Reorientation of international investment in times of crisis

Yantovskiy Oleg_ AFRICA, THE CENTER OF INVESTMENT ATTRACTION

Unraveling global geopolitical environment, imposition of international sanctions and dropping oil prices have all taken their toll on current investment activity and made investment flows reorient significantly.
At this conjuncture, stock markets of the leading countries are still incapable of growing stably, and the volatility of various segments of financial market is still quite high, while taking investment decisions is becoming more and more time consuming. Reorientation of the global economy makes it necessary to change the capital investment strategy in order to minimize risks.
According to the World Bank’s estimate, developing countries will still be demonstrating positive growth dynamics while the global economy is stagnating. The rate of Africa’s economic growth is expected to increase 5% in the years to follow, which makes Africa an attraction center for international investors who are already competing hard for the African market.

WHY AFRICA?

International experts point out several factors that have defined the prospects of economic growth in Africa.
Firstly, constant inflow of investment that increases year by year. According to Ernst & Young, a British audit and consulting company, in the 2011 annual opinion poll amongst businessmen regarding the investment attractiveness of the world’s regions, Africa ranked eighth out of ten, whereas in 2014, Africa ranked second alongside with Asia that had been on top of the list for three years in a row, and only allowed North America ahead.
The World Bank points out that investment in Sub-Saharan Africa reached 5.3% of the regional GDP in 2013, which is significantly higher than the average of 3.9% for developing countries. The net inflow of direct international investment in the region has grown 16% and amounted to $43 billion in 2013, which is close to the all-time high.
The second factor is inflation deceleration. In 2013, the annual inflation stood at 6.3%, down from the 10.7% of the year before (according to the World Bank).
Steady development of Africa is also determined by the substantial reserve base (raw materials which are in high demand in Asia), favorable demographics (the average annual growth rate of the African population is 2.8%), stable currency rates, and decreasing debt load. The positive results were made possible mostly owing to the increased attention of African governments towards exports, investment in capital assets, improvement of the business climate, dynamics of the consumption, and the growth of the real income in Africa.
The Economist notes that African countries exporting raw materials maintained their investment attractiveness at a time when the global prices for energy resources are going down by having taken preemptive measures to diversify their economies. This was aided by creating a legal framework for conducting business, which attracted direct foreign investment. For example, the recent growth Nigeria demonstrated does not come from the oil industry, but rather from the sector of financial and other services. Hermes-Sojitz international investment foundation also noted the development of food industry in Africa over the last several years.
Even though natural resources and minerals continue to play an important role in the investment attractiveness of Africa, with up to 90% of various metal reserves, 40% of gold reserves and 10% of oil reserves being localized on the continent, new segments of African economy which attract foreign capital are constantly emerging.
According to the estimates by fDi Intelligence, 14.1% of all direct foreign capital investment projects in Africa in 2004 were related to mining and metal industry, and 11.6% of the projects were related to oil and gas industry. In 2013, shares of these sectors went down to 2.4% and 3.5%, respectively. Media and telecommunications became the leading sector with its share of 20.2%, and the consumer sector was right behind it for the first time, with its share of 17.5%.

RETAIL IS A NEW LANDMARK FOR INVESTMENT

One of the fastest growing segments of the African economy is retail. The growth of personal income and the increasing share of the middle class in many African countries result in expanding demand for consumer goods. For example, it is expected that new investors from around the world will come to the African continent in the nearest future and they will consider retail along with other investment proposals.
Groups of companies from around the world have already begun to compete for Africa’s huge consumer goods and food market. Analysts of OC & C-Strategy Consultants estimate that fifteen out of 50 major producers of this economic sector currently have their offices in Africa, yet the situation is about to change in the coming years.
German newspaper Handelsblatt quotes analysts of OC & C-Strategy Consultants in saying that one of the first supermarket chains in South Africa, Pick ’n Pay, has gained rapid development not only in South Africa but also in neighboring countries by filling the shelves of its stores and expanding the range of goods made by leading international corporations interested in the African market. For example, back in 2011, Walmart, a U.S. retail giant, acquired the share of the Massmart retail chain, competitor to Pick ’n Pay. Moreover, in 2013, Carrefour, a famous French retail chain, found a business partner in the south of Africa.
Western corporations engaged in food production and manufacturing of consumer goods also increase their investments in Africa. For example, 25% of employees of the British Diageo, the world’s largest premium alcohol producer, work in Africa. Diageo owns 13 breweries in Africa, which operate under such brands as Guinness and Serengeti Lager, and another 16 plants are the company’s co-owned property. According to the German newspaper Handelsblatt, the Swiss Nestle plans to invest $1.4 billion in local enterprises by 2015, and the American Coca-Cola plans to invest $12 billion by 2020.
Asia still holds the leading position of African market presence in various segments. For example, China has invested in implementation of about 2,000 projects in Africa, including agricultural, infrastructure, logistics sector, as well as the manufacturing sector.
When interviewed by CNTV, Chen Xudong, CEO of GN FOOD, one of the key Chinese ketchup producers, defined the main reasons for the interest of Chinese investors in the African market: “Last year the company decided to build a plant in Western Africa, in Ghana. We chose Tema, the country’s second largest city. It is also the main commercial harbor of the country. First and foremost, Africa attracted us with its rich natural and human resources. Secondly, we consider the African market as a priority growth area. Thirdly, the cost of goods produced in Africa will be lower than of those produced in China. On top of that, the Government of Ghana laid down preferential rules to attract Chinese investors. In general, the investment climate in Africa gets better year by year.”

PROPERTY DEVELOPMENT PROJECTS

Development of retail trade and international retailers’ ambition of marketing their products in Africa has spurred the evolution of retail and residential property development projects in Africa.
Firstly, retailers need new trading platforms to sell their goods in a well-developed retail sector compliant with international standards. Secondly, due to the expected affluence of market traders from other continents, new and more comfortable apartments of European quality need to be constructed. It therefore follows from expert evaluations that investment in property development industry in Africa is expected to increase.
For instance, the International Investment Fund Hermes-Sojitz launched its investment and development program in West African Union in 2014 (the Fund’s portfolio of investment in development projects in Africa by 2017 amounts to $2 billion). The company focuses on investing in property development projects which are unprecedented in the region: construction of a 65-storey skyscraper and a shopping mall with an area of over 100,000 sq.m. each.
Oleg Yantovsky, the head of the Russian branch of Hermes-Sojitz and a member of Hermes-Sojitz’s Board of Directors, comments on the reorientation in investment flows in Africa: “The interest of international retailers in the African market is understood. Due to the rapid saturation of the Western European markets, retailers and investors have to find other consumer markets which would be less mature, but fast growing. Pull factors for Africa are evident: first of all, it has low barriers for entering the market. The economic growth rates of African countries are above the world’s average, and due to the advancing market liquidity, long-term investment projects may eventually prove short-term. For instance, in these troubled times for the global economy, the African market becomes more stable and, consequently, more attractive for investors.”
Mark Mobius, Managing Director of Templeton Asset Management and a large investor who has been supporting developing markets for over 40 years, expresses his confidence in the prospects of Africa: “Africa has a significant growth potential and we believe that many of its countries can become the world’s leaders in future. According to the IMF’s forecast for the next five years, 10 out of 20 fastest developing economies will be in South Africa and two will be in North Africa”, Vesti Finance informs.

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