World Review | Investors safety fears may stunt Africa’s economic future

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Investors safety fears may stunt Africa’s economic future

Investors safety fears may stunt Africa’s economic future
Morocco's car industry is a key sector in the economy (photo:dpa)

FOREIGN direct investment (FDI) is crucial for Africa’s long-term economic growth and job opportunities.

A number of African nations have neither the money, expertise nor the technology to unlock the treasure trove of potential riches in their own countries.

FDI inflows into Africa, the direct investment into production or business in a country by a company from another country, grew from US$10 billion in 2000 to US$60 billion in 2008. The increase of around 500 per cent came after many African countries implemented legal safeguards and frameworks for foreign investors.

But the rate of increase in inflows to Africa slowed to around US$40 billion in 2011 following the 2008/2009 world financial crisis and the 2011 uprisings in North Africa.

After two years of decline in FDI inflows from minus 8.98 per cent in 2009 and minus18.1 per cent in 2010, prospects for renewed investment improved as foreign countries and companies started to return, with a decline of just minus 1.1 per cent in 2011.

The figures for 2011 show just how important foreign investment is for North African countries.

FDI inward stocks, the value of capital and reserves in an economy attributable to a parent enterprise from a different country, accounted for 31.3 per cent of gross domestic product (GDP) in Egypt, 49.5 per cent in Libya and 67.8 per cent in Tunisia.

Foreign investment is expected to decline further in those countries while the future of their governments is uncertain and conflicts persist.

The bulk of FDI in Africa in recent years has come mainly from China, India and the United Arab Emirates. But much of China’s loans and aid to Africa is used for massive infrastructure and resources projects, from airports to mines and highways, rather than direct capital investment.

Coal, oil and gas have been the main targets for foreign investment, accounting for 43 per cent.

Manufacturing industries - mostly metal related - have accounted for 29 per cent. The service sector as a whole accounts for 28 per cent.

The regions which led the boom in investment between 2000 and 2008 were north and central Africa. Most of it was targeted at Egypt, Morocco, Equatorial Guinea, Chad, the Democratic Republic of Congo and Congo. Gabon has been a more recent destination for foreign investments.

The huge potential of the Sahel and neighbouring countries, north and south, has exerted a strong pull on foreign investors in the past decade. Companies located in this region in 2012 were among the largest operating in Africa.

Major foreign energy companies in Algeria, which include BHP Billiton, BP, Statoil and Total, operate in joint ventures with the state company, Sonatrach.

Morocco has identified the car industry as a strategic sector for its economy. The French car company, Renault, represents 94 per cent of Morocco's automobile sector.

Nigeria accounts for around 10 per cent of total inflows to Africa. But one of the biggest success stories has been Somalia. Foreign investors started to take notice of its oil, uranium and iron ore riches in 2005.

But in spite of the progress made in the Horn of Africa, especially Somalia, conflicts over resources continue to undermine security and territorial integrity.

Criminal gangs, outlawed militias and militant extremists in the Sahel have carried out attacks on foreign businesses, which have included the kidnapping and sometimes killing of foreign nationals.

Recent developments, particularly the crisis in Mali and neighbouring Algeria, have exacerbated the region’s vulnerability to the risks of insecurity with subsequent effects on economic growth.

The costs of doing business in the region will rise if Western companies have to spend money on security and reduce the number of people they employ.

Future projects are also at stake, especially in the oil sector. Power vacuums, created by military coups, are another discouraging factor for foreign investment.

Foreign investment in Sub-Saharan economies, including Guinea, South Africa, Djibouti, Rwanda, Zimbabwe, Burundi, Mozambique and Kenya, rose by around 28 per cent from 2010 to 2011. But a number of those countries face challenges ahead.

The risks are also high in Kenya, where the total of FDI in 2011 reached US$335.2 million. But the results of the 2013 election, won by Uhuru Kenyatta, have been contested, and the president-elect faces charges of crimes against humanity at the International Criminal Court.

Teresa Nogueira Pinto

Teresa Nogueira Pinto is an African Affairs expert. She is an international relations consultant in Gaporsul Ltd, a business intelligence and advisory company which has some of the main Port ...

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