Investing in Africa, Good News, Bad News and Faux Pas

As people around the globe eye Africa for potential investment and South Africans head north there is some encouraging news to feed those ambitions, worrying reports to temper our enthusiasm and some mistakes to learn from.
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Ghana’s capital Accra is awash with educated, well-dressed young up-and-coming people, driving top-of-the-range cars living in stylish houses. It’s indicative of Ghana’s economic growth, 4% last year. According to the World Bank many African economies are among the world’s fastest growing in 2015. African countries in the top 20 last year with the highest projected compounded annual growth rate (CAGR) from 2013 through 2015, based on the World Bank’s estimates are: Zambia 7.2%, Tanzania 7.4%, Uganda 3.4%, Sierra Leone 9.5%, DRC 7.9%, Ghana 8.1%, Mozambique 8.7%, Angola 8%, Rwanda 7.8%, Gambia 7.8% and Ethiopia 7.9%.

US-based business consulting company Ernst & Young reports: “There is a story emerging out of Africa: a story of growth, progress, potential and profitability.”  Back in 2013 US secretary of state for African affairs, Johnnie Carson is quoted as saying that Africa represents the next global economic growth since 2000, U.S. trade relations with Africa have been dictated by the Africa Growth and Opportunity Act (AGOA). As a unilateral preference scheme of the U.S. to promote trade and investment in Africa, AGOA was meant to boost U.S. trade with Africa and the development of the continent. However, 14 years in, U.S. trade in goods with Africa has demonstrated a perplexing downward trend since 2011. U.S.-Africa trade dwindled from $125 billion in 2011 to $99 billion in 2012 and $85 billion in 2013. For the first five months of 2014, U.S.-Africa trade in goods totalled about $31 billion. At this rate, the total trade volume in 2014 could be well below $80 billion in a continuation of the declining trend. This is largely blamed on an decline in demand for oil from Africa and the fall-out from the 2008 financial crisis

In comparison, Beijing has been quite low-key in disseminating its Africa trade promotion efforts, although its trade with Africa has been growing exponentially. China surpassed the U.S. as Africa’s largest trading partner in 2009. China-Africa trade reached $166 billion in 2011, an 83 percent rise from 2009. The bilateral trade further increased another 19.3 percent to $198 billion in 2012, and passed the $200 billion threshold to $210 billion in 2013. In terms of trade volume, Chinese trade with Africa not only dwarfs U.S. trade with Africa, but the gap is as large as 2.5 times the magnitude of last year. But there’s some dissonance between the rhetoric and action.   {THE HILL}

London based magazine The Economist reported: “Since The Economist regrettably labelled Africa ‘the hopeless continent’ a decade ago, a profound change has taken hold.” Today “the sun shines bright … the continent’s impressive growth looks likely to continue.”

Africa’s trade with the rest of the globe has skyrocketed by more than 200% and annual inflation has averaged only 8%. Foreign debt has dropped by 25% and foreign direct investment (FDI) grew by 27% in 2011 alone and 13% in 2013. Although according to E&Y FDI projects (as opposed to cash) declined by 3% in 2013

Despite projections for growth in 2015 being revised downward due to the so called Arab Spring, lack of demand for oil and a sluggish world economy , Africa’s economy is expected  to expand by 4.2%, according to a UN report earlier in the year. The International Monetary Fund (IMF) is expecting Sub-Saharan African economies to increase at above 4.5%. Added to that, there are currently more than half a billion mobile phone users in Africa, while improving skills and increasing literacy are attributed to a 3% growth in productivity.

According to a UN report the think tank,  McKinsey Global Institute writes, “The rate of return on foreign investment is higher in Africa than in any other developing region.”

An end to numerous military conflicts, the availability of abundant natural resources and economic reforms have promoted a better business climate and helped propel  Africa’s economic growth.  Greater political stability is greasing the continent’s economic engine. The UN Economic Commission for Africa (ECA) in 2005 linked democracy to economic growth. Having said this attacks by Boko Haram in Nigeria and Al Shabab in Somalia and Kenya go against this trend and have worrying consequences if not contained. Also in this category would be the so-called  Xenophobic violence in South Africa.

All this growth and urbanisation is putting a strain on social services in cities, it has also led to an increase in urban consumers. More than 40% of Africa’s population now lives in cities, and by 2030 Africa’s top 18 cities will have a combined spending power of $1.3 trillion. The Wall Street Journal reports that Africa’s middle class, currently estimated at 60 million, will reach 100 million by the end of 2015.

Some other sobering news:  “A sustained slowdown in advanced countries will dampen demand for Africa’s exports,” writes Christine Lagarde, managing director of the IMF. Europe accounts for more than half of Africa’s external trade. Tourism has been and may continue to suffer as fewer Europeans come to Africa, affecting tourist dependent economies like Kenya, Tanzania and Egypt.

