened to help Africa compete globally for the capital required to support infrastructure development.
  • Governments also need to learn from the challenges being experienced on current large infrastructure projects to identify the key areas of focus to ensure successful execution.
  • Productive dialogue and active collaborative partnerships with business and donor agencies, need to become the operating norm across the continent, in order to accelerate economic development and job creation.
  • In order for entrepreneurship development and structural transformation across Africa to be successful, governments need to invest in education and vocational training programmes, adopt more flexible labour market policies, improve the regulatory environment for businesses and make efficient use of the business incubator model to facilitate the growth of SMEs.
  • African governments and leaders will play a critical role in building a digital future for the continent. One obvious area is delivering citizen-centric services using technologies like cloud computing.
  • They can also assist to promote the growth of tech-driven businesses across Africa by providing as killed labour force, affordable internet access, a business-friendly environment

Contact us

  Schalk Barnard

Lead Partner Markets & Business Development

+ 27 79 971 8583

  Sarah Custers

Africa Brand, Marketing and Communications

+27 11 772 3300

  Graham Thompson

Global Markets | EY Knowledge
Africa Team Leader

+27 11 772 3202