MON, AUG 17 2020-theG&BJournal– The Economist Intelligence Unit (The EIU) is forecasting a 30% drop off in foreign direct investment (FDI) flows to Sub-Saharan Africa (SSA) from US$31.7bn in 2019 to US$22.2bn in 2020, a much bleaker outlook because of unprecedented market disruption in the wake of the global Covid‑19 pandemic.
‘’The pandemic impact will see many projects delayed, shelved or scrapped, alongside a reduction in reinvested earnings, a key source FDI, as company profits are squeezed. Several non-oil multinationals will prioritise their home markets (including building more resilient domestic supply chains) rather than investing abroad, which will work to SSA’s disadvantage,’’ The EIU in its latest report on SSA.
EIU predicts that more diverse economies (such as South Africa) will be better shielded from the pandemic than those relying on single commodities (such as Zambia, whose exports are dominated by copper), the pandemic will have a mixed impact on mergers and acquisitions. Greater caution by firms points to less deal-making, but there will also be opportunities for consolidation, as stronger companies buy out struggling competitors.
‘’Despite the varied challenges, SSA’s enormous mineral wealth, its fast-growing population and prospects of deeper regional integration (and the consequent creation of larger markets) will ensure that SSA stays on investors’ radars.’’
FDI inflows into SSA has already dropped by 9.9% to US$31.7bn in 2019 (cutting the region’s share to 2.1% of global flows), according to the latest World Investment Report from the UN Conference on Trade and Development (UNCTAD).
The EIU notes that the downturn in 2019 reflects rising geopolitical tensions, marked by US-China trade wars, and adverse changes in some SSA markets such as Nigeria where inflows almost halved (to US$3.3bn) because of tighter rules as oil and gas companies divert attention to more investor-friendly locations.
In Ethiopian inflows fell by a quarter (to US$2.5bn) owing to heightened political tension. South Africa therefore regained top spot in the regional FDI league in 2019, despite inflows dipping by 15% to US$4.6bn. Some countries bucked the falling trend, including Côte d’Ivoire, Senegal, Uganda and Zambia.
The EIU in the report cites the significant diversity in market conditions and investment flows, but points also to the common features, such as a heavy dependence on commodities, especially oil and gas, minerals and agricultural raw materials.
‘’Investment in services, although strong in some countries (such as South Africa and Kenya), still lags behind investment in natural resources.’’
UNCTAD expects regional FDI inflows to recede by 25-40% in 2020, but this includes North Africa, which will suffer disproportionately because of its high dependence on hydrocarbons.
By sectors, Oil and gas is seen as ‘’hit hard.’’
Major oil producers, including Nigeria and Angola, as well as mid-tier players, such as CongoBrazzaville, Gabon, Equatorial Guinea, Chad and Ghana, can all expect much weaker FDI inflows in 2020 or, in Angola’s case, more rapid disinvestment, EIU said.
The slump will also affect would-be hydrocarbons producers such as Senegal, where separate offshore oil and gas developments now face delays of a year or longer. Uganda’s and Kenya’s hope of joining the oil exporters club are receding.
EIU noted however, that some deals will still proceed despite pandemic-related disruption, citing the example of the US$15bn raised in July by multinational oil firm Total to develop major gas reserves in Mozambique for the liquefied natural gas (LNG) export market.
For mining, EIU forecasts FDI could fall steeply in 2020, at least in new operations, because of the long lead time for projects coupled with a high degree of uncertainty about future market trends. Regulatory barriers in key markets, such as South Africa, Zimbabwe and Tanzania, are an additional deterrent to new mining FDI.
For Agriculture, global and regional concerns about food security, which have been amplified by the pandemic, will spur FDI in agriculture, at least in theory, although difficulties in navigating land rights hurdles in many SSA countries, as well as the wider problem of deficient infrastructure, work against farm projects.
For manufacturing, infrastructure bottlenecks, in both transport and energy, will make it hard to attract FDI, ‘’ despite a desire by many countries to embrace import substitution (partly to protect against pandemic-style global supply-chain dislocations),’’ EIU said.
FDI in services, including banking and telecommunications, ‘’will probably suffer the least from the pandemic slump, except for tourism, hospitality and aviation, which will take a hard knock.’’
It said telecoms ‘’will probably maintain its strong regional growth trend, despite the pandemic, driven by ever-greater internet usage, rising levels of e-commerce and more home-working (in wealthier markets). Key overseas players, such as Vodafone (UK) and Airtel (India), will continue investing to cement their positions and take advantage of future growth.’’
Financial inclusion and deepening, assisted by mobile money, will similarly drive FDI and other deals in banking and financial services, including by major global players such as Visa and PayPal, and by private equity outfits.
According to the EIU, banking will be a key sector for intra-Africa investment, as illustrated by the acquisition in 2020 of two smaller banks in Kenya by Access (Nigeria’s leading bank) and by Commercial International Bank (Egypt’s largest private bank). Another area of opportunity for investment, despite the pandemic, is electricity supply, especially renewables, helped by the availability of multinational financing for solar and wind projects.
EIU pointed to some promising drivers in the sector that could help FDI to recover some lost ground in the short to medium term.
‘’A renewed focus among African governments on boosting healthcare and telecoms infrastructure will provide some support to underlying demand, as will efforts to get major energy, power, water and transport infrastructure projects back on track. Local manufacturing and industrial complex infrastructure could receive a boost in the medium term as some companies seek to build domestic capacity and mitigate the risks posed by disrupted global supply chains or volatile import costs, while governments retain a focus on export-oriented industrialisation as a key development strategy,’’
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