Africa - where should the Gulf invest?

Opinion: Africa has historically been regarded as a high-risk environment, but this precludes its abundant opportunities from private equity in Morocco and Egypt to sugar in Ethiopia
In comparison to other emerging markets, Africa has historically been regarded as a high-risk environment for trade and investment, writes Roddy Mckean, director at Kenyan-based law firm Anjarwalla & Khanna.
By Roddy Mckean
Wed 04 Oct 2017 10:55 AM

In comparison to other emerging markets, Africa has historically been regarded as a high-risk environment for trade and investment.

Of course, doing business in any emerging market has inherent risks. However, Africa, particularly sub-Saharan Africa, has often been tainted with an exaggerated risk perception driven by overly negative press coverage focussing on such issues as disease, war and famine, and limited understanding by investors of its realistic trade and investment opportunities.

To put this into perspective, many investors, including in the Gulf, have viewed Asia and China in particular as a more ideal investment destination because of the size of the market. In reality, the risks of doing business in Asia are very similar to Africa and the focus of investor concerns are on similar issues.

In the past, Gulf investors have associated Africa with unstable political environments, corruption, lack of rule of law and regulation, poor corporate governance and weak security – all of which have also been identified as barriers to increased investment.

Currency risk has lately been a concern for investors in Africa but that is not unique to this continent. While these challenges remain today, it is increasingly easier to manage the risks associated with investment through a deeper understanding of the continent and an open-minded approach to risk.

Africa, not a homogeneous land

Africa seems to be the only continent today that is regularly referred to as a country. From a business perspective, Africa is not homogeneous and focusing on ‘Africa’ as a unit is not meaningful.

By painting Africa with one broad brush, investors misunderstand the risks and returns. Africa’s one billion people reside in 54 countries, across four different time zones and regulatory environments, speak different languages and have very different historical roots – all resulting in unique economic characteristics across the continent.

African countries have not historically traded with each other and have one of the lowest rates of intra-regional trade of any emerging market. This in itself has created opportunities for savvy investors, many of whom are focussing on developing regional footprints for their businesses and promoting cross-border trade.

In the current economic climate, larger economies such as Nigeria and Angola have been particularly hard hit by lower oil prices, while growth in South Africa has remained slow since 2007 for a number of different reasons.


DP World's operations in Algiers, Algeria

By contrast, the economies of Ethiopia, Kenya, Tanzania, Mozambique and Côte d’Ivoire are all forecast to grow at rates of over 5 percent per annum. These marked differences in growth reinforce the diverse and fragmented nature of Africa’s markets and we are beginning to see what has been termed multi-speed growth as different countries develop at varying growth rates.

The reason for this trend is simple: investors see significant opportunity to invest in Africa’s non-commodities sectors such as financial services, construction and manufacturing. With rising production costs in Asia, investors are particularly keen on markets such as Ethiopia, Kenya and Rwanda.

Looking at East Africa, Kenya’s strategic significance as a hub for investment into the region will ensure that it continues to attract foreign direct investment (FDI).

While recent oil discoveries may transform the investment landscape, the good news is that Kenya already has a diversified economy focusing on financial services, technology, agriculture, textiles and tourism, all of which have prevented it from being reliant on a particular commodity and caught in the downward spiral of falling oil prices.

With a population of over 90 million, cheap labour and a relatively stable political and social environment, Ethiopia is drawing significant attention from international investors, including from the Gulf and multinational corporations. It is the fastest growing economy in the world and its government is actively seeking to improve the investment landscape by developing infrastructure and more efficient business registration processes.

Some of the key priority areas for investment in Ethiopia include the agro-processing, textile, sugar, chemicals and metals and engineering industries. Challenges remain, given that the legal and regulatory frameworks are not well developed and certain industry sectors are not yet open to foreigners. Still, it remains one of the top investment destinations for many because of its untapped potential.

Moving towards North Africa, investors are gradually returning to Egypt and Morocco after they were scared off by political turmoil over the last few years.

A small but vibrant start-up scene is emerging in Egypt and Morocco, which is attracting foreign investment. Both of these markets also dominate the private equity market accounting for 81 percent of the value of all such deals in the region, according to the African Private Equity and Venture Capital Association.

Key areas that have been targeted by private equity investors include manufacturing, education, healthcare and consumer goods. Gulf investors who have ventured into sub-Saharan Africa use North Africa (particularly Egypt) as a launch pad due to linguistic, cultural or political ties and this trend is expected to continue.

Looking West to Francophone Africa (Cameroon, the Democratic Republic of the Congo, Côte d’Ivoire, Guinea, Republic of the Congo and Senegal) is increasingly being viewed as a dynamic and exciting region for business.

Growth has continued to improve annually and, while it has traditionally been mainly French companies setting up shop here due to linguistic preferences, today, more and more multinationals are seeking opportunities in this emerging region.  Sectors of interest include technology, financial services, agriculture and consumer-facing industries such as real estate, particularly around the development of shopping malls, which West African cities still lack.

The time to act is now

Africa is an exciting place in which to do business. The opportunity to enter the market is now, as growth is stabilising, and barriers to entry are low - brave investors can reap good returns.

However, as in any other part of the world and especially given the scale, complexity and fragmented nature of the continent, it is important for GCC, and all, investors to carry out due diligence and make well informed investment decisions. Given regional diversity a generalist or one-size-fits-all approach will not work.

A thorough analysis and understanding of the country, its regulatory framework and how business is done is key. Therefore, a local partner who can provide support and guidance is essential – although they must also be subject to background checks.

Lastly, there is no substitute for research and analysis which lends to sound, strategic decisions. This week, the Africa Legal Network (ALN) holds its annual conference on Gulf investment into Africa, which should provide some good insight into the market.

Crucially, Gulf investors should retain a flexibility to their investment approach in Africa so they can adapt, realign and recalibrate as those markets develop.

Roddy Mckean is director at Kenyan-based law firm Anjarwalla & Khanna

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