Foreign direct investment to Africa faces strong headwinds

Foreign direct investment (FDI) to Africa declined by 16% in 2020 to USD40 billion as the COVID-19 pandemic continued to have a persistent and multifaceted negative impact on cross-border investment globally and regionally, according to the World Investment Report 2021 published by the United Nations Conference on Trade & Development (UNCTAD) in June.

The FDI downturn in 2020 was particularly severe in resource-dependent economies due to low prices and dampened demand for energy commodities. Amid the slow roll-out of vaccines and the emergence of new COVID strains, significant downside risks persist for foreign investment to Africa. UNCTAD projects FDI in Africa to increase in 2021, but only marginally.

An expected rise in demand for commodities, new opportunities due to global value chain restructuring, the approval of key projects and the impending finalisation of the African Continental Free Trade Area (AfCFTA) agreement’s Sustainable Investment Protocol could lead to investment picking up greater momentum by 2022.

Africa is expected to see FDI rise, but only to a limited extent in 2021. Given a projected GDP growth rate in 2021 of 3.8%, which is lower than the projected global average, and a slow vaccine roll-out programme, investment recovery in Africa is likely to lag behind the rest of the world.

This is in contrast to trade, which is forecast to grow by 8.4% in parallel with global growth of 8%. In the long run, the speed and the scale of the FDI recovery will depend on the extent to which the economic and social impact of the pandemic can be contained on the continent, as well as the global economic situation and the pace of implementing key announced projects.

Despite significant risks related to foreign investment in 2021, some indicators point to a potential return of FDI to pre-COVID levels by 2022. Although the overall value of planned project finance and greenfield investments fell considerably, a few large deals announced in 2020 signal that foreign investors are engaged despite the unfavourable investment climate.

For example, MTN Group (South Africa) announced it would invest USD1.6 billion to strengthen its 4G network services in Nigeria. Eni also announced plans to construct a natural gas processing plant as part of a joint venture with a local firm in Angola, with the opening date scheduled for 2023. Major investment announcements were also made during the Third South Africa Investment Conference in November 2020. Google, for example, announced it would invest approximately USD140 million in a fibre-optic submarine cable that will provide high-speed internet connectivity across the country. However, the realisation of these sizeable investment projects is likely to be drawn out, due to the unfavourable investment, economic and epidemiological conditions.

The expected adoption of the Sustainable Investment Protocol of AfCFTA could also bolster FDI flows to and within Africa in the long term. The protocol is being negotiated as a Phase 2 issue of the agreement, along with competition policy and intellectual property rights. Finally, indications of an increase in commodity prices in 2021, especially for crude oil and natural gas, could also encourage investment flows to Africa. Oil prices are projected to increase by 21% on average and non-oil commodity prices by 13%.

Implementation of the AfCFTA is expected to significantly shape foreign investment into African special economic zones (SEZs). It is also likely to affect target industries and source countries of investment. According to a recent UNCTAD survey of SEZ stakeholders in Africa, FDI in SEZs is expected to increase by 15% from other members of AfCFTA and by 30% from outside Africa.

The survey revealed that the vast majority of African SEZs view the AfCFTA with optimism: over 85% of respondents expect FDI from Africa to increase or significantly increase, while almost the entirety of respondents (95%) expect investment from outside Africa to do so. In the context of enhanced regional integration, international investors are likely to increasingly pursue regional market-seeking investments, considering African SEZs as points of entry into the whole continental market, therefore scaling up FDI towards the most competitive zones.

According to SEZ stakeholders, the most promising industries for FDI flows in African SEZs post-AfCFTA implementation are agriculture and food, light manufacturing, textiles and electronics. More and more SEZs are also looking to attract investment in the automotive and construction sectors. In this regard, the implementation of the AfCFTA presents a window of opportunity for SEZs to pivot away from primary commodities traditionally driving African investment and trade flows, such as mining and hydrocarbons, while instead attracting and leveraging investment into higher value-added industries.

Cross-border M&As, which form a relatively small part of total inflows to Africa fell by 45% to USD3.2 billion in 2020. Although multinational enterprises (MNEs) from the US accounted for the highest value (USD2 billion) of M&As in Africa, transactions from developed economies fell considerably. In contrast, those from developing economies, especially China – at USD844 million compared with USD131 million in 2019 – rose.

