While the threat of Fed tapering in the coming months has spurred some investors to pull their money out of emerging markets, the likes of longer-term, big-ticket investment projects in sub-Saharan Africa (SSA) will remain on track after a record 2013, say analysts at Fitch Ratings.
“FDI, on which Africa has mostly relied until now, is much less volatile [than other flows],” says Richard Fox, head of MEA sovereign ratings at Fitch Ratings.
“Most inflows [in SSA] are dominated by FDI, so we think in general that the region will cope reasonably well, but there are some spots that will be more volatile to a sudden outflow than others.
“Africa can withstand Fed tapering, but countries with weak fundamentals, for instance those with twin deficits such as South Africa, are the most exposed.”
From 1995 to 1998, net FDI to SSA was $3 billion each year. From 2009 to 2012, net FDI grew tenfold to $30 billion each year, according to IMF data, thanks to new projects in commodity countries in Angola, Ghana, Mozambique, Uganda and Zambia, among others.
In 2013, net direct investment is set to hit a record of at least $40 billion, compared with official flows of $32 billion. The FDI pattern is predicted to continue along this positive trajectory thanks to untapped reserves and mineral discoveries.
“[What’s more] there are some signs that other sectors are attracting FDI due to changing sources of FDI into Africa and the increasing amount of south-south investment,” says Fox.
More recently, market-seeking FDI in the service sector – for instance in banking, retail and telecommunications – has increased to respond to new consumer needs. And while China is one of the main investors in the region, Fox highlights India’s growing importance in the region as well.
Underdeveloped local capital markets in the region mean that, all in all, portfolio flows – such as equity and bonds – remain limited in size.
And although South Africa and Nigeria are two main exceptions to the rule, attracting a variety of portfolio flows in recent years, these have been highly volatile.
2013 is set to be a bad year in Africa, with respect to net private portfolio flows, thanks to outflows in north Africa and volatile inflows in frontier equities and bonds thanks to the threat of Fed tapering, even as a solid clutch of SSA sovereign bond issuers have successfully launched deals at competitive pricing.
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Net creditor
While FDI to SSA will continue for some time, research has shown that the continent has been a net creditor for the past 30 years, despite market commentary that the region has a structural capital deficit.
According to research released in May 2013 by the African Development Bank (AfDB) together with Global Financial Integrity, a Washington-based watchdog group, Africa was a net creditor to the world, as measured by the net resource transfers, of up to $1.4 trillion in the period between 1980 and 2009 – adjusted for inflation.
“There was a big fall back after 2008 when countries across the board, particularly in South Africa and Nigeria, used their coffers overseas to act as a buffer during the financial crisis,” says Fox. “But bank lending to these countries is increasing in gross terms. It is being matched by flows from the countries into deposits in other jurisdictions.
“Sovereigns borrow from banks, but there is probably a lot of capital flight from the private sector. I’m not suggesting that this is only happening in SSA, but it is an issue. While not all outflows are illicit, maybe a lot of it is.”
Illicit and huge financial flows fleeing the continent deprive Africa of important resources for economic development, and also highlight that the domestic population has little faith in investing at home.
“If a lot of that money had stayed in Africa, today the continent would look like a very different place,” says Fox.
According to AfDB research, in terms of the volume of illicit financial flows, Nigeria, Libya and South Africa and other resource-rich countries led regional outflows. Although net deposits in Bank for International Settlement-registered banks are an imperfect proxy for resident outflows, because it includes central banks’ foreign-exchange reserves and South African deposits, the table tells the story, according to Fitch.
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