/ 10 May 2013

Services overtake resources in powering Africa’s growth

Services Overtake Resources In Powering Africa's Growth

The growth has moved away from its dependence on natural resources towards greater diversification of economic activities.

Natural resources are now contributing only one third of Africa's growth. The services sector has taken the lead, with the bulk of the growth coming from financial and business services, followed by communications and then food and tobacco.

The perception that South Africa is the gateway to Africa for corporates is being given credence by recent research that shows the country was the biggest single investor in foreign direct investment (FDI) projects in Africa in 2012.

Emerging markets are driving Africa's growth: so, too, is intracontinental investment, which has been growing at a compound rate of 32.5% since 2007.

The biggest emerging market contributors to new FDI projects since 2007 are India, South Africa, the United Arab Emirates, China, Kenya, Nigeria, