WITHIN the last decade considerable focus has been placed on Africa as a lucrative choice for investment. Economic development gurus like Paul Collier, point to the increasing African growth and potential for high returns.
Despite being somewhat doubtful about the direction in which the continent is heading in terms of structural transformation, most economists seem certain that individuals looking to make a quick buck ought to have Africa on their radars - this was no different in 2014, and some of the trends seen this year might hold for 2015.
Growth and Investment
Africa as a whole grew at an average rate of about 5.3% between 2004 - 2014. In comparison, Latin America expanded at a slower rate of about 4% (understandably so, since most Latin American countries start from a higher base of development and therefore depreciate their potential rate of yearly growth).
Of course, the mere GDP growth indicator does not show the whole picture and many will rightly argue that taking into account a more objective measurement would focus on GDP per capita (measured in Purchasing Power Parity).
Indeed, this statistic paints a more depressing picture. According to The Guardian‘s research Africa’s wages only grew by about 1.8% in the past 20 years, while East Asia’s by 7.3%.
Nevertheless even if people’s income remains low rendering the demand for goods below optimal, the returns on investment in Africa are among the highest.
Over 50% of the world’s fastest growing economies, according to the data from IMF, are currently in Africa. These include: Angola, the Democratic Republic of Congo, Ethiopia, Ghana, Mozambique, Nigeria, Rwanda, Sierra Leone, Tanzania, Uganda and Zambia.
The easy assumption is that if a country is growing fast there is a lot of potential for investment. However, the risk factor is important in determining whether the cash-making potential is worth the associated dangers.
The Baseline Profitability Index (BPI) measures a combination of factors detrimental to safe investment. Taking into account economic growth, financial stability, physical security, corruption, expropriation by government, exploitation by local partners, capital controls and exchange rates, the BPI provides a detailed and more accurate answer to a question: ‘If I had a $1 million, where should I invest it?’.
The Golden Performer
According to the BPI statistics for 2014, Botswana emerges as the country with best returns on investment in the world, considering potential gains and the risk factor. For the second time in a row Botswana beat the famous “Tiger” nations of Hong Kong, Taiwan and Singapore, which are globally perceived as the easiest and safest money-making hubs.
A transparent and reliable rule of law, which caters for all individuals alike (a rare feature in the African context), along with persistent growth rates in the range of 8% for the past several years as well as encouraging economic indicators, such as net budget surplus, low public debt and high industrial production growth rate, give Botswana all the necessary attributes of a high-returns investment option with relatively low risks.
Still, many global indicators of investment opportunities rank Botswana lower than BPI does, however, it almost always emerges as the top African performer for capital returns.
In order to grasp the magnitude of the country’s potential it is enough to look at the financial data. Listed on the Botswana Stock Exchange (BSE) Sechaba Brewery Holdings fetched a return of 40.9% this year; this is remarkable, considering the country’s alcohol levy of 50%.
Other companies that also did very well include: Chobe Holdings whose yield reached 32.9%, Safalana Holding Company who scored a 30.2% increase while G4S, the security company, obtained a return of 21.3%. Its African average equaled only 12%.
Safalana Holdings, on the other hand, ranks as one of the best stocks to invest in in Africa, increasing by almost 100% on the Botswana Stock Exchange (measured in local currency). With a trouble-free election behind it, and not being reliant on oil like Angola, the odds look as bright for Botswana in 2015 as they were in 2014.
Rwanda, Ghana and Uganda emerge as the next best countries to invest in Africa, given their 2014 performance. Rwanda boasts an investor-friendly climate and exceptionally strong economic indicators as well as robust governance and clear long-term vision.
Indeed, despite scoring 162nd out of 180 countries on the 2013 World Press Freedom Index, Rwanda attracts significant international business and gives jaw-dropping results. On a mission to become Africa’s Singapore, President Paul Kagame supports policies that simplify regulations (it takes 1 day to start a business in Rwanda), improve infrastructure and energy and keep the balance of payments within the acceptance range.
Ghana and Uganda have also shown very promising results in terms of investment returns this year. There is already research from eight years ago by Yale University which showed that real return to capital in Ghana can be enormous, with new high-tech farming technology yielding returns of 200 - 350% (the standard returns being in the range of 30%).
After Ghana’s economic growth of 14.5% in 2011 the current 7.9% may seem a setback, but it is, nevertheless, the thirteenth highest in the world (according to the CIA Factbook). Holding all other factors constant, that extraordinary performance alone is enough to leave investors buzzing with excitement.
Uganda’s GDP growth is less impressive, at just over 5%, but its return on investment oscillates around 25%. The government provides numerous investment incentives, such as investment capital allowances on land, machinery, mining exploration, scientific research among others, and an export promotion incentive including a 10 year income tax break.
Looking toward 2015, Ghana’s currency the cedi will probably remain weak and its bet on oil is unlikely to improve its prospects. But it has stability going for it, and managed to avoid the Ebola pandemic that swept parts of West Africa. Uganda on the other hand has elections coming up in February 2016, and President Yoweri Museveni has become famous for risky populist decisions in the year to elections. However, he looks more entrenched than in the past, and the country will face fewer of the pre-election uncertainties of the past.
Rwanda has not worries. Its building boom continues, and the shifting international opinion against the rebels in eastern DR Congo, remnants of the group that committed the 1994 genocide in which nearly one million were killed, means the country will live through a better diplomatic climate than in the past.
There have always been many obstacles to investment in Africa. High degrees of political and financial uncertainty, corruption and unreliable infrastructure and energy sources deterred many venture capitalists from engaging in business on the continent.
This view, however, is changing. Yes, a high proportion of African countries are still touched by the above mentioned problems, but the opportunities they offer in terms of returns on investment may significantly outweigh the risks.
The year 2014 showed that the risks themselves are diminishing more rapidly than ever before. Mozambique and Burkina Faso, ranked 17th and 23rd on the BPI respectivelly, are also strong performers, beating the United States and Vietnam, the East Asian star performer for many years.
The newest Ernst & Young report (2014) titled “Africa Attractiveness Survey” listed certain areas of South Africa, Egypt, Morocco, Kenya and Nigeria as the most investor friendly, adding to the list of potential African money-makers.
The continent is full of opportunities. The best performers now compete for best investment destinations world wide. The quicker one abandons the prevailing mentality of Africa as a hostile business environment with limited possibilities, the more opulent the wallet may become. And almost overnight.
Stinking the neighbourhood
As Paul Collier said: “There are big opportunities in Africa but Africa is complicated. And, where investors are at, I think, is that they have a sense that they know there are opportunities there, they know they don’t know and they know they better find out.”
Overall, what the continent has to worry about are events that might “stink the neighbourhood”. Perhaps the most worrying spot is Nigeria, which is headed for an election in February where it is likely that there might not be a free vote in three states in the northeast plagued by violence from the hardline Islamist group Boko Haram.
The ruling People’s Democratic Party (PDP) of President Goodluck Jonathan also faces the highest likelihood since the country returned to civilian rule in 1999 to the opposition All Progressives Congress (APC).
Should something go bad with the election, or the PDP refuses to concede in the event that it loses, and Nigeria implodes, the image hit on the continent would be huge—and a lot of the remaining lustre would be washed off.