South Africa could play a key role in helping Africa to live up to its potential and attract the foreign direct investment (FDI) it needs to accelerate growth and development, said Michael Lalor, director of Ernst & Young’s Africa Business Centre, at a press briefing in Cape Town last week.
“South Africa is uniquely well positioned because it has many of the characteristics of a developed economy – for example, a strong services-based economy, a relatively large domestic economy, strong financial framework and a robust democracy,” said Lalor. “In many ways, this makes [South Africa] an ideal entry point for foreign investors, particularly those that are still not certain about the continent.”
In fact, when benchmarked against other rapid-growth markets, Lalor argued, South Africa is virtually without peer as an investment destination, both in its own right and as a platform for expansion into Africa.
South Africa could also play an important role as a source of capital for other, faster growing African economies. “Unlike any of the traditional or indeed new sources of capital, South Africa has a vested interest in Africa’s success, and so is much more likely to take a long-term view,” explained Lalor.
The importance of Africa in repositioning South Africa
However, South Africa’s positioning relative to FDI flows needs to be more clearly defined, and work needs to be done to more clearly articulate and market the South African investment proposition to international investors.
Lalor said that the rest of Africa needs to form a key part of this proposition. “While South Africa’s growth is likely to be modest in the foreseeable future, South Africa’s better integration with the rest of Africa will allow it to benefit from rapid growth in other parts of the continent while helping to make that growth more certain and sustainable – a virtuous cycle that we need to help create and then reinforce.”
“A South Africa increasingly integrated with the rest of Africa, and providing a stable platform for expansion and investment into the continent could also rival the BRIC economies in the imagination of international investors. [South Africa] has a key potential role to play in Africa, and it must begin by acknowledging its dependence on Africa to meet its own growth and development targets,” Lalor added.
Africa’s emergence as an exciting growth opportunity is driven by the growing affluence of its young and growing population, its natural resources and its progress in both combating corruption and implementing stable, democratic government, said Lalor.
“However, in order to fulfil its growth potential, Africa needs to attract enough FDI,” he noted. “FDI has been a strong driver of growth in rapid-growth market countries like Chile, Czech Republic and Kazakhstan, and Africa needs to ensure that it receives the FDI it needs to develop its markets and people further. Unfortunately though, the entire continent currently attracts less FDI than India alone; this despite what we believe is a compelling investment proposition.”
According to Lalor, one key factor in this apparent lag in FDI is a perception gap between negative prior held beliefs about the continent and the positive reality of the African growth story over the past decade. As a result many investors still seem to approach the continent with greater caution.
“So, for example, many investors will view Africa as being a more challenging place to do business in than other rapid-growth markets; this despite the fact that in the World Bank’s most recent Ease of Doing Business rankings, 14 African countries rank ahead of Russia, 16 of Brazil and 17 of India,” he said.
“Similarly, Africa is often perceived as being inherently corrupt. While corruption no doubt remains a big challenge in Africa, according to Transparency International’s Corruption Perception Index, 13 African countries rank higher than India, and a staggering 35 higher than Russia.”