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May 03, 2012

FDI into Africa seen growing as investor confidence improves

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The perception of Africa as an attractive investment destination was expected to improve over the next three years, a survey by advisory services company Ernst & Young (E&Y) has found.

In its ‘Building bridges: the 2012 Africa attractiveness report', E&Y stated that 73% of the respondents said Africa’s attractiveness as a place to do business continued to improve, while 60% of those surveyed believed that the attractiveness increased in the past three years.

About 5% of the respondents felt that the continent’s attractiveness was deteriorating, while 11% perceived that Africa’s appeal had waned over the past three years.

Overall, the survey reflected growing confidence in Africa’s prospects, said E&Y managing partner for Africa Ajen Sita on Thursday.

The number of new foreign direct investment (FDI) projects in Africa increased 27% from 675 in 2010, to 857 in 2011. This was up from 339 new projects recorded in 2003.

Developed markets accounted for 66% of the overall projects and emerging markets were responsible for the remaining 34%. The survey found that the top investors into Africa included the US, France, the UK, India, and the United Arab Emirates. South Africa was listed as the sixth largest FDI investor, while Nigeria and Kenya were listed in the top 20.

E&Y forecast that the continent would experience a robust growth rate of between 4% and 5% a year for the next ten years, while FDI into Africa was expected to reach $150-billion by 2015.

Sita added that Africa’s economic output increased from a gross domestic product (GDP) of $516-billion in 1995, to a GDP of $1 855-billion in 2011. This was expected to reach $2 545-billion in 2016.

However, despite this growth, Africa only attracted 5.5% of global FDI projects in 2011.

The firm attributed this in part to a perception gap that remained between those investors with an established presence in Africa, who believed that only Asia represented a more attractive option, and those who have yet to invest, who perceived Africa in an “overwhelmingly” negative light.

“Despite high optimism, high growth and high returns, the perception gap still exists and the African continent as a whole still attracts fewer FDI projects than India, and far fewer than China,” he said, adding that there was work to be done by the private sector and governments in Africa to better articulate and “sell the growth story and investment opportunity” for foreign investors.

The survey revealed that, of the respondents with no presence in Africa, 87% and 82% cited political instability and corruption, respectively, as concerns, while 67% believed the ease of doing business was a significant factor for potential investors.

However, Sita pointed to the improving business environment. The World Bank’s ‘Ease of Doing Business’ rankings, ranked 16 African countries ahead of Brazil and 17 ahead of India, while Transparency Internationals ‘Corruption Perception Index’ found that 13 African countries ranked higher than India and 34 ranked higher than Russia.

“Perceptions that corruption is rampant across the continent, or that African countries are inherently more corrupt than other rapid-growth markets, do need to be challenged,” the survey stated.

Further, Sita said that 33% of the top 30 economies that improved the regulatory environment for business the most over the past five years were in sub-Saharan Africa and that Africa’s political progress, which had steadily improved over the past 20 years, mirrors economic growth.

Most African countries have transitioned, or were currently moving toward some form of participatory democracy, which had in turn decreased armed conflict in Africa, the survey further pointed out.

Sita also noted that significant improvements in trade agreements, regional integration and increased investment in infrastructure, would ‘push Africa into the top league’ of investment destinations.

Meanwhile, African countries were increasing the number of intra-Africa investments, with the number of FDI projects growing from 27 in 2003, to 145 in 2011, accounting for 17% of all new FDI projects on the continent.

“There has been a radical shift in mindset and positioning over the last decade, with Africans themselves increasingly leading from the front by providing African solutions to Africa challenges” he concluded.

Edited by: Mariaan Webb
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