Is Africa a profitable investment destination?

This is the first question any potential investor in Africa should ask before making a decision.

The answer to this question depends on your informed knowledge of factors such as being able to discern and take advantage of available opportunities, build up thorough understanding of African business and social cultural environment.

You are also expected to be familiar with local business rules, regulations and conventions.

To assist your decision making process, we have listed several Good Reasons why Africa will remain a profitable investment destination well into the future.

Africa’s Image Challenges

• The image of Africa as a failing continent still exists but there is a widening gap between reality and perception of Africa.
• There may be drought, disease and corruption. Still, there are new generations of young, educated, savvy entrepreneurs running businesses in Africa.
• A great number of professionals and business managers in Africa are educated in the best universities of the world, and have worked in high profile institutions/companies in developed economies across the globe before returning home.
• The HIV scourge in Africa is slowly beginning to lose momentum. Uganda has managed to cut the AIDS infection rate from 30% in the 1990s to single-digit figures in 2007.

Africa’s Economic Prospects

• Africa’s economic growth is steady and healthy. The World Bank confirmed that GDP has been higher than the world average for five years and is predicted to be between 5%-6% for 2008 and beyond.
• Africa’s economic prosperity has created a growing middle class. The World Bank estimates that the sub-Saharan middle class will be 43m strong by 2030, up from 12.8m in 2000. South Africa leads the pack with other countries such as Zambia, Nigeria, Kenya and Ghana demonstrating strong prospects. It all means that billions will be spent on consumer goods, telecoms, agriculture and infrastructure projects.
• Africa’s mineral wealth is vast. Africa supplies half of the world’s diamonds, a third of its gold and more than three-quarters of the platinum/palladium precious metals complex. It has huge copper reserves in Zambia and South Africa. Africa has 12% of the world’s oil reserves.
• Five of the world’s ten fastest-growing economies are in Africa and Egypt was the world’s best-performing stock market in 2005.
• Two decades ago, there were just five stock exchanges in Sub-Sahara Africa. Today, there are 18 with 1,500 separate listings. It has been reported in Fortune magazine that, excluding South African shares, African stocks have climbed an annualized 43 per cent since the end of 2006. In particular, since 2001 the Mauritian, Botswana, South African and Namibian stock exchanges have outperformed the Dow Jones index by 483 per cent, 375 per cent, 202 per cent and 188 per cent respectively.
• While most developed nations are worried about ageing “baby boomers”, Africa has a very young population which guarantees optimum productivity and sustained-growth economy into the future.
• Africa offers many exciting investment opportunities as long as the risks are properly assessed and then managed on an ongoing basis. Risk Management in Africa should not be viewed as a mere compliance requirement because its effective application should lead to enhanced profitability through the identification and treatment of risks.

Africa’s Political Reforms:

• Across Africa the number of democracies has risen from 10 in 1980 to 34 by the end of 2007. The older generations of leaders are retiring and the new western-educated elite are taking control.
• From 1960-1980, no African leader left office having lost an election. In the 1980s, there was just one. But from 1990-2003, 18 were voted out of office.
• The Mo Ibrahim Foundation has recently published its new ranking of African governance. 48 of the 54 African countries were reviewed, with Mauritius, the Seychelles, Botswana, Cape Verde, and South Africa occupying the top five positions and Sudan, Chad, the DRC and Somalia at the bottom of the table.
• Almost all African countries are embracing capitalism and stock markets and have a sound legal framework based on respect for property rights.

Selected African Economic Sector Prospects

Banking

Most institutional investors in Africa have made straight for the banking sector, with the big Nigerian banks featuring prominently in many international portfolios. In Exotix's recent Africa study, 18 of the top 30 companies in Sub Sahara Africa were banks with a combined market capitalization of $46bn (65 per cent of the entire index). Traditionally, the big Anglophone banks in West and East Africa have been relatively well run with great growth prospects. They have been producing impressive returns on equity – 15 per cent is standard, with some producing closer to 30 per cent.

Land and Agriculture

Agriculture is the continent's most important economic sector – it still employs more than half the labor force yet remains one-fourth as productive as its counterparts around the world. One recent survey of this huge sector concluded that part of that productivity gap can be explained by the fact that nearly two-thirds of Africa's agricultural land has been degraded by erosion, misused pesticides and abandoned because of oil boom.

Infrastructure

Africa's infrastructure sector faces enormous challenges. In a presentation to the World Water Forum in Mexico in March, African ministers put the total annual investment required in their water sector alone at $20bn. Separate research from the World Health Organization research indicates that $23.5bn a year would be saved by providing basic access in Sub Sahara Africa – 5 per cent of the region's gross domestic product.

Average electricity access in Sub Sahara Africa stands at about 25 per cent, and the World Bank expects 60 per cent of sub-Saharan Africans to still lack electricity by 2020. A report by Tanzania's Economic and Social Research Foundation calls for a doubling of generating capacity over the next 10 years, while Nigeria, which has only a tenth of South Africa's power output for three times the population, plans to more than double its capacity by 2011.

Telecommunication

The International Telecommunications Union recently noted that: "Growth in Africa's mobile sector has defied all predictions. Africa remains the region with the highest annual growth rate in mobile subscribers." The UN agency adds that no less than 65m new subscribers signed up in 2007. "By the beginning of 2008, there were over a quarter of a billion mobile subscribers in Africa and mobile penetration had risen from just one in 50 people in 2000 to almost one-third of the population today."

World Bank officials now estimate that an astonishing $14bn has gone into telecommunications in Africa in the past five years, with the number of mobile telephone lines rising to 135m last year from 15.6m in 2000 – a compound annual growth rate of almost 54 per cent, compared with 24 per cent globally. Yet this growth has only scratched the surface – mobile penetration across the continent is still only 15 per cent. Morgan Stanley estimates that mobile-phone penetration in Sub Saharan Africa will rise to 42 per cent by 2012.

Africa’s Top Ten Ranking on World Bank 2008 Doing Business Report.

1. Mauritius

2. South Africa

3. Namibia

4. Botswana

5. Kenya

6. Ghana

7. Seychelles

8. Swaziland

9. Ethiopia

10. Nigeria