TSHEPO NCUBE: Africa is open for business despite negative headlines

While it is easy for armchair analysts to look at recent social unrest in SA, or the attempted assassination of Mali’s interim president, or the military coup in Guinea, and say “Africa is not conducive to good business”, the discussion is far more nuanced than the news headlines let on.

A decade ago “Africa” was viewed as an homogeneous frontier market. Over the past 10 to 15 years the domestic financial markets are developing and country-specific data is emerging. It is clear that each of the 54 African countries represent their own particular challenges and opportunities.

Countries such as Egypt and Morocco are not necessarily front of mind when one talks about high-growth economies, but both have emerged from 2020 on the front foot and are doing innovative things to grow their economies and attract foreign investors.

Across the continent there is concern over a chronic shortage of critical infrastructure such as water, electricity and transport, which in turn is hindering growth. Without this investment, African markets will fail to realise their potential.

A nagging concern for those looking from the outside into Africa is that this investment deficit creates a situation such as we are seeing in SA, where a shrinking corporate and private tax base is expected to carry the burden of infrastructure and social programmes.

It is important that this narrative does not become the norm. In finance there is a core rule: capital will follow yield. If we look at data around foreign direct investment (FDI) into SA, for instance, we see a positive trend. 

President Cyril Ramaphosa’s drive to attract new investment saw net inbound FDI trickle in, despite the impact of Covid-19. The automotive sector was one of the big beneficiaries, with Mercedes-Benz and Ford investing in new infrastructure, while Toyota SA has committed to the production of energy vehicles domestically.

The alcohol sector has faced headwinds and negative headlines in the past 18 months, and one would be forgiven for assuming investors would steer clear of local investment. Yet we see Heineken tabling an offer for local group Distell, which is valued at R31bn. This transaction reflects the largest transaction Heineken has undertaken since 2018, when it bid for China Resource Beer.

It is not just big corporates that are circling attractively established assets and businesses. Technology analyst Maxime Bayen tracks venture capital activity on the continent and highlights that in the first half of 2021 African technology start-ups raised more than $1.3bn in funding, led by SA, Nigeria, Egypt and Kenya. This $1.3bn at the halfway mark is more than what was raised across all of 2019 for African start-ups, and even more impressive about the 2021 number is that 70% of these deals are funded by foreign investors.

A number of these transactions are in the financial technology space and should improve access to finance and the ability to move funds around the continent in a more efficient manner over time. Less friction in the ecosystem will benefit all stakeholders.

Chinese investment into Africa has its detractors, but as the London School of Economics points out they are deploying significant capital in the continent and Chinese state-owned enterprises are the biggest investors by value and dominate new investment in the resources, energy and transportation sectors. In 2019 the $110bn in Chinese investment into Africa accounted for 20% of the continent’s economic growth.

As China shifts from being a low-cost producer and its middle class develops, the country has a strategic requirement to feed 800-million consumers by 2030. This is expected to be a big driver for agriculture in Africa, which is expected to satisfy this demand.

With new investment driving economic expansion there will be a requirement for sustainable and consistent energy supply, and countries like SA are attracting a lot of interest from foreign investors looking to fund ventures in high-growth emerging markets. As energy supply improves this drives additional economic activity, which in turn leads to capacitating of downstream industries and broadens the tax base.

There is no question that the events that unfolded in SA in early July do not paint the continent in the best light, but it is important to understand that Africa remains one of the few remaining frontier markets where capital can generate huge investment returns for the patient investor.

Context is important and the African growth story remains intact, no matter what the headlines say.

• Ncube is head: global corporates SA at Absa Group.