Ever since the pandemic-related lockdowns began, high inflation rates and fear of recession have loomed over European and US economies. In such times, it is more important than ever for investors to find new avenues for growth.
Fortunately, Africa is a land of opportunity for investors. The continent is home to young, dynamic, and rapidly urbanizing populations that are hungry for technology. With a large workforce and an abundance of natural resources, Africa is emerging as one of the most lucrative regions for foreign investments.
In fact, a United Nations report found Africa to be the most profitable global region. The continent’s rate of return for foreign investments stood at 11.4% from 2006 to 2011, compared to 7.1%, the global figure.
However, it would be wrong to say that all is well in the land of opportunity. Every investor knows where there’s reward; there’s some risk too. Here’s a detailed overview of both sides of the coin.
Investing in Africa: Return on Investments
At a time when the rest of the world saw a slump in foreign direct investments, Africa escaped this decline, seeing a rise of 11% in investments. According to UNCTAD Secretary-General Mukhisa Kituyi, the combination of growth prospects and the African Continental Free Trade Area (AfCFTA) will increase the inflow of investments to the region.
It’s important to note that East Africa was the fastest-growing region in Africa, with foreign investments of $9 billion, according to the World Investment Report 2019. Most of these investments were in diverse sectors, such as oil and gas, chemicals, hospitality, and manufacturing.
Special Economic Zones
One of the main reasons for returns in African investments being high is the presence of special economic zones or SEZs. There are about 237 of these zones in Africa, with many more being planned.
Kenya has the most SEZs, followed by Nigeria, Ethiopia, Egypt, and Cameroon. These zones facilitate economic development by offering incentives to large corporations, such as tax exemptions.
MIGA
Foreign investors can also expect to see high returns in their African ventures due to the political risk insurance provided by MIGA (Multilateral Investment Guarantee Agency).
MIGA is a World Bank Group member, providing political risk guarantees for projects in several industries in developing countries. The agency facilitates foreign direct investments in African countries by providing guarantees on investments against risks such as expropriation, political violence, business interruption, and breach of contract.
Bright Economic Prospects
Part of the reason investments in Africa are presumed to be lucrative is the region’s growing economic prospects. According to the United Nations, six of the fastest-growing countries in the world are in Africa. The IMF (International Monetary Fund) has also projected Africa to have the highest growth prospects from 2018 to 2023.
Some of the sectors where foreign investors will have an advantage are infrastructure, telecommunications, and banking. As more Africans become banked and gain the economic resources to utilize new technologies, the markets for these tools will also grow.
Lower Cost of Doing Business
Since Africa has a large youth population, there’s an abundance of labor for businesses. The hourly wage for labor is also lower than in other parts of the world, making it attractive to foreign investors. Similarly, production costs are also lower for labor-intensive industries, resulting in high returns on investments.
Risks of Investing in Africa
Although investor interest in the African continent is at an ”all-time high,” some risks can lower the returns on investment. Let’s look at them.
Lack of Familiarity with Local African Dynamics
Most people, including investors, view Africa from the old-school lens of news channels and media publications that often present Africa in an outdated light. Due to this, investors are not fully familiar with the local dynamics, failing to connect to their target audiences.
Political Uncertainty
The political landscape in Africa is ever-changing, with frequent shifts in government policies and regulations. It creates an uncertain economic environment for investors, leaving them in the dark about the viability of their future plans and business predictions.
For instance, Investec Bank’s chief executive recently stated that South Africa has had the most uncertain political climate since the end of apartheid. As a result, there have been concerns among investors entering the country.
Poor Infrastructure
Although African governments have sped up the work on national infrastructure, the progress is still not at par with the developed world.
Poor infrastructure is often seen as an impediment to the growth of new businesses, deterring investments into already established ones. An unreliable power supply further adds to the problem, as 43% of the total population in Africa does not have access to electricity.
Conclusion
There is sufficient evidence and expert-backed anecdotal insight to show the potential of Africa as a prime destination for foreign direct investments. While investors cannot ignore the risks associated with investing in the region, the government incentives, MIGA, economic zones, and lower cost of starting a business often compensate for these risks.
That’s not the end of your problems, though. There’s an added complexity of dealing with regional regulations and laws. Luckily, we solve that problem for you.
Trans African Investments connects you to best-in-the-field certified financial experts and lawyers in Africa to navigate the business investment process. Contact us today for more information.