Foreign investment in Africa directed towards sectors related to the Sustainable Development Goals (SDGs) fell considerably in nearly all sectors in 2020. Renewable energy was an outlier, with international project finance deals increasing by 28% to USD11 billion, from USD9.1 billion in 2019. This is consistent with global trends of investment in renewable energy, which has picked up even as the pandemic has constricted investment in other sectors.

Renewable energy projects were announced in many countries, including some with weak electricity infrastructure. For example, Schneider Electric Solar (France) announced a USD165 million solar energy project in Burkina Faso as a part of its plan to expand its presence in Sub-Saharan Africa. In contrast, greenfield investment projects fell significantly in food and agriculture (-78% to USD1.7 billion) as well as in health (-58% to USD267 million) and education (-45% to USD143 million), exacerbating investment gaps in human capital and the enhancement of value addition in natural resources.

In conclusion, FDI to Africa faces strong headwinds in the short term with significant downside risks. In the longer run, vaccine availability, domestic economic recovery policies and international financial support will be critical to the revival of FDI and the post-pandemic recovery.

Africa FDI by region

Central Africa was the only region in Africa to register an increase in FDI in 2020, with inflows of USD9.2 billion, as compared with USD8.9 billion in 2019. Increasing inflows in the Republic of the Congo – by 19% to USD4 billion – helped prevent a decline. Investment in the country was buoyed by flows in offshore oil fields after the completion of the Phase 2 licensing round of available oil blocks in 2019.

FDI also grew by 11% in both the Democratic Republic of Congo and Gabon, to USD1.6 billion and USD1.7 billion respectively. In the DRC, inflows in mining supported FDI, as prices for cobalt increased with rising demand for its use in smartphones and electric car batteries. Similarly, Gabon registered robust inflows in the oil industry, as the adoption of its new Petroleum Code in 2019 led to several new offshore production-sharing agreements, some of which materialised in 2020. Inflows were relatively stable in Chad, decreasing only 2% to USD558 million. FDI to the country remained overwhelmingly concentrated in natural resources.

FDI to East Africa dropped to USD6.5 billion, a 16% decline from 2019. Ethiopia, despite registering a 6% reduction in inflows to USD2.4 billion, accounted for more than one third of foreign investment to the subregion. Despite the pandemic, the Ethiopian economy still grew a substantial 6.1%. The manufacturing, agriculture and hospitality industries drew the highest shares of investment in 2020. The government initiated a programme to facilitate foreign investment in the manufacturing of personal protective equipment (PPE) and several Chinese firms have already started production.

FDI to Tanzania was largely unchanged at USD1 billion. FDI to Uganda decreased by 35% to USD823 million, compared with USD1.3 billion in 2019, as work on the Lake Albert oil project slowed due to the pandemic as well as disagreements between the government and oil companies on the development strategy. The approval of the USD3.5 billion East African Crude Oil Pipeline project, which will result in the construction of a 1,400 km pipeline from Uganda to the Tanga seaport in Tanzania, augurs well for investment to both countries.

FDI to Somalia increased by 4% to USD464 million. The country launched a new investment promotion strategy in 2020 that outlined 10 priority areas for foreign investment, including livestock, fisheries, energy and manufacturing.

FDI to Southern Africa decreased by 16% to USD4.3 billion, with Mozambique and South Africa accounting for most inflows. In Angola, repatriation of capital by MNEs in the oil and gas industry slowed, and the country registered net inflows of -USD1.9 billion, as compared with -USD4.1 billion in 2019. Inflows were steady in Mozambique, increasing by 6% to USD2.3 billion. The implementation of the USD20 billion investment led by Total (France) in the liquefied natural gas (LNG) project in the country slowed but continued, despite the pandemic and other challenges.

FDI to South Africa, in contrast, decreased by 39% to USD3.1 billion. South Africa has borne high human and economic costs due to the pandemic, and the country’s GDP is estimated to have dropped by 8% in 2020. Cross-border M&As in South Africa dipped significantly – by 52% to USD2.2 billion – but still accounted for a large part of total inflows. The largest investment realised in 2020 was PepsiCo’s acquisition of Pioneer Foods after the Competition Tribunal of South Africa approved the deal. The acquisition, announced in 2019, is worth USD1.7 billion, to be disbursed over several years.

FDI inflows to Sub-Saharan Africa decreased by 12% to USD30 billion, with investment growing in only a few countries. In West Africa, inflows to Nigeria increased slightly, from USD2.3 billion in 2019 to USD2.4 billion. The average price of crude oil dropped by 33% in 2020, and lower demand along with supply-side constraints caused by the slowdown in site development restricted FDI to the country in the first half of 2020.

