The scramble for resources in sub-Saharan Africa is well-documented, and west Africa has featured as the protagonist, attracting commodity-hungry investors. However, according to Sebastien Spio-Garbrah, managing director of political risk consultancy Damina Advisors, investor attention is about to head eastwards. He says that west Africa will experience a slowdown in long-term growth, while increasing FDI flows into east Africa will provide a major boost to the region’s economy.
A continent divided
East and west Africa exhibit a regional divide when it comes to foreign direct investments, according to data from greenfield investment monitor fDiMarkets. While the number of projects into east Africa has generally been higher than west Africa, capital expenditure in west Africa has been consistently higher.
Adopting the UN's definition of east and west Africa, fDiMarkets data shows west Africa consistently trumps east Africa in terms of inward FDI capital expenditure, but project numbers are generally higher in east Africa. The Africa Competitiveness Report 2011, released by the African Development Bank (AfDB) and the World Bank, found that although resource-rich countries have higher levels of income, commodity prices cannot sustain growth, and in the long term east Africa will attract more sustainable FDI. “East Africa will achieve higher growth as it hosts a myriad of investors, thus eastward FDI flows will be more sustainable,” explains Mr Spio-Garbrah in an interview with fDiMagazine.
Between the first quarter of 2010 and the fourth quarter of 2011, east Africa’s share of African FDI increased by 12.7%, while west Africa experienced a smaller increase of 1.9%, according to fDiMarkets. A closer look at the regional trading blocs reveals the share of FDI into the five East African Community (EAC) member states increased by 14.4%, while the 15 members of the Economic Community of West African States recorded no increases over the same period.
Capital continues to flow west
The short-term narrative, however, remains the same, as Africa’s resources will continue to attract higher capital expenditure. “The important basic division between west and east Africa is one has a lot of oil and the other has none,” says Jan Rielaender, an economist at the Organisation for Economic Co-operation and Development's Europe, Middle East and Africa desk.
Although east Africa recorded 200 investment projects from 143 companies between 2010 and 2011, and west Africa received 184 investment projects from 137 companies, the average project size in west Africa was more lucrative, worth $220m per project, in comparison to average investments in east Africa worth $128m, according to fDi Markets. “Investments in oil extraction are very capital intensive,” says Mr Rielaender. “In east Africa you have investments in banking, telecommunications, and several other sectors where individual project sums will be smaller than those in extractive resources.”
The African Economic Outlook released by the AfDB and the UN reveals that west Africa received 20% of all FDI flows to Africa over the past five years, attracting investments worth $9bn in 2010. The main destination was Nigeria’s oil industry, which received $4.5bn in 2010, accounting for 50% of FDI to the region.
Conversely, east Africa captured 8% of FDI flows, and in 2010 FDI flows were worth $6bn. “East Africa generally is attracting several greenfield investments,” says Mr Rielaender. Thus east Africa has captured a higher number of greenfield investment projects as this reflects the focus on market-seeking investments in the productive and services sectors.
This trend bodes well for the east. “If you take energy out of the equation, FDI flows to west Africa will drop. Most of the investments in east Africa go to a wider variety of sectors. Yet in west Africa, roughly 70% investments go into oil and gas, and telecommunications and real estate capture the remaining 30%,” says Mr Spio-Garbrah.
Opportunities in the east
Unique differences will continue to influence the pull factors attracting FDI into the two African regions. West Africa will benefit from its extractive resources industry, while east Africa, as an oil importer, will face the perennial problem of managing a deficit in its balance of payments during a period of high oil prices, says Christopher Hartland-Peel, managing director of Hartland-Peel Africa Equity Research. Moreover, the sheer size of west Africa will offer investors with another advantage. “Nigeria alone is huge – its market size means investors benefit from economies of scale,” says Mr Spio-Garbrah.
However, east Africa’s consumer market will be important in attracting FDI. “Domestic markets are robust in east Africa. If you look at the food and beverage sectors, Kenya alone is the regional industrial hub of east Africa and Nairobi is the biggest manufacturing sector between Johannesburg and Cairo,” says Mr Hartland-Peel.
The International Monetary Fund revealed the GDP per capita growth average in the eight West African Economic Monetary Union member states had a negative growth of -1.4% in 2011, and while this could improve to 3.3% in 2012, it will still remain below the EAC average growth of 3.3% in 2011 and 3.8% in 2012. This higher GDP per capita average means that growing consumer markets in east Africa will attract more foreign investors to the services sector in the long term.
Transfer of power?
Geography will be a crucial dynamic influencing long-term FDI reversals away from the west to the east. East Africa’s proximity to emerging markets near the Indian Ocean is significant. “East Africa is close to Middle East, India and China, and it therefore has much easier access to those regions than west Africa,” says Mr Rielaender. Conversely, west Africa’s declining fortunes will be tied to its proximity to the countries near the Atlantic Ocean, namely the US, the UK and France, all of which are suffering the effects of the 2008 financial crisis.
Hit hard by the global economic crisis, developed countries have substantially reduced their FDI into Africa. While oil exporters in west Africa still lead GDP growth in Africa, Roubini Economics has forecasted that falling commodity prices and demand will weaken growth and dampen investment. As resource-rich western Africa faces prospects of a decelerated economic growth, it appears that fortune will favour the diversified economies of eastern Africa.