The State of Foreign Direct Investments in Africa
Foreign Direct Investments – FDI Flows – to Africa rose by 11 per cent to $46 billion in the past year, and in 2019, a number of factors, including the the realisation of African Continental Free Trade Area Agreement (AfCFTA) could support additional flows. According to UNCTAD’s World Investment Report 2019, here is how Africa stands.
In 2018, FDI flows to Africa defied the global downward trend and rose to $46 billion, an 11 per cent increase after successive declines in 2016 and 2017. Reduced FDI flows to some major economies of the continent, including Nigeria, Egypt and Ethiopia, were offset by large increases in others, most significantly in South Africa.
Growing demand for and prices of some commodities, as well as sustained non-resource-seeking investments in a few countries, were largely responsible for the higher FDI flows to the continent.
However, lower than expected global economic growth, rising trade tensions and tepid economic growth in Sub-Saharan Africa limited the extent of this increase. Multinational enterprises – MNEs – from developing economies were increasingly active in Africa, although investors from developed countries remained the major players.
In 2019, the expected acceleration of economic growth in Africa, progress towards the implementation of the African Continental Free Trade Area Agreement and the possibility of some large announced greenfield investments materialising could result in higher FDI flows to the continent.
Inflows
FDI inflows to North Africa increased by 7 per cent to $14 billion, due to elevated investments in most countries of the subregion. Egypt remained the largest FDI recipient in Africa in 2018, although inflows decreased by 8 per cent to $6.8 billion. Foreign investment in Egypt was skewed towards the oil and gas industry, as significant discoveries of offshore gas reserves attracted investments from MNEs, and the country became a net exporter of gas in January 2019. British Petroleum, for example, has increased its greenfield and merger and acquisition (M&A) investments in the country in the last two years, bringing the company’s investment stock in the country to more than $30 billion.
Egypt signed at least 12 exploration and production agreements with international oil companies in 2018. Some large foreign projects were announced in other sectors also, such as a $2 billion project of Nibulon (Ukraine) to upgrade Egypt’s grain storage infrastructure and a $1 billion project of Artaba Integrated Holding (Saudi Arabia) for the construction of a medical city. In addition, Shandong Ruyi Technology Group (China) signed an agreement to invest $830 million for the construction of a textile area in the Suez Canal Special Economic Zone (SEZ).
FDI flows to Morocco rose by 36 per cent to $3.6 billion. The country continues to benefit from relatively stable economic performance and a diversified economy, which is drawing foreign investment in finance, renewable energy, infrastructure and the automotive industry, among others. The largest investment was the acquisition of the remaining 53 per cent of Saham Finances, Morocco’s largest insurer, by Sanlam Emerging Markets (South Africa) for $1 billion.
FDI to the Sudan increased by 7 per cent to $1.1 billion in 2018, aimed primarily towards oil and gas exploration and agriculture. Political instability, foreign exchange shortages and expensive banking channels constrain FDI to the country, despite the lifting of sanctions by the United States. Small investment flows were registered in non-traditional sectors in 2018, however. For example, ride-sharing company Careem (based in the United Arab Emirates; now owned by Uber Technologies Inc.) started operating in the capital Khartoum and plans to expand further in the next two to three years.
In Tunisia, FDI flows increased by 18 per cent to $1 billion. The highest share went to the industrial sector ($375 million), followed by energy ($300 million) and services ($200 million). France was the largest investor country in Tunisia in 2018, followed by Qatar. In addition, Chinese companies announced key greenfield investments. Chinese automaker SAIC Motors, for example, signed an agreement with the Tunisian Group Meninx to establish a manufacturing plant targeting the African and European markets.
FDI flows to Algeria increased by 22 per cent to $1.5 billion. In addition to FDI in the oil and gas sector, Algeria received significant investment in the automotive industry in 2018. BAIC International (China), for instance, opened a manufacturing plant, with an investment of more than $100 million to serve both the domestic and regional markets. Hyundai (Republic of Korea) and Ford (United States) also received approvals from the Algerian Investment Council to set up manufacturing plants.