The South African Reserve bank warned in May that the financial crisis in Europe, which consumes 25% of South Africa’s exports, poses large risks. Adverse effects on South Africa could have severe consequences for neighbouring economies.

Another worry is the resurgence of political crises. Due to the so called Arab Spring, economic growth in North Africa plummeted to just 0.5% in 2011 and hasn’t recovered much since. Recent coups in Mali and Guinea-Bissau could have wider economic repercussions. “Mali was scoring very well, now we are back to square one,” says Mthuli Ncube, the AfDB’s chief economist. Ethiopia, Kenya, Uganda and other countries have militarily engaged in Somalia, which may slow their economies.

A cause for concern what many are referring to as Africa’s “jobless recovery.” Investors are concentrating on the extractive sector, specifically gold and diamonds, as well as oil, which generates fewer employment opportunities. 60% of Africa’s unemployed are aged 15 to 24 and about half are women. In May, UNDP raised an alarm over food insecurity in sub-Saharan Africa, a quarter of whose 860 million people are undernourished.

But none of this is deterring South African business interest north of the border. One may ask why? South Africa’s domestic market is not providing local companies with enough growth opportunities, prompting many of them to look at the rest of the continent. This according to Ernst & Young’s Africa Business Centre’s leader, Michael Lalor in an online press conference recently: “While South Africa was still growing well compared to the advanced economies, it’s certainly hasn’t kept up with some of the other rapid-growth markets.” Says Lalor. Now it’s battling to grow at all.

Analysts are pointing out that many of the other emerging markets, such as China and South America, are difficult to enter, making the rest of Africa the obvious choice. Asia is seen as almost excessively competitive. Latin America ventures mean dealing with a very strong and ever present Brazil. Therefore Africa, given its sustainable growth story and its potential, is an obvious region for South African companies to grow into.

Quoted by howemadeitinafica.com Lalor says that most Johannesburg Stock Exchange-listed companies are currently developing strategies for the rest of the continent.   Ernst & Young is experiencing strong interest from foreign companies to invest in the continent. “The response from our clients and from potential investors is overwhelmingly positive, to the extent that we simply cannot keep up. So there’s no doubt that we are seeing significant interest, both spoken, interest in spirit, but also people putting their money where their mouths are,” he said.

These sentiments are confirmed by a survey done last year by Price Waterhouse Coopers. A CEO survey published by PwC found that 94% of South African company heads expect their business in Africa to grow in the next 12 months. PwC interviewed 32 South African CEOs in the ICT, financial services, and consumer and industrial products and services industries.

With this in mind it’s worth turning to Raymond Booyse, founder of consultancy firm Expand into Africa, who identified four mistakes often made by South African companies venturing into the rest of the continent.

The first was: Not doing your homework. South African firms are frequently not prepared to spend money on market research. “Go and look if there is a market for your products or services. After you’ve established that there is indeed a market, find out who your competitors will be,” says Booyse.

Booyse points out that South African companies underestimate transport costs and ignore how local laws and regulations influence doing business.

Secondly: Ignorance. Many South African business people are ignorant of local cultures and attitudes according to Booyse. By way of example, ignorance doesn’t realise that just because they’re both former Portuguese colonies, what works in Angola’s capital Luanda, doesn’t necessarily mean it will work in the northern Mozambique. In a recent report, research firm Nielsen noted that African consumers’ attitudes towards technology, fashion and how to spend leisure time vary greatly. No prizes for that one.

Thirdly: Arrogance. Booyse says that South Africans sometimes think they know what people in the rest of the continent need. “In the rest of Africa, South Africans are often regarded as arrogant.”

Finally: Not being prepared for the high costs of doing business in Africa. Many South African companies are not aware of the high costs involved in doing business in the rest of the continent. “If you want to spend two weeks in Angola it will cost you R40,000 (US$4,700),” notes Booyse. “It is not cheap and easy.” Flights for example, from South Africa to either Kinshasa or Lubumbashi can be costly, and hotel rates are also very high.

It’s clear that Africa is a fertile place to plant seed. But Africa is not for the faint-hearted as business is done in a very different way to elsewhere in the world, with all manner of social and political hoops to jump through. South African companies have a potentially bright future and definite advantages if they are prepared to take risks, stay humble and do their homework.

For more articles by Matthew Campaigne-Scott CLICK HERE

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About Matthew Campaigne Scott

I'm a freelance writer and researcher. I have written for periodicals and websites, composed speeches and sermons and prepared copy for web advertisements and research papers. I can tailor my work according to your needs. I love a challenge and enjoy building work relationships.

Posted on May 27, 2015, in Africa, Commerce, Finance, Politics and tagged , , , , . Bookmark the permalink. Leave a comment.

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