Tremendous opportunities await foreign direct investors, but geopolitical issues, China’s lending practices and human rights violations may stymie that potential.
In 2021, Africa witnessed an unprecedented rebound in foreign direct investment (FDI). According to a recent report from the United Nations Conference on Trade and Development (UNCTAD), which tracks globalization efforts in developing countries, FDI flows into Africa reached $83 billion. This was a record high from the $39 billion recorded in 2020, when the Covid-19 health crisis devastated the world economy.
Even though this accounts for just 5.2% of global FDI, which stood at $1.5 trillion, the uptick in deal volume underscores just how quickly Africa is changing—and the roles foreign investors are playing as catalysts of change.
“We see tremendous opportunities for the United States to invest in Africa’s fast-growing markets,” says Alice Albright, CEO of Millennium Challenge Corporation, a foreign aid agency established by Congress in 2004.
Indeed, the U.S. has a renewed focus on the region, considering that President Joe Biden resurrected the US-Africa Leaders’ Summit, a three-day event beginning Dec. 13 in Washington DC. The last time the Summit was held was in August 2014.
While the US is largely playing catch-up in Africa, Europe has been—and continues to be—the largest holder of foreign assets in Africa, UNCTAD noted. The two EU member states with the most investor activity in the region are the UK and France, with $65 billion and $60 billion in assets, respectively.
Other global economic powers—China, Russia, India, Germany and Turkey, among others—are also inking deals across the continent.
“Efforts to create an enabling environment and proactive promotion are yielding results in attracting FDI,” says Ratnakar Adhikari, executive director of the Enhanced Integrated Framework at the World Trade Organization.
Of the continent’s 54 countries, South Africa maintains its position as the largest host of FDI, with investments worth more than $40 billion. Recent deals in the country included a $4.6 billion clean-energy project sponsored by UK-based Hive Energy, as well as a $1 billion data-center construction project in Johannesburg’s Waterfall City led by Denver-based Vantage Data Centers.
Egypt and Mozambique trail South Africa, each with $5.1 billion in FDI. Mozambique, for its part, grew by 68% thanks to an uptick in so-called greenfield projects—construction on completely vacant sites. One UK-based company, Globeleq Generation, confirmed plans to build multiple greenfield power plants for $2 billion in total.
Nigeria, which recorded $4.8 billion in FDI, touts a burgeoning oil and gas sector, along with international project finance deals such as the $2.9 billion industrial complex—dubbed the Escravos Seaport project—currently under development.
Ethiopia, with $4.3 billion, saw FDI increase 79% due to four major international project finance agreements in the renewables space. It has also become a focal point for China’s Belt and Road Initiative, a massive infrastructure initiative that aims to create jobs through various projects such as the Addis Ababa-Djibouti Standard Gauge Railway.
Despite the increase in deal activity, Africa is still a risky bet. Commodities, for example, account for more than 60% of total merchandise exports in 45 African countries, according to UNCTAD. This leaves local economies highly vulnerable to global commodity price shocks.
Russia’s war in Ukraine dealt a major blow to commodity markets, disrupting production and trade of several commodities, including energy, fertilizers and grains. These price increases came on the heels of an already volatile commodity sector, due to pandemic-related supply constraints.
According to the World Bank, disruptions to wheat exports from Ukraine affected several importing countries, especially those in North Africa, such as Egypt and Lebanon.
“Geopolitical interests are playing an increasing role, as many different international actors jostle for influence on the continent,” says Patricia Rodrigues, senior analyst and associate director for Africa at intelligence firm Control Risks.
African countries will likely maintain a high level of pragmatism when it comes to engaging with various geopolitical powers to guarantee FDI inflows, she adds.
Whether that guarantee comes to fruition remains to be seen. The 2021 growth momentum is unlikely to be sustained, UNCTAD warns. Overall, signs are pointing to a downward trajectory. Military coups, instability and political uncertainty in certain countries don’t bode well for FDI activity.
Take Kenya, for example. The country has a history of election-related violence and a lack of accountability for human rights abuse, according to Human Rights Watch. Investors shun the country—unlike Ethiopia, Kenya’s East African neighbor.
In fact, Kenya’s FDI decline brought it from $1 billion in 2019 to a mere $448 million in 2021. In July, it was ranked the second-worst country to invest in after Colombia by the World Uncertainty Index.
There’s also the ongoing repayment crisis between Africa and its biggest bilateral creditor, China, which holds 21% of the continent’s debt as of 2021, World Bank data shows. The International Monetary Fund (IMF) lists more than 20 African countries as being in, or at high risk of, debt distress.
“Foreign investors are attracted to market size, openness, policy certainty and predictability,” Adhikari says. One factor investors can count on is Africa’s growing population, which is expected to double to 2.5 billion people by 2050. Studies conducted by the University of Toronto’s Global Cities Institute predict that Africa will account for at least 10 of the world’s 20 most populous cities by 2100, with many cities eclipsing New York City in growth. This trend makes Africa one of the fastest-growing consumer markets in the world.
Shirley Ze Yu, director of the China-Africa Initiative at the Firoz Lalji Centre for Africa at the London School of Economics, reckons that the continent could replace China as the world’s factory.
“The demographic dividend will place Africa prominently in the global supply chain recalibration as the Chinese labor dividend diminishes,” she says.
Africa may also benefit from the African Continental Free Trade Area (AfCFTA). If implemented, observers say the region will become the fifth-largest economic bloc in the world.
The pact could be a game changer in making the continent attractive to FDI, the World Bank notes. AfCFTA has the potential to generate greater economic benefits than previously estimated, with FDI totals potentially increasing 159%.
Last, while sectors like oil and gas, mining and construction still command huge stocks of FDI, the global push toward net-zero, coupled with Africa’s vulnerability to climate change, means “clean” and “green” investments are on an upward trajectory.
Data show the value of investments in renewable energy has increased from $12.2 billion in 2019 to $26.4 billion in 2021. Over the same period, the value of FDI in oil and gas declined from $42.2 billion to $11.3 billion, while mining sank from $12.8 billion to $3.7 billion.