Nigeria, South Africa among foreign investors’ choice locations in Africa

Lagos is 4th investment city of choice in sub-Saharan Africa.

Nigeria and South Africa have kept their positions among the top 10 countries by foreign direct investments, FDI, projects in 2013.

A new Executing Growth, EY’s 2014 Africa Attractiveness Survey report published on Thursday showed South Africa in the first position with 142 projects and Nigeria in third with 58 projects.

Though FDI projects in both countries witnessed a slight decline, the report revealed that countries like Kenya, Ghana and Mozambique all moved up the ranks, with 68, 58 and 33 projects respectively.

Zambia and Uganda were the new entrants into the top 10 list in 2013 with 25 and 21 projects respectively, reflecting an increase of more than 20 per cent from the 2012 performance.

In contrast, North African countries such as Morocco, Tunisia, ranked 8th in 2012, and Egypt slipped on the new rankings.

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According to the report, Africa’s share of global FDI projects reached the highest level in a decade.

The report combines an analysis of international investment into Africa since 2003, with a 2014 survey of over 500 global business leaders about their views on the potential of the African market.

The latest data shows that while there has been a decline in FDI project numbers from 774 in 2012 to 750 in 2013, primarily due to ongoing uncertainty in North Africa, they remain easily in excess of the pre-crisis average of 390 projects per year.

The report stated that there was a noticeable divide between FDI trends in North Africa as against sub-Saharan Africa, SSA.

While FDI projects in North Africa declined by nearly 30 per cent, projects in SSA increased by 4.7 per cent, reversing the decline of 2012.

This further widened the gap between the two sub regions, with SSA’s share of FDI projects exceeding 80 per cent for the first time.

While the U.K. remains the lead investor in the continent, intra-African investment continues to rise steadily.

Investors are also looking beyond the more established markets of South Africa, Nigeria, and Kenya to expand their operations, as well as moving into more consumer-related sectors as Africa’s middle class expands.

“Africa’s share of global FDI projects has grown steadily over the past decade and it is a promising sign that investors are now looking across the continent and to new sectors,” Chief Executive Officer, EY Africa, Ajen Sita, said.

Mr. Sita underlined the need for further regional integration and infrastructure development to continue to entice investors to the exciting investment opportunities that Africa can offer.

The report noted that in 2013, both West and East Africa surpassed North Africa for the first time, becoming the second and third most attractive sub-regions in Africa after Southern Africa for investment.

During the year, the United Kingdom emerged leading investor in the continent, with 104 projects, while the United States dropped from joint first place to second place with 78 projects, a 20 per cent decline from the previous year.

South Africa, the continent’s third largest investor, directed 63 investment projects into the rest of Africa, a 16 per cent decline on the 2012 figure, a significant increase from pre-crisis levels when it registered on average 12 projects.

There was a sharp uptake in FDI projects by Spanish and Japanese companies with increases of 52 per cent and 77 per cent respectively.

Intra-African investment, Mr. Sita said, is gaining momentum, with African investors nearly tripling their share of FDI projects over the last decade, from 8 per cent in 2003 to 22.8 per cent in 2013.

The growth indices, he said, was fuelled by the need for improved regional value chains and strengthening regional integration.

The other driver of growth during the period was the African investors’ understanding of the market and of the potential opportunities and challenges.

EY’s Lead Partner Africa Business Center, Michael Lalor, said external investors supply long-term capital, skills and technology, and intra-African investment creates a virtuous circle that encourages greater foreign investment.

An important highlight of the survey was that there was a significant shift of investors’ interest away from extractive industries towards consumer related sectors.

From the report, the top three most attractive sectors are technology, media and telecoms, TMT with 150 projects, retail and consumer products, RCP, with 131 projects ,and financial services with 112 projects, accounting for more than half of the total projects in 2013.

During the year, RCP overtook financial services to become the second most attractive sector in Africa.

Equally, FDI projects in the real estate, hospitality and construction sector increased by 63 per cent, making it the fifth most attractive, up three positions from 2012.

On the other hand, for the first time ever in 2013, mining and metals dropped off the top ten sectors when measured by FDI project numbers.

On the three sectors that would offer the highest growth potential for Africa in the next two years, the report said investors highlighted the rising importance of agriculture, ranked only marginally behind mining and metals.

Infrastructure also put up a strong showing, as it was perceived as a key growth sector as well as consumer-facing industries, including financial services, telecommunications, and consumer products.

Though Mr. Lalor said perceptions indicate that resource driven sectors were expected to remain the industries with the highest potential over the next two years, he pointed out that the actual numbers show that infrastructure and consumer-facing sectors showed the best prospects to increase in prominence as the middle class expands and consumer spending on discretionary goods grows.

The report also noted that Africa’s perceived attractiveness relative to other regions improved dramatically over the past few years, with the overall survey results showing that Africa has moved from third last position in 2011, to become the second-most attractive investment destination in the world, behind North America.

About 60 percent of survey respondents said that there had been an improvement in Africa’s investment attractiveness over the past year, up four percentage points from last year’s survey.

“The good news in this year’s survey is that perceptions about the continent seem to be shifting,” Mr. Ajen observed. “For the first time, Africa is seen as the second most attractive investment destination in the world.”

“It has strong fundamentals to encourage investment, including steady democracy and macroeconomic growth; an improving business environment; rising consumer class; abundant natural resources and infrastructure development.”

However, he said there was still a stubborn perception gap between those already operating on the continent and those yet to come, with this year’s survey showing that companies with a presence on the continent perceive Africa as the most attractive investment destination in the world.

This perception contrasts sharply with those with no business presence in Africa, who still view the continent as the world’s least attractive investment destinations.

About 73 per cent of those who are already established in the region believe Africa’s attractiveness has improved over the past year, as against about 39 per cent who are not established.

Equally, most of Africa’s cities are now emerging as the hotspots of economic and investment activity on the continent, the report said, with about 70 per cent of respondents acknowledging the significance of cities and urban centers in their investment strategy in Africa.

In terms of perception, city attractiveness closely maps country appeal, with half of the respondents in SSA quoting Johannesburg as the most attractive city in which to do business, ahead of Cape Town.

On the other hand, Nairobi and Lagos were ranked as third and fourth most attractive cities, respectively, while in North Africa, Casablanca, Cairo and Tunis were perceived as the top three cities in which to do business.

To attract greater investments, investors underlined the need to focus on some critical factors, namely infrastructure (77 per cent), consumer base (73 per cent), local labour cost and productivity (73 per cent) and a skilled workforce (73 per cent).

“Africa’s stronger investment attractiveness is best explained by its own sustained growth rates in the context of slower global growth,” Mr. Ajen said. “Africa’s growth prospects are likely to remain solid, as an urbanizing and rising middle class drives demand for consumer products and improved services.”

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