Despite the pandemic, the long-term policy of FDI diversification appears to have had some impact. One important greenfield investment (USD66 million) in the non-oil economy was the construction of a manufacturing facility in the Lekki Free Trade Zone by Ariel Foods (Kenya). There was also a significant M&A deal in the same region, with China Communications Construction Company providing the initial USD221 million equity injection in Lekki Deep Sea Port, out of a planned total investment of USD629 million. Other transactions that contributed to FDI diversification, such as the investment by Multichoice Group (South Africa) in Betking, a provider of data hosting services, were relatively small.

Senegal was among the few economies on the continent to have received higher inflows in 2020, with a 39% increase to USD1.5 billion, due to investments in energy, in both the traditional oil and gas industry as well as renewables. Work on offshore oil and gas fields started for the first time in Senegal in 2020; with production expected to start in 2022, the government expects double-digit economic growth by 2023. The largest of these projects is the SNE Oil Field, which is being developed 100 km south of the capital, Dakar, by a consortium comprising Woodside Petroleum (Australia), Cairn Energy (United Kingdom), FAR (Australia) and Petrosen (Senegal).

Ghana registered a 52% decline in FDI in 2020, leaving inflows at USD1.9 billion, from USD3.9 billion in 2019. Stringent lockdown measures in the first half of the year contributed to the investment decline, with the country among the first in the continent to impose mobility restrictions. The main investing economies in 2020 were Australia, China, the Netherlands, South Africa and the UK. Almost half of the FDI to Ghana was in manufacturing, whereas the services and mining sectors accounted for 25 and 16% of foreign investment respectively.

Inflows increased in Mauritania by 10% to USD1 billion as a result of investments from China. FDI to Togo almost doubled to USD639 million, mainly due to investment from other West African countries. A key project was a USD100 million plant for building construction material announced by CimMetal Group (Burkina Faso), which is to start production in 2021. Another significant investment realised in 2020 was the new cement plant constructed by Dangote (Nigeria) for USD60 million.

FDI inflows to North Africa contracted by 25% to USD10 billion, down from USD14 billion in 2019, with major declines in most countries. Egypt remained the largest recipient in Africa, albeit with a significant reduction (-35%) to USD5.9 billion in 2020. Attempts to promote FDI diversification include the recent agreement to activate the USD16 billion Saudi–Egyptian investment fund that lists tourism, health, pharmaceuticals, infrastructure, digital technologies, financial services, education and food as priority sectors.
Despite this, FDI to the country is still directed largely to natural resources. The discovery of the offshore Zohr gas field in the Eastern Mediterranean region has reinforced this pattern. In 2020, the development of the Baltim South West offshore project, the Kattameya field project and the third phase of the Kamose-North Sinai project were announced as priorities, all with significant participation expected from foreign investors. One sizeable investment outside the gas industry was the establishment by Realme (China), a smartphone manufacturer, of its USD210 million regional sales and servicing facility in Cairo, to serve the entire African market.

Flows to Morocco remained almost unchanged at USD1.8 billion. Morocco’s FDI profile is relatively diversified, with an established presence of some major MNEs in manufacturing industries including automotive, aerospace and textiles. The long-term commitment of these firms to the country, coupled with steady inflows in mining of phosphate – Morocco holds the largest reserves – mitigated against a decrease in cross-border investment inflows despite the global crisis.

FDI to Algeria dropped by 19% to USD1.1 billion, with inflows mainly directed to the natural resources sector. In 2020, Algeria lifted restrictions that capped foreign ownership at 49%, except in the retail industry and in strategic sectors, including infrastructure and natural resource processing. Although this could encourage the diversification of FDI, the impact may appear only after foreign investment recovers more broadly.

FDI to the Sudan shrank by 13% to USD717 million. Easing of political tensions between the Sudan and the United States in 2020, added to other political developments conducive to investment, should pave the way for higher investment inflows in the medium term, after the negative impact of the pandemic recedes.

Inflows to Tunisia declined to USD652 million from USD845 million in 2019, a 23% fall. The manufacturing sector attracted the most FDI (54%), followed by energy (33%). The biggest impact of the pandemic on investment was in the services sector, where FDI declined by 44%, which left its share of total FDI flows in Tunisia at only 9% in 2020.

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