Companies becoming pickier about expansion into Africa

15 May 2016 - 02:00 By BRENDAN PEACOCK

Two reports released this week showed estimates of near-term economic growth in Africa have halved and companies wanting to expand on the continent have become more selective about investment opportunities.The annual Africa Attractiveness survey published by global consultancy EY referred to the International Monetary Fund's projection for GDP growth in Africa for 2016 being cut from 6.1% as recently as April 2015 to 3% now.With pedestrian growth in developed markets and the cooling of China's economy, demand for Africa's resources has waned, leaving most of the continent's economies limping.However, EY's researchers said the continent remained the second-fastest-growing region in the world - after Asian emerging markets - and that it experienced an increase in foreign direct investment projects in 2015 while the rest of the world experienced a drop-off.According to EY, 771 foreign direct investment projects were under way in Africa last year, up 7% from the year before.story_article_left1Overall project value was down on 2014, at $71.3-billion (about R1.07-trillion), as was the creation of 148695 new jobs.Egypt led the way in project value, at $100.5-billion, followed by Nigeria ($81-billion), South Africa ($81-billion), Angola ($47.3-billion) and Morocco ($46.9-billion).Ranking African economies on an attractiveness index that factors in good governance, resilience against weak global growth and ease of doing business placed South Africa in first position, followed by Morocco, Egypt, Kenya and Mauritius.EY found 82% of business leaders believed there had been "a lot of talk but little change" to improve investment environments in Africa, and 72% agreed that there needed to be more focus on making African economic growth more inclusive.Further research conducted by FTI Consulting among business leaders revealed that although the international business community still displays appetite for African investment opportunities, perceptions of risk have risen by 10% in the past year and the perception of African expansion as "essential" to companies' futures has fallen by a third."The top three barriers perceived as holding back the international community from considering Africa as essential to strategic growth are political instability, red tape and bureaucracy, and risks of breaching bribery and corruption regulations," said FTI's researchers.Business leaders polled by FTI said in 2015 the profile of investments had been dominated by next-generation telecommunications, infrastructure, public-private partnerships, joint ventures and greenfields ventures. The expectation for 2016 was the same.By contrast, when asked which types of investment business leaders would most like to see come to Africa, agriculture and farming were placed top, followed by renewable energy and energy utility investments, banking and finance.story_article_right2According to 57% of respondents, Rwanda is the best African country at marketing itself and providing relevant information to investors, followed by Mauritius, South Africa, Kenya and Ethiopia. EY's findings mirrored these closely.However, South Africa still ranks as first choice for a regional headquarters location, followed by Nigeria, Kenya and Rwanda.Respondents found government support, availability of public-private partnership opportunities, market accessibility and stable regulatory environments crucial factors in determining potential investment destinations.Shabbir Norath, head of advisory for Nedbank's Corporate and Investment Banking division, said the difficulty for investors had been the identification of suitable investments.He said private equity players, in particular foreign players, preferred "chunkier" investments and often could not find the requisite scale, even though struggling economies presented assets for sale at historically depressed prices.Norath said South African investors had become wary of certain African markets, notably in West Africa, where some companies have had their fingers burnt. However, East Africa, with its similar legal structures and language, presented a simpler environment for investing multinationals to scale up quickly in the region.Chinese investors featured prominently, he said. "They are prepared to take a long-term view and are very active in buying up assets."story_article_left3Despite the sluggish local economy, Norath said South Africa continued to feature heavily as the entry point for foreign investors wanting to scale up into Southern Africa and East Africa, and that for a lender such as Nedbank, corporate activity was higher at present than during better market conditions.This is mostly due to asset prices being tempting to foreign investors able to borrow cheaply in developed economies with strong currencies.According to EY's research, from an investment perspective Africa is facing a tough few years. Even though economies in sub-Saharan Africa are becoming more resilient through structural change and diversification, this process will take decades."Although we do not expect a significant drop-off in the levels of longer-term, focused foreign direct investment, planning patience and the portfolio effect will be more important than ever," the report said.Norath confirmed that trade players tended at present to be wary of anything but bolt-on acquisitions that had a high level of synergy alongside existing business units...

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