Economic reform is making Africa an attractive market for FDI

EY has released the latest edition of its Attractiveness Programme in Africa report, revealing that foreign direct investment (FDI) indicators across the continent are increasingly promising. A combination of political changes and economic reforms appears to be an attractive prospect for foreign investors. 

FDI is crucial in Africa’s current economic scenario, as countries look to achieve substantial integration with markets across the globe. Most economies have been reliant on oil and commodities, and are looking at FDI as a means to break out of this dependence that has caused a considerable degree of economic fluctuation.

The continent also has a young, vibrant population, and significant economic potential, which has made it an attractive prospect for foreign investors for a number of years now. Some of the biggest barriers to FDI in Africa until this point have been political instability and corruption.

Some of the region’s largest economies – including South Africa, Nigeria and Zimbabwe – have undergone major political instability in the last two years, in addition to a string of corruption scandals in South Africa and political delays in Nigeria. Despite these factors, EY paints a promising picture.

‘In 2019 we have seen a further spread of political reform and adoption of continent-wide trade agreements, that create an enabling environment for economic growth and attraction of FDI. These developments provide a good foundation for economic growth and increased FDI flows,’ states the EY report.

The reforms EY refers to include the South African President’s plan to draw as much as $100 billion in foreign investment over the next five years, among others. Countries across the region are focusing on developing markets of the future, complete with digital talent and digitally integrated businesses.

Early last year, 44 of the 55 member states in the African Union signed the African Continental Free Trade Area Agreement (AfCFTA), allowing for the unrestricted flow of funds and goods on the continent. Not only does this provide the possibility of increasing the flow of investments within Africa, but it also appeals to foreign companies that wish to gain wider market access.

The ratification of the AfCFTA has been a major boon to FDI prospects in the region. Over the course of 2018, more than 700 FDI projects were active in Africa, which account for nearly 120,000 jobs and more than $75 billion in capital. Most of the FDI pool comes from the US and France.

However, there is an increasing volume of FDI coming in from emerging markets, which make up 34% of the overall FDI share in Africa, and account for more than half of the jobs created. Within Africa, Egypt, South Africa and Morocco are the countries that currently draw the most FDI.

In terms of economic segmentation, most foreign companies appear to be investing in the services sector. Services draw 66% of the total FDI share, while the industrials sector draws 23%. Extractives draw only 11%. Not surprisingly, the technology, media and telecommunications sector accounts for most of the FDI in services.

While FDI increases have driven economic growth across the continent, development in the region is far from equitable. While East Africa is growing at an impressive 7% on average, West Africa is growing at just over 3%, while Southern Africa falls below the 3% mark. North Africa is growing at an average of just over 4%.

EY recommends a more robust financial structure to collaboratively improve on this scenario.‘Funding infrastructure must be sustainable and profitable. With an increasingly uncertain geopolitical outlook, Africa can shape its own future through the African Continental Free Trade Agreement,’ states the report.