Dubbed as the ‘new frontier’ and the ‘diamond in the rough’ by investors seeking to add quality assets to their portfolios, Africa, especially the Sub-Saharan part of the continent, despite numerous economic challenges like falling oil prices and political instability, continues to be a popular destination for business investment. Especially for the Gulf countries, whose deep historical trade and political ties with Africa, adds significant importance to today’s investment decisions.
Trade between the Middle East and Africa is now over USD 50 billion, and between GCC member states and Africa was USD 35 billion in 2014, compared to USD 7 billion in 2004. According to IMF (the International Monetary Fund), GCC exports to Sub-Saharan Africa (SSA) are modest – in 2014 totalled USD 19.7 billion, but that was just 2 percent of the GCC’s total exports, while GCC countries received only USD 5.5 billion of imports from Africa. Untapped opportunities are also shown when it comes to foreign direct investment (FDI). According to Ernst & Young, GCC states’ share of FDI to Africa was almost 9.1 percent of the total in 2014.
The latest research by the Dubai Chamber of Commerce and Industry (DCCI) ‘Beyond Commodities: Gulf Investors and the new Africa’, produced in collaboration with The Economist Intelligence Unit (EIU), revealed that Gulf firms provided at least USD 9.3 billion in FDI into the SSA region from 2005 to 2014, plus a further USD 2.7 billion in the first half of 2015, more than in any previous full year. But, Gulf countries invested nearly ten times as much in North Africa over the same period, demonstrating closer links with fellow Arab countries, stated the report. GCC investments in the SSA region are rising, slowly and cautiously, despite the fact that Africa registered a 5 percent GDP growth in 2014, beating the global average by 1.5 percentage points.
“Gulf investors continue to perceive Africa as a risky market. Risks from operational problems, non-honouring of contracts, currency fluctuations, political risks and change of government and policies, especially relating to long-term projects, are among the main concerns for Gulf investors,” says Sunita Singh-Dalal, partner at Dubai-based international legal consultant firm Anjarwalla Collins & Haidermota, the regional office of the Africa Legal Network in the GCC.
“Additionally, a common mistake made by investors is that of attributing risk profiles of some of the less developed and low income African countries to all 54 African nations and viewing the continent as one single country or economic group. A greater insight into each country, economic grouping and fundamental cultural and political nuances would certainly assist in increasing trade relations. Finally, with the fast developing FMCG (Fast-moving consumer goods) sector throughout the continent, Africa is still in need of ramping up and implementing user friendly and cost effective, cross-border solutions for the logistics and infrastructure sectors, thereby making FDI options far more attractive and profitable,” adds Singh-Dalal.
Despite the obvious brand problem, Africa is behind North America as the second most attractive investment destination globally, and it has seven of the 10 fastest-growing economies in the world. World Bank data shows that in 2014 a record USD 87 billion of FDI went into most of the countries, of which USD 60 billion went to the SSA region, which is five times more than in 2000. Howewer, Sub-Saharan Africa accounts for only 2 percent of total world trade, and only about 1 percent of global private equity goes to the continent.
The recent shortage of US dollars, caused by continuous falling prices of oil and other commodities like cotton, is pushing major African economies – Angola, Mozambique and Nigeria, which has more than 90 percent of its foreign currency reserves from oil exports – to restrict their assets in order to protect dwindling reserves. Scarcity of dollars, which are in large sums difficult to obtain, is making foreign investors nervous, causing project delays and cost increases.
So should investors from the Gulf still consider Africa a source of positive investment returns in the future? According to Rezwan Mirza, managing director and head of corporate banking division for the Middle East at Barclays, the decline in commodity prices represents an opportunity for long term investors.
“Most governments in Africa have taken major initiatives to encourage foreign investment and improve the ease of doing business in their countries by reforming the legal and regulatory regimes. This will continue to benefit foreign investors seeking opportunities in Africa,” says Mirza, adding that the continuing positive trends in demographics across Africa are conducive to growth opportunities across other non-commodity sectors such as retail, hospitality, infrastructure, etc.
The demographic picture is more than promising – Africa’s population now exceeds 1 billion with 41 percent of the population under the age of 15, and it is rising by 2.1 percent every year (1.1 percent is the global average). By 2030, Africa will be the youngest continent, with Nigeria as a fourth most populous country in the world. It is predicted that a decade from now, 25 percent of the global workforce will be in Africa, and by the end of the century Sub-Saharan Africa’s population will host 3.9 billion people. Average real GDP growth across the continent was 6.1 percent from 2010 to 2014 and EIU estimates that per capita income rose by nearly 60 percent.