After a significant contraction for two years, FDI flows to Sub-Saharan Africa increased by 13 per cent to $32 billion in 2018. This increase can largely be attributed to an uptick in resource-seeking FDI and to recovering inflows to South Africa, the second largest economy in the continent. This more than outweighed the substantial decline in inward FDI registered in a number of countries in the subregion, which was due in part to political uncertainty and unfavourable economic fundamentals.
FDI to West Africa fell 15 per cent to $9.6 billion, the lowest level since 2006. This was largely due to the substantial drop in Nigeria, for the second consecutive year. Inward FDI to that country declined 43 per cent to $2 billion, and Nigeria is no longer the largest FDI recipient in West Africa. Foreign investors may have adopted a cautious approach and withheld planned investments in light of the risk of instability associated with Nigeria’s elections and disputes between the Government and some large MNEs.
In 2018, both HSBC (United Kingdom) and UBS (Switzerland) closed their local representative offices in the country, and the telecommunication giant MTN (South Africa) remained embroiled in litigation related to the repatriation of profits. In addition, international oil companies have been ordered to pay $20 billion in back taxes.
Nevertheless, investments by oil companies, which included significant reinvested earnings by established investors, remained prominent in 2018. The new policy to reduce public ownership in joint-venture oil assets to 40 per cent could drive up FDI in Nigeria in the coming years.
Ghana became the largest FDI recipient in West Africa, even though FDI inflows decreased by 8 per cent to $3 billion. Most of the FDI is oriented towards gas and minerals, with the largest greenfield investment project coming from Eni Group, which is set to expand the Sankofa gas fields.
The largest M&A was the acquisition by Gold Fields Ltd (South Africa) of a 50 per cent share in Asanko Gold Ghana Ltd, a Greater Accra-based gold mine operator, for $185 million.
FDI flows to East Africa were largely unchanged at $9 billion in 2018. Inflows to Ethiopia contracted by 18 per cent to $3.3 billion. Yet the country continued to be the biggest FDI recipient in East Africa, with investments in petroleum refining, mineral extraction, real estate, manufacturing and renewable energy. FDI to the country was diversified in terms of both sectors and countries of origin. Prospects remain positive due to economic liberalization, investment facilitation measures and the presence of investment-ready SEZs (chapter IV). Recently, Hyundai Motor Company (Republic of Korea) opened a manufacturing plant in the country, its first in East Africa, with a planned production capacity of 10,000 vehicles per year.
In Kenya, FDI flows increased by 27 per cent to $1.6 billion. Investments were received in diverse industries including manufacturing, chemicals, hospitality, and oil and gas. The country has been making strides to facilitate private enterprise and foreign investment, which are contributing to increasing FDI.
It improved its “Ease of Doing Business” ranking and has also been marketing its export processing zones (EPZs) as attractive destinations for manufacturing-oriented foreign investment. Uganda and the United Republic of Tanzania saw increases in FDI flows of 67 and 18 per cent (to $1.3 billion and $1.1 billion), respectively. FDI to Uganda reached a historic high in 2018, largely due to investments in the oil and gas sector, as well as in manufacturing and in the hospitality industry.
The development of the country’s oil fields, led by a consortium made up of Total (France), CNOOC (China) and Tullow Oil (United Kingdom), is gaining momentum. Plans to ramp up investment in upstream and downstream oil facilities could drive FDI flows to Uganda significantly higher in the next few years.
FDI flows to Central Africa were largely stagnant at $8.8 billion in 2018. The Congo recorded the highest FDI levels in the region ($4.3 billion), with the bulk of investments directed towards oil exploration and production. Intracompany loans from existing investors accounted for a high proportion of these FDI flows. In addition, some investments from the first phase of the Congo Offshore Licensing Round materialized in 2018.
