A lot of the hype that has surrounded Africa in the past few years has been steadily quietened by today’s global realities. African currencies across the board are reeling against a strong dollar. Global oil prices have fallen over 70% since mid-2014, while other commodity prices have also taken a dive, leaving many African countries with less revenue.
And declining commodity consumption in China – Africa’s largest trade partner – is not helping the situation. China recently revealed that its imports from Africa in 2015 plummeted 38% from the previous year. China’s direct investment into the continent also reportedly fell 40% in the first half of 2015.
South Africa – historically a large exporter of iron ore to China – has been suffering from a slump in mining and a sharp decline in its rand, which hit record lows to the dollar this month. Investor confidence is also waning alongside political uncertainty, as seen with President Jacob Zuma’s unexpected finance minister reshuffle in December. Slow growth, power shortages, drought, inflation, and credit rating downgrades are only heightening the situation.
Nigeria, Africa’s largest economy, is also nursing injuries. The country’s 2016 budget, revealed in December, was calculated with Brent crude – which contributes the largest share of the country’s foreign exchange reserves – estimated at a price of US$38 per barrel. While this was already considerably reduced from last year’s benchmark of $53 per barrel, this month Brent hit lows of below $28.
The Central Bank of Nigeria has also halted US dollar sales to foreign exchange operators. This year saw the naira fall close to 300 to the dollar on the black market, around a 50% difference to the official central bank rate of near 200 to the dollar. And uncertainty around a possible naira devaluation has slowed investment in the country.
Is the Africa hype over?
So what effect will these challenges have on foreign investment to the continent? Anna Rosenberg, head of Frontier Strategy Group’s sub-Saharan Africa Research practice, believes it depends on the investor.
“I think you can divide the effect in two groups. You can look at the companies that believe in the long-term potential for sub-Saharan Africa – they will continue to invest. They will adjust their strategies and just stay put because they know that volatility is just part of the game when it comes to sub-Saharan Africa,” she says.
“But then there are going to be those that don’t really know the continent very well, which have maybe been influenced by reading a little about the overhyped ‘Africa Rising’ narrative. They are probably going to be more discouraged and are likely going to focus somewhere else.”
One example of this could be arguably be seen with Barclays, whose new CEO, Jes Staley, is believed to be considering selling the firm’s stake in Barclays Africa Group, which houses much of its African business. On the other hand, former Barclays boss and co-founder of Atlas Mara, Bob Diamond, says he is looking to invest more in Africa’s banking sector. This is despite rating agency Fitch recently giving a negative outlook for the region’s banking sector in 2016.
Competing with other emerging markets
But African countries are not the only emerging markets feeling the pressure.
“Executives from big companies have to make choices right now across the world because honestly most emerging markets, with the exception of India maybe, are doing poorly,” continues Rosenberg. “And they have to pick battles now and decide where we are going to focus.”
India is one of the more optimistic stories when looking at the BRIC economies. While India’s exports have been hit by a slowing global economy, its GDP growth (above 7%) remains a lot more attractive than many other large emerging market players.
Brazil on the other hand is facing huge struggles with high inflation, labour job losses and political uncertainty stemming from a corruption scandal surrounding President Dilma Rousseff and a change in finance ministers in December. The country’s debt was recently downgraded to junk status by Fitch.
Russia’s economy has also been hit hard by the collapsed oil prices and sanctions imposed by the West, with preliminary figures suggesting the economy contracted by 3.7% in 2015.
Other emerging markets, such as Turkey, Saudi Arabia and Columbia, are also looking less attractive for FDI due to global headwinds, and Edward George, Ecobank’s head of research, argues this might actually help place Africa further up the agenda.
“Everyone is going to be looking elsewhere for yield and Africa is moving even further up the agenda,” he argues.
“For example, at the end of last year I was involved in an event in the Czech Republic, with Czech companies now looking to get into Africa – they would have never looked there before. There are a lot of companies who are happy to invest in emerging markets; they have just never been in African emerging markets. So I think if anything Africa is going to move even further up the agenda for all of the investment community.”
Shift to East Africa
According to Martyn Davies, managing director of emerging markets and Africa for Deloitte, East African markets such as Kenya and Ethiopia will increasingly become a centre of growth for the continent, as investment focus shifts from regions that are heavily dependent on extractive industries to those with more diversified economies and business-friendly environments.
While Kenya has also experienced a devaluation of its currency to the dollar, investors remain relatively optimistic about the East African powerhouse.
“You have a pro-business government in place that saw Kenya beat the rest of the world when it comes to improvements in the ease of doing business ranking in the latest World Bank report,” highlights Renaissance Capital’s global chief economist, Charles Robertson.
“If you look at the score rather than the rankings in emerging markets, India’s score improved by two points which is the best in emerging markets. Kenya’s score improved by five points, which is the best score in frontier markets and double what Prime Minister Modi was able to achieve in India.
“Kenya is delivering on electricity supply, it’s improving its business climate, it’s paving the way for industrialisation and it’s benefiting from low oil prices. And it’s growing by over 5%.”
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