When investors look across Africa as the year draws to a close, a contradictory picture emerges of a continent beginning to tap into its great potential, while being ever-threatened by the demons of old.

According to the United Nations Conference on Trade and Development (Unctad), FDI in African countries reached $35.6bn in 2007, double that of just three years earlier. Long-running civil wars in Angola, Liberia and Sierra Leone have given way to electoral democracy, and investment in the region has diversified from its traditional commodity-dependent base.

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Unsettled continent

However, the continent remains unsettled. Wars still still rage in the Democratic Republic of Congo (DRC), Somalia and in Sudan’s Darfur region. Disputed elections in Kenya have led to violence in which more than 1500 people have died, and the power-sharing between Zimbabwe president Robert Mugabe and opposition leader Morgan Tsvangirai can be described as tense, at best.

A recent report by Unctad – Economic Development in Africa 2008: Export Performance Following Trade Liberalisation – concluded that although “efforts made by African countries in terms of trade liberalisation... have removed most of the policy barriers considered to be the main impediments to these countries’ export performance... African countries have not diversified their exports towards more dynamic primary commodities and manufacturing goods, which are less prone to the vagaries of international markets.” According to the report, Africa’s export market share fell to about 3% of world exports in 2007, down from 6% in 1980.

Controversial agreements

The Economic Partnership Agreements, put forth in place of the Cotonou Agreement, which expired at the end of 2007, have proved controversial. Ostensibly designed to regularise trading patterns between Africa and the EU, many African countries, such as the 20-nation Common Market for Eastern and Southern Africa (Comesa) group, have expressed fears that a lowering of tariffs would result in a devastating loss of revenue for governments in the region, and that local economies could not withstand competition from European goods.

“If you lower tariffs and open up Africa, you will swamp the continent with European goods, which consumers will like, but it will hold back Africa’s development and ability to compete,” says George Ayittey, economist-in-residence at American University in Washington, DC. “The focus on foreign trade with Europe is also somewhat misplaced, because if Africans don’t know how to trade among themselves, how will they trade with Europeans? If anything, internal trade with Africa will be good for Africa.”

Although regional trade groupings such as Comesa and the 15-member Economic Community of West African States (Ecowas) have helped regional integration to some degree, many hurdles remain. For example, the CFA franc, in use in 12 African countries that were formerly French-ruled, is issued in two different currencies – the West African CFA franc and the Central African CFA franc. Although both retain the CFA name and exchange rate, notes and coins of the two denominations are not accepted in countries that have opted for one form over the other.

East for expansion

Beyond its neighbours, the region looks increasingly eastward for expansion, with omnipresent China playing a dominant role. According to International Monetary Fund figures, Africa’s exports to China rose by more than 40% between 2001 and 2006, while imports from China increased by 35%. China’s trade with Africa has now passed the $55bn mark, and its share in Africa’s yearly export growth has nearly doubled since 2000.

“Africa is still tied up with Europe in terms of the critical mass of its trade, but it is decreasing quite quickly, and it is Asia that has recovered the bulk of this loss,” says Karim Dahou, executive manager of the New Partnership for Africa’s Development – the Organisation for Economic Co-operation and Development Africa Investment Initiative. “There is a move that augurs gradually from Europe to Asia,” he adds.

In an illustration of its new-found clout, the Chinese government announced a $5bn loan to the DRC last December – just days before an important EU-Africa summit in Portugal. In September 2007, the government of Congolese president Joseph Kabila inked an agreement with China whereby, in exchange for China’s assistance on projects to improve the war-wracked country’s infrastructure, China would receive great deference in the extraction and sale of the country’s mineral reserves, with more than 10 million tonnes of copper to be extracted over a 15-year period to pay for $12bn-worth of improvements.

Electronics on the rise

Although a World Bank working paper earlier this year noted that 46% of exports from Africa to the EU are oil products from countries such as Nigeria, investment has come during recent years in some surprising sectors. Helped by its easy access to the European market, the possibility that north Africa may be on the brink of becoming an electronics manufacturing hub appears to be within reach.

Tunisia, which along with Algeria and Morocco is a signatory to the Euro-Mediterranean Association Agreements guaranteeing free access to European markets, is another striking case in point. On a continent where fewer than 4% of the population is connected to the internet, Fuba Tunisia, a Tunis-based outgrowth of German digital giant Fuba Printed Circuits, completed a $10m modernisation and expansion of its Tunisian plant.

Last year, London’s Oxford Business Group consultancy assessed that the electronics sector accounted for 20% of Tunisian exports in 2006, valued at about $11.6bn, with the electronics sector providing about 45,000 jobs in the country.

A joint venture between Algerian electronic manufacturer ENIE and Spanish renewable energies companies Isofoton and Alsolar to build Algeria’s first thermal energy plant, and moves into Morocco by Geneva-based ST Microelectronics, complete the picture of a growing electronics sector to be watched.

Boutique investment growth

Another change, unlikely as it may seem, has been the growth of boutique investment firms focusing on Africa.

London-based private equity investor Actis is fairly representative of other concerns such as Washington, DC-based Emerging Capital Partners and London’s Helios Investment Partners, in its management of investments between $20m and $100m per transaction. Nubuke Investments, a hedge fund set up by a former board member of UBS’s investment bank, focused exclusively on Africa, is thought to have to raised more than $200m in its first round of financing.

“In terms of equity shops, there has been a plethora that are starting, which really started about a year-and-a-half ago,” says Kerry Constabile, an energy and economics consultant with extensive experience in the region.