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Africa: Opportunity Beyond the S in BRICS

Investors who have been considering going a bit farther afield than EU countries, Japan, and other developed markets for opportunities might want to consider Africa—and not just South Africa, the fifth member of the BRICS nations. There are 54 countries on the continent, and while there are hazards to investing in many of them, there are also opportunities. Both can be substantial.

A new study from the financial advisory firm AlixPartners and the international law firm Dentons indicates that the rise of a middle class in African countries promises opportunities in fields from telecommunications and energy to agriculture and transportation, among others. In “Africa: Now Open for Business—Weighing the Opportunities and Risks,” the two firms point out that in its October regional economic outlook, the International Monetary Fund projected that 12 of the 20 fastest-growing national economies over the next five years will be in Africa.

While the study is aimed primarily at businesses that “have not fully realized this evolving picture or have not found the strategies that may allow them to benefit from it,” the same could be said for investors, who may be so concerned with the potential for risks that they overlook opportunities in some of the more developed African countries. “A considerable gap persists between stereotypical perceptions of Africa as a single place of prohibitive risks and the evolving reality of the rising potential within an extraordinarily diverse and vibrant continent,” the study states.

So substantial is that gap that in a survey of mostly U.S. companies that was conducted for the study, 68% indicated that they were not doing business in Africa, although, among the respondents that did include Africa among the countries in which they did business, 60% said that the continent was “important to their overall businesses.” Among those businesses, several sectors went even further and said that Africa was critical to their businesses; these sectors included business and professional services (16%), energy companies (16%), and technology companies (13%).

While South Africa came in at the top of the list of African nations where survey respondents did business, the next most popular nations were Egypt, Nigeria, Kenya and Ghana. If the mere mention of Nigeria brings to mind only e-mail and other scams, it may be no surprise to learn that corruption was cited as a risk by 86% of companies doing business on the continent. And of course there are other hazards, such as allegations of child and/or slave labor and human trafficking in the cocoa industry in Côte d’Ivoire, Ghana and Cameroon; conflict financing tied to the mining of diamonds and other minerals; and environmental issues in many nations.

However, middle-class populations in many African nations are growing. Nigeria alone accounts for 15% of the continent’s population, and growth opportunities there, and in other countries, are soaring. The IMF said in April that growth in Africa south of the Sahara is expected to outpace the global average of 4% in 2014, instead turning in a rate of 6.1%.

In its world economic outlook report, the IMF said that Côte d’Ivoire and Mozambique—the former the world’s largest cocoa producer and the latter the site of the largest gas discovery in the world in the last 10 years—should grow at a rate of 8%, while Nigeria will not be far behind at 7%, putting it within shouting distance of challenging South Africa as the continent’s largest economy.

In addition, the World Bank predicted foreign direct investment in sub-Saharan Africa would rise to record levels each year for the next three years. In 2012 such investments stood at $37.7 billion; by 2015 the total is expected to hit $54 billion.

Sub-Saharan Africa is not the only part of the continent offering opportunities; Tunisia, a former French protectorate, with the benefits of French law, an infrastructure of roads and pipelines already in place and a stable government, is attracting new attention for oil and gas companies. In addition, central African countries are also now in the sights of the industry, with Somalia, Ethiopia, Eritrea and Kenya coming in for renewed attention.

At the April IMF-World Bank spring meetings in Washington, finance ministers from African countries met to discuss the opportunities and challenges that faced their homelands, and much of the news was good—especially for the business climate.

Nigeria’s finance minister, Ngozi Okonjo-Iweala, said publicly that so far this year Nigeria has seen its economy grow by 6%; in addition, inflation was down. Ali Soilihi, finance minister of Comoros, also reported his country’s economy growing at a faster rate than last year, despite a number of challenges. And Cameroon’s finance minister, Alamine Ousmane Mey, emphasized the need for better infrastructure for more efficient industrial development, as well as reporting that the country was working on everything from roads and ports to dams to boost imports, exports, and domestic demand. Countries also reported on road building projects that would link nation to nation, for better regional integration.

Thomas W. Laryea, a Dentons partner and one of the authors of the study, said there were “tremendous needs on the African continent for energy,” and that the whole energy sector, oil and gas as well as power, has become easier for the firm’s clients to invest in. Telecommunications and the tech sector have also been attractive to investors. “In many respects, Africa is very advanced such as in mobile payments, more than in the U.S.,” he said.

While agricultural projects are also necessary, they are more problematic. “There are many complexities across the agricultural sector,” Laryea said, explaining that despite the fact that Africa has 60% of the arable land in the world, it’s “hard to move forward with major agricultural products there,” partly due to the lack of infrastructure that the finance ministers are so anxious to improve. While cocoa is “an interesting specific example of investing in agriculture,” he added, there are difficulties connected with it because of the allegations mentioned earlier.

Real estate too is “particularly tricky” as an investment opportunity, according to Laryea. While housing is needed, getting financing for real estate developments can be challenging because of legal and financial factors. “There is still tremendous uncertainty on legal title,” he explained, with investors not being fully satisfied that projects have legal title to developments. The financial obstacle entails demand: “There has to be demand after [developments have] been built.” There are no commercial mortgage markets, which makes it difficult to sell houses once a project has been completed.

While there are “very few developed secondary markets in stock—Nigeria, Kenya, South Africa—most investment is not going in through stock purchases, but through private equity and venture capital investing in projects, rather than in stocks.” Still, Laryea said, "That is bound to change if growth continues at its predicted rate.”

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