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.