Focusing on East Africa
“There is an average growth prediction of 5.3 percent for the continent 2017-2020. Sub-Saharan Africa’s population is predicted to host a third of humanity by the end of the century. A study by the IMF showed that during 2009-2014 the GDP of Angola, Kenya, Tanzania, Mozambique, Nigeria and Uganda consistently outperformed other African nations. Other good examples of sources of positive investment returns are those generated from the recent discovery of oil in Kenya and gas in Tanzania, which in turn increases fuel resource-based economic growth,” Singh-Dalal says explaining why Africa is a source of positive investment returns for investors from the Gulf region.
“Interestingly there has been a recent trend of increased Islamic finance products and providers in Africa. Approximately 30 percent of the Sub Saharan African population are Muslims. This has obviously had a direct impact on the level of investment from the GCC. In 2014, Kuwait Finance House’s first sukuk (sharia-compliant bonds) arranged for South Africa was oversubscribed and totalled circa USD 500 million. Kenya, Senegal and South Africa are planning additional sovereign sukuk and these will more than likely encourage additional capital market activity across the continent,” says Singh-Dalal, adding that historically investors have preferred the relatively stable and clear market of South Africa.
“However recent economic reporting has shown that East Africa is probably the most appealing region for non-commodity investment from the Gulf currently. Manufacturing in Ethiopia, leisure, retail and tourism in Mozambique and Kenya, and education in Uganda are all examples of sectors where Gulf investors have seen positive returns on investment. Retail, automotive, commercial banking and tourism are also key sectors,” she states. Underlining tourism as a great investment opportunity, Singh-Dalal says Africa remains one of the world’s most exciting tourism frontiers, with sites of natural beauty and increasing infrastructure to support leisure tourism.
“Gulf airline carriers have all played a role in opening up Africa to international tourists. Partnerships with African carriers have become increasingly common and in 2013, Etihad went one step further to acquire 405 of Air Seychelles. Gulf investors are said to own more than 20 five star hotels in South Africa and Zanzibar, with competitors such as Jumeirah and Rotana eyeing the market with great enthusiasm,” she adds.
Singh-Dalal says favourable FDI legislation, together with professional management and reporting system, has also encouraged investment from national players and private equity houses from the Gulf region. “The most prominent Gulf investments to date took place in 2014; they are Qatar National Bank’s purchase of a 23 percent stake in Ecobank of Togo, and the Investment Corporation of Dubai’s USD 300 million investment into Dangote Cement of Nigeria. Abraaj Capital is also extremely active in the healthcare sector. Another investment route, often favoured by Gulf sovereign wealth funds, is that of partnerships with African governments. An example of this is Saudi Arabian South Africa Holding, established by the two countries in 2012 to identify investment opportunities,” she says.
Despite the tremendous economic growth – today Africa’s collective GDP stands at some USD 2.2 trillion – it has to be considered that it is the growth from almost zero – in 2000, the entire continent had a collective GDP of USD 600 billion. Such a rapid change puts extra pressure on already undeveloped infrastructure, with the data from African Development Bank showing that around USD 93 billion is required annually to meet the continent’s infrastructure needs through to 2020. According to DCCI, Africa’s infrastructure needs will require investment of USD 2.6 trillion by 2030. At the present just 19 percent of Sub-Saharan Africa’s roads are paved, what is an additional challenge for potential investors.
“The underdeveloped infrastructure in certain parts of Africa is impacting the operational costs of companies especially on the logistics front,” says Mirza listing the main challenges for GCC investors in Africa. “The recent decline in commodity prices and the associated impact on the economies and currencies would be a challenge for investors already invested in this sector,” he says, adding that the legal and regulatory environment in individual countries is a challenge given that stability and enforceability are important factors for investors, along with the availability of bank credit and associated costs, foreign currency availability and exchange controls, and differences in cultures and tastes of local consumers in different countries across Africa.
Regardless of the above, annual Gulf investment contributions to Africa are expected to average USD 5 billion, or 10 percent of total average annual inflows, in the coming years and the most popular countries for Gulf investors in the SSA region are Nigeria, Kenya, Uganda and South Africa. The study also revealed that Gulf entities have provided at least USD 30 billion of funding, at current prices, for African infrastructure over the last decade, which amounts to between 7 percent and 10 percent of total inflows, of which approximately USD 15 billion is in loans and grants from Gulf development agencies and approximately USD 15 billion in direct investments, much of which has been focused in North Africa.
Speaking of the biggest infrastructure investments in Sub-Saharan Africa made by investors from the Gulf region, Singh-Dalal underlines telecommunications favoured by the GCC’s private sector, transport, aviation and logistics, and very important investments in electric power since only 32 percent of Africans have access to electricity. “Gulf power companies’ experience in implementing power projects, has helped meet rapid growth in Gulf power demand. Their interest is extending to Africa, and the first mover was Mubadala, which took a 25 percent stake in the development of a power plant in Algeria in 2006. Today three big players, ACWA Power (Saudi Arabia), TAQA (Abu Dhabi) and QEWC (Qatar) have projects in Africa.
“Although most Gulf funding of renewable energy projects in Africa has been for small aid-driven projects, commercially viable ventures are increasingly evident. Masdar has built the largest solar photovoltaic plant so far in Africa, a 15 MW facility in Mauritania, and has installed a wind farm in the Seychelles,” adds Singh-Dalal. Talking about telecommunications, she says the interest is largely a result of the sector’s relatively low risks compared with other infrastructure areas. Kenya continues to be the leader in mobile banking solutions with more than 30 percent of the Kenyan population using their mobile phones daily for transactions.
“Gulf players have been successful in those sectors where consumers pay upfront and where the cost in physical infrastructure investments in advance is relatively rather lower contrasted with the amount of business they get,” she states. With regards to transport, Gulf investors are most heavily involved in ports, followed to a lesser extent, by airport and road construction and aviation, says Singh-Dalal. “A landmark investment was DP World’s concession to manage the Doraleh Container Terminal in Djibouti. It has since invested around USD 1.5 billion and made Djibouti, the maritime gateway for Ethiopia, the third-largest container port in Africa contributing around one-quarter of Djibouti’s GDP. DP World went on to invest in ports in Algeria, Egypt, Senegal and Mozambique, providing the company coverage across the continent, whilst at the same time boosting the integration of African economies into global trade.”
When it comes to the aviation and logistics industry, according to Singh-Dalal, Gulf carriers, such as Emirates, have expanded in Africa, however related construction projects in the aviation sector are still small in number. “Solving the historic problem of cross-border connectivity, poor infrastructure and logistics, remains a challenge. UAE-based DP World have capitalized on this and manage ports in Senegal, Mozambique, Egypt and Algeria. Similarly, Kuwaiti company Agility is active in 11 African countries and has plans to develop five warehouse distribution hubs across Africa,” she says.
Mirza sees financial services, healthcare, real estate, natural resources, tourism, retail, power and other utilities, along with agriculture as the most important sectors for future investments in Africa. When it comes to financial services – where most notable investors are National Bank of Abu Dhabi and Qatar National bank, which has acquired banks in Egypt, Libya and Tunisia, and set up branches in Mauritania, Sudan and South Sudan – Mirza says that multi-national corporates investing in Africa have alerted their ‘home banks’ to invest in Africa and support them locally. “We are witnessing an increasing footprint of GCC banks in Africa as they seek to support GCC investors that are getting more active across the continent,” he says.
Continuing to healthcare, Mirza explains that affordability and access to healthcare remains a challenge in Africa. “Given the demand side of the equation for this basic requirement, there is likely a significant opportunity in this sector across the continent. However, we need to recognise that healthcare is also an attractive sector for investors domestically within the GCC region,” states Mirza.
He underlines that rural to urban migration has fuelled growth of major African cities creating a demand for increased volumes of high-quality commercial and residential real estate. “Given the ample experience GCC investors enjoy in this field, real estate would serve as an attractive sector for investment.” Talking about investments in African natural resources, Mirza’s opinion is that the commodity sector has probably played the most important part of the Africa investment story in the last few years. “The recent drop in commodity prices may provide a window of competitive opportunity to GCC investors who tend to be long-term players to acquire assets at attractive prices,” he states.
The agriculture sector, which accounts for at least 30 percent of Africa’s GDP, stays firmly in the focus of Gulf investors, and Mirza is says that Africa, whose 64 percent population is dependent on agriculture, is ripe for a green revolution. “According to the McKinsey Global Institute, the continent is currently home to 60 percent of the world’s total uncultivated, arable land. This comes with a huge opportunity to invest in food production and processing. GCC governments are very active in this sector and have mobilized strategic resources to ensure that this sector contributes to their food security agendas. This is an opportunity for Gulf investors to align their investments with their governments’ long term social objectives,” concludes Mirza.