The Case For Investing In Africa

Tweet

Mombasa, Kenya

The continent is now growing much more rapidly than the OECD nations. It may well be on the cusp of a reversal of fortunes. This post is written Paul Collier, of Forbes

McKinsey Quarterly 

Most international businesses are still not very aware of Africa's investment opportunities. Information costs are high: Africa is fragmented into many different countries, and even in aggregate the continent is a fairly small economy. For several decades, investor ignorance did not matter: With few exceptions Africa's economies were too badly run for there to be many opportunities for firms of integrity. But there has been a sea change--Africa is on the move. There will be ups and downs, but investors from the countries of the Organisation for Economic Co-operation and Development (OECD) who remain set in their ways may be missing a giant business opportunity if they fail to pay attention to the changes afoot.

The situation in Africa quietly began to change during the period 1995-2005. Profound macroeconomic reforms tamed inflation and opened economies to international trade. More patchily, the regulatory environment facing international business also improved. Public ratings, such as the World Bank's Doing Business surveys, enabled African governments to benchmark their performance and began to put pressure on those that were recalcitrant. As the global commodity boom built to its 2008 crescendo, many African countries were well positioned to harness the spike in their export revenues for growth beyond the resource extraction sector itself.

Sankara Hotel, Nairobi.

That upturn in national growth rates was mirrored in the increased profitability of companies operating in Africa. Indeed, three distinct sources of data indicate that returns on investment are higher there than in other regions. One was a comprehensive study of the publicly traded companies operating in Africa for the period 2002-07, mostly in the manufacturing and services sectors. It found that these companies' average return on capital was around two-thirds higher than that of comparable companies in China, India, Indonesia and Vietnam. Another source, on the foreign direct investment of U.S. companies, showed that they were getting a higher return on their African investments than on those in other regions. Finally, analysis of a series of surveys of several thousand manufacturing firms around the developing world found that, at the margin, capital investment had a higher return in Africa.

This was the scene in the years leading up to the global crisis. Although its origins had nothing to do with the continent, the crisis did not bypass Africa. Its effect was to collapse commodity prices--for example, the price of oil initially tumbled by more than $100 a barrel. More subtly, the international appetite for risk collapsed, and since Africa is still generally viewed as the riskiest region, investors got scared; for example, international banks curtailed letters of credit to African exporters far more drastically than to those in other regions.

These effects were severe. However, with a few exceptions--inevitable in a region with so many countries--Africa weathered the economic storms well. Led by its two largest economies, South Africa and Nigeria, most countries had built prudent fiscal positions: In a remarkable break with its past, Nigeria had freed itself from debt and built up over $70 billion of foreign exchange reserves. Further, the adverse impact of the crisis through commodity prices lasted less than a year for Africa. Globally, commodity prices rapidly bounced back and seem to have stabilized around levels markedly higher than those in the decades before the boom, underwritten by growing Asian economies and their corresponding need for commodities; What do you think?