Confidence in the African economy remains positive, finds FTI

31 May 2016 6 min. read
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Executives globally are generally confident about the African economy, with particularly the east garnering favour. However, much still needs to be done to reduce political instability and end systematic corruption in a number of the continent’s countries. According to new report, four policy levers are instrumental to propelling the region to more prosperity: the continent’s local business leaders, government support, infrastructure investment and ending corruption.

The continent of Africa offers a large range of opportunities for global and local businesses. It has a large, and young, population base, is rich in minerals and other commodities, and is ripe for economic development. The diversity of the continent, and a history that saw many of its regions scared by bloody post-colonial civil wars, economic and cultural segregation and, in a number of countries, rife corruption, means that supporting businesses that, on the one side support prosperity, and on the other side, generate reasonable returns, has been hard to achieve.

In a new survey, conducted by FTI Consulting, the authors explore the investment sentiments in the region and look into the key factors inhibiting growth of enterprises. The study involved the views of nearly 100 executives from across global regions and was delivered ahead of the World Economic Forum’s 2016 African summit, which took place earlier this month in Kigali, Rwanda.

Views on business opportunities in Africa

The research finds that overall, while the international business community stills displays appetite for exploring business opportunities in Africa, perceptions of risks have grown by 10% in one year, and the essentiality of Africa in strategic growth has declined by one third.

According to the respondents, a number of trends are holding back investment from the international community in the region. Top of the list, as selected by 61% of respondents, stands political instability, reflecting the continued turmoil caused by warring factions, coups, rigged elections and political infighting on the continent. Second on the list is red tape and bureaucracy, cited by 57% of respondents.

Many of the countries in Africa are on the bottom end of lists portraying perceived corruption (e.g. the ‘Corruption Perceptions Index’ by Transparency International), with corruption running from the top political class of society to among some citizens, whether they want to be corrupt or must play ball to get by. The result is that, to operate a business, business may sometimes come into conflict bribery and corruption regulations, a problem cited by 56% of respondents. Security and terrorist threats were cited by 56% of respondents.

Barriers to investment in Africa

Regional sentiment
Across the board, 12% of respondents are slightly positive about the general outlook for investment activity In the continent (74%), with 12% very positive. Eastern Africa leads the pack, with 50% of respondents very positive on the region’s outlook and 35% slightly positively. West Africa follows, with 26% reporting a very positive sentiment, followed by 50% that were slightly positive. North Africa and Central Africa have the lowest level of positive sentiment, reflecting recent political turmoil and the effect of regional wars.

Positive sentiment in Africa economy

In terms of the countries deemed to represent the best base for operations in five years’ time, South Africa dominates as a regional headquarters location (75%). According to a recent study by McKinsey, South Africa fares as the strongest economy on the African continent, yet at the same time the country faces a number of major challenges, including a staggering unemployment rate and a daunting capital investment agenda needed to maintain the country’s per capita income level. South Africa is followed by Nigeria (62%) and Kenya (57%), with Rwanda ranking 4th.

Encouraging investment
The opinion leaders were also asked about the kinds of drivers that would encourage investment activity on the African continent. The two top rated items relate to political conditions, with 93% of respondents citing the importance of government support for investment projects, while 87% said that the availability of public-private partnership (PPP) opportunities are significant. The respondents also cited that market accessibility, size & growth prospects were important considerations, as well as a stable regulatory & political environment. Factors of least interest to respondents were the quality of life, cited by 61%; standard of living, cited by 59%; R&D infrastructure, cited by 58%; and the cost of living, cited by 49%.

investment encouragement

Effective leadership
In terms of those best suited to effectively encourage the right sort of investment into Africa to help boost the economy and benefit to society, two thirds of respondents said that African business leaders are key, followed by international investors, at 56% of responses. International business leaders come in in third spot, cited as important by 54% of respondents. The groups with the least influence on investment include NGOs, at 12%, international law and regulations, also at 12% and international politicians, at 16%. On the matter, and concurrent with previous results of the study, respondents have reiterated that businesses need to become more effective communicators and that African governments should be more realistic about what investments can achieve.

Key groups for attracting investment into Africa

Focus areas
In terms of the kinds of activities and investments deemed important for leaders of African countries to concentrate on, infrastructure tops the list – as cited by 87% of respondents. Ending systematic corruption, and improving transparency, comes in second, as cited by 79% of respondents. Increasing employment for the population ranks third, followed by increasing inward FDI. Increasing natural resource exports (oil or mining) and other (not specified), were cited last, at 12% and 10% respectively. 

Tops African investment drivers

The report reflects that “there is an emerging trust in its business community, with two thirds of respondents identifying African business leaders as the most effective at encouraging the right sort of investments into Africa to help boost the economy and benefit to society. Concurrent with our 2015 results, respondents have reiterated that businesses need to become more effective communicators and that African governments should be more realistic about what investments can achieve.”

A report released earlier this year by Economist Intelligence Unit showed that across the African continent, the use of islamic finances is set to take off. On the back of a growing Muslim population, demand for Islamic products and services on the continent is expected to boom in the coming years. In another analysis on the outlook of Africa’s economy, experts from EY drafted five priorities of action that according to them can enable Africa to sustain its growth trajectory.