Investing in Africa’s Frontier Markets

Africa is a continent with significant untapped economic potential, which presents opportunities for investors. It is the second largest continent, with an estimated area of 30 368 609 Km2. In the next 20 years, forecasts show that Africa will surpass the 2 Billion population mark, with at least 1, 2 Billion people living in urban cities. Of these, about 300 Million people will be earning US$20 a day, effectively creating a US$2 Trillion market annually, according to the African Development Bank. This growing population compounded with the effects of urbanisation and rising levels of affluence, is likely to attract investors into most of Africa`s frontier markets.

This phenomenon has already begun, at the July 2012 China-Africa co-operative summit, the Chinese government through the China Export-Import bank pledged US$20 Billion in new loans over the next 3 years to Africa. Interestingly, it seems that Africans are realising too, the investment opportunities that lie in their homeland. South Africa is now the 5th largest investor in Africa, concentrating mainly in manufacturing and retail. Statistics also show that, Nigerian companies have for the period 2003-2011, increased their African investments by 78%, and similarly, Kenyan companies have grown their African Investments by 73% during the same period. These trends highlight the growing confidence that Africans have in Africa and this has buoyed intra-African trade.

With the African economy emerging relatively unscathed from the Global Financial Crisis, and offering a more attractive investment destination, it is apparent therefore, that there is a greater scope for investing in Africa. Historically, there has always been an infrastructure deficit in Africa. Vast investments in essential infrastructure like rail-road transport networks, cost effective electricity supply and telecommunication systems are of paramount importance in plugging in these infrastructure deficits, which have continued to curtail economic development on the continent.

Currently, there are about 5, 98 Billion mobile phone subscriptions globally, and Africa has approximately 644 Million subscribers, implying a global subscriber base of 11%. This shows the huge potential of Africa`s telecoms industry as there is room for growth in the mobile penetration rates to levels similar to most developed economies, spurred by the effects of mobile phone subscriber double simming. Analysts predict that Africa is set to become the first post-PC region in the world. Mobile money transfer platforms like Kenya`s highly successful M-pesa and Zimbabwe`s Ecocash will conceivably be in line to benefit from this trend. Investment in Africa`s telecoms sector remains important in improving the business environment, and will go a long way in minimising business inefficiencies.

Endowed with an expansive mineral base, the continent has massive capacity to flourish in the minerals trade sector. Furthermore, rising commodity prices in recent years add to the allure of Africa’s mining industry. Over 80% of the world`s platinum group metal reserves are in South Africa and it accounts for nearly 77% of global platinum supply. Libya has the largest oil reserves in Africa, and 5th largest in the world. Deposits in most sub-Saharan states of minerals like gold, diamonds and copper which remain untouched paint a picture of a mining sector in which a great deal of investment, is needed to unlock Africa`s mineral wealth.

Business Insider Report notes that in 2012, the Nigerian, Nairobi and the Egyptian Stock Exchanges all gained 34, 4%, 39, 3% and 49, 6% respectively. This underscores the significant upside African equities markets have. Most African exchanges have made strides in the right direction, by focusing on automation of their trading systems and shoring up the regulatory framework in line with global trends. The Nigerian Exchange for example has introduced market making. Foreign Investor confidence in African bourses continues to soar, with over 50% of Equity Bank, Kenya`s best performing stock since 2006, being owned by foreigners.

At the heart of any investing endeavour is the concept of investor confidence. Herein potentially lays the problem. The geopolitical turmoil in Africa has always cast a negative shadow which has dented investor sentiment and in extreme cases, caused capital flight. Visionary and accountable leadership which transcends mere political rhetoric is essential. Corruption and pillaging of resources are ills that need to be dealt with decisively to ensure equitable development. Effective regulatory mechanisms which monitor capital flows both in and out of Africa must be established to increase transparency.

Consistent policy formulation should thus be the bedrock of all efforts to lure investors. This entails crafting of complimentary interest, exchange, tax rates and regulations which draw investors. With an ever increasing informal sector full of capital hungry businesses well placed to attain rapid growth and expansion, Africa offers attractive investment opportunities. Financiers therefore have a pivotal role to play in transforming African economies into industrialised high growth economies that can create jobs, and in so doing, ensure the continent`s sustainable and equitable development.

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