The second phase comes into effect in 2019, which is expected to generate more investment in the coming years.
FDI to the Democratic Republic of the Congo increased by 11 per cent, to $1.5 billion. Continued investments in mineral exploration (especially for cobalt, for which the country holds 60 per cent of the world’s known reserves) underpinned flows to the country. International mining companies including Glencore (Switzerland) and Molybdenum (China) expanded their presence in the country in 2018. Extractive-industry investors will now operate under an amended mining code, with new provisions that increase royalties, remove the 10-year amnesty on new rules for existing miners and impose a super-profits tax.
FDI flows to Southern Africa recovered to nearly $4.2 billion in 2018, from -$925 million in 2017. FDI flows to South Africa more than doubled to $5.3 billion in 2018, contributing to progress in the Government’s campaign to attract $100 billion of FDI by 2023. The surge in inflows was largely due to intracompany loans, but equity inflows also recorded a sizeable increase. In 2018, China-based automaker Beijing Automotive Industry Holding opened a $750 million plant in the Coega Industrial Development Zone, while automakers BMW (Germany) and Nissan (Japan) expanded their existing facilities in the country. In addition, Mainstream Renewable Energy of Ireland began building a 110 MW wind farm, with a planned investment of about $186 million.
FDI flows to Angola in 2018 continued to be negative (-$5.7 billion). Angola has traditionally been an attractive FDI destination because of its oil and gas sector; however, FDI inflows to the country have been negative for the last two years due to both profit repatriations by foreign parent companies and the decline in the country’s oil production, which weighed on new investments.
The current negative FDI flows contrast with almost $7 billion a year invested on average in the country between 2014 and 2015. Recently the Government, in an attempt to encourage FDI, introduced an investment law that removes the mandatory national ownership share of 35 per cent in greenfield investments and the minimum investment requirements.
Mozambique received FDI flows amounting to $2.7 billion in 2018, up from $2.3 billion in 2017. New equity investment accounted for less than 20 per cent of inward investment flows, however. The balance was due to intracompany transfers, i.e. loans and other transfers by parent companies to affiliates already established in the country, mainly for gas exploration and production.MNEs from developing economies were increasingly active in Africa but investors from developed countries remained the major players.
On the basis of FDI stock data through 2017, France continues to be the largest foreign investor in Africa both due to its historical links with a number of countries on the continent and due to large investments in major hydrocarbon-producing economies, particularly Nigeria and Angola. However, the total stock of France’s FDI in Africa was not significantly different in 2017 than in 2013.
The Netherlands holds the second largest foreign investment stock in Africa, more than two thirds of which is concentrated in only three countries, Egypt, Nigeria and South Africa. The total stock of FDI in Africa from both the United States and the United Kingdom has decreased in the last four years, as a result of divestments and profit repatriations.
The stock of China’s FDI in Africa, in contrast, increased by more than 50 per cent between 2013 and 2017.
Looking to the future
In 2019, a number of factors could support additional FDI flows to Africa. Although commodity prices are projected to remain stable in 2019, moderately higher prices are forecasted for some minerals that Africa is a major producer of, as well as for oil and gas.
Combined with the development of newly discovered mineral mines and hydrocarbon fields, this forecast could encourage further investment in a number of countries on the continent. Investment in manufacturing and services is expected to remain mostly concentrated in a handful of economies in North and Southern Africa, as well as emerging manufacturing destinations in East Africa.
However, the ratification of the African Continental Free Trade Area Agreement (AfCFTA) could also have a positive effect on FDI, especially in the manufacturing and services sectors. The elimination of tariffs under the Agreement could support market-seeking FDI, as foreign investors venture to tap into a market of 1.2 billion people with a combined GDP of more than $2.2 trillion. In addition, regional integration could encourage foreign investment that targets value addition to local commodities and natural resources, as well as increased intra-African investment as major economies on the continent seek a first-mover advantage.