Lack of experience flavours investors’ perceptions of Africa

Africa attracted fewer foreign direct investment projects than India or China last year, partly because dated perceptions kept business leaders from making their first investments on the continent, according to a report from Ernst & Young.

Perceptions of Africa as an investment destination split two ways, according to a survey of more than 500 international investors, commissioned by E&Y in January. Those with no financial stake compared the continent negatively with most other emerging markets and regions. Respondents who had invested in Africa were overwhelmingly positive; they ranked only Asia as slightly more attractive.

Political risk factors primarily flavoured the negative perceptions in the survey.

“We need to bridge this perception gap by telling new stories about Africa, stories of economic growth and opportunity, democratic progress, and human development,” Mark Otty, an E&Y managing partner who focuses on Europe, the Middle East, India and Africa, writes in the report’s introduction.

E&Y launched that mission a year ago with the first survey to test how attractive Africa had become to investors, and this year continued with a follow-up survey.

Constraints exist, E&Y acknowledged. Africa is a vast continent with 54 sovereign countries. Many of them have small populations, underdeveloped economies and few resources. Each country has its own set of rules, regulations, stakeholders and markets. Logistics, communications, transport and energy infrastructures are often lacking. Corruption remains a big challenge.

But similar constraints exist in emerging economies that investors like.

The World Bank’s 2012 Ease of Doing Business rankings list 14 African countries ahead of Russia, 16 ahead of Brazil and 17 ahead of India. Transparency International’s 2011 corruption perception index ranked 14 African countries as “cleaner” than India and 35 as “cleaner” than Russia.

Furthermore, an increasing number of African countries are or are on the way to become participatory democracies, a development that has decreased armed conflict across the continent. Only two African countries, Eritrea and Swaziland, are still considered autocracies like, for example, China and Vietnam.

Seven African countries rank among the 10 fastest growing economies in the world, the E&Y report says.

The 1 billion Africans were expected to generate a collective gross national product of $1.86 trillion last year. By comparison, India, with a population of 1.2 billion was estimated to have a 2011 GDP of $1.7 trillion, according to the IMF. And African economies are becoming less dependent on the extraction of natural resources. Nearly 40% of the foreign capital invested across the continent since 2003 has gone into the manufacturing sector, another 25% intro infrastructure projects, the report says.

African investors funded about 17% of the 857 foreign development investment projects in 2011, according to E&Y. Intra-African investment is spearheaded by regional powerhouses Kenya, Nigeria and South Africa.

Also, Africans in all but a handful of countries enjoy an increasing amount of disposable income, E&Y reported.

E&Y projects that rapid urbanisation, population growth and continued socioeconomic development will drive and accelerate domestic demand and consumer consumption over the next 15 years.

—Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.