Image Credit: African Market, Francisco Anzola

 

In 2020 Africa faces its first recession in 25 years. Among the indicators pointing in this direction are remittances, which we touched upon last month although the early signs are better than widely feared, and foreign direct investment (FDI) intentions.

 

UNCTAD’s World Investment Report 2020, its thirtieth edition, warns that the Covid-19 virus will be negative for FDI but also notes that the trend for Africa last year was already downwards. Total inflows declined by 10.3 per cent to US$45.4bn in 2019. Egypt was no 1 in the table and enjoyed a healthy increase to US$9.0bn, which could reflect the popularity of President Al-Sisi’s government with Gulf states and infrastructure operators. The next four (South Africa, Congo-Brazzaville, Nigeria and Ethiopia) saw inflows of between US$2.5bn and US$4.6bn and sizeable falls on the previous year.

 

Another data series from UNCTAD could well point to the direction of FDI. It put greenfield FDI projects in Africa at US$76.6bn in 2019. A good number will have been deferred or canceled due to the virus. That said, the leading industries were electricity, gas and steam (US$10.2bn), and construction (US$9.6bn). Mining and quarrying projects were valued in the report at just US$2.6bn.

Extraction industries are not abandoning exploration and production in developing countries but they have become more choosy on the return of global recession. France’s Total announced last month that it has secured US$15bn financing to develop and process LNG in Mozambique. This is an impressive achievement in the current economic climate and in the light of some localized political instability. It goes ahead, however, as a transformative mega-project with support from the US and Japanese governments. Frontier prospects with greater risk are not so lucky, and there are serious doubts whether the oil will ever flow in Uganda or Kenya.

 

We can argue about the impact of climate change on the plans of Big Oil and whether the struggle against it has been enhanced by the virus. Yet some niche industries in Africa appear vulnerable in the light of both (the cause and the virus). Kenyan floriculture does not sit comfortably with a focus on the carbon footprint, let alone water levels in Lake Naivasha. The first point could equally be made of the Ivorian green beans available in European supermarkets.

 

The virus has developed one potential economic benefit for manufacturers in developing countries. Users of smartphones and many more consumers will have noted the negative consequences of depending on a single supply chain for spare parts and intermediates. A large UK-based vehicle manufacturer resorted to flying employees out to China to fill their suitcases with spares.  Several multinationals will have learnt the appropriate lesson. The question is whether they will invest in new capacity in Ethiopia and Senegal, for example, rather than Vietnam or Bangladesh. If they attach importance to the World Bank’s Doing Business series, they may look away from the African alternatives. In the latest volume (2020, released in October), the continent has one country in the top twenty (Mauritius) and just one more in the top fifty (Rwanda). South Africa has dropped quickly down the table in recent years.

 

Life under Covid-19 has raised the profile of technology in Africa. Balloons in Kenya and drones in Ghana have improved access to outlying areas for beaming 4G data services and delivering tests for COVID to government laboratories respectively. Digital has soared during lockdowns, with the governor of the Bank of Ghana saying in May that electronic payments had increased by 81 per cent year-on-year in Q1 2020. Fintech (broadly defined) is one promising area for FDI in Africa, particularly for economies of scale in the large domestic markets such as Nigeria.

The virus has not been kind to globalization and rising ‘populism’ has not been helpful either.

 

UNCTAD argues that, since traditional export-oriented FDI is in decline, African governments should develop and encourage investments that are built around domestic or regional demand. In many cases the individual domestic markets are too small so we trust that the African Continental Free Trade Area (AfCFTA) meets the high expectations of it once it starts operations formally on 01 January, 2021.

 

Jean Puri

19 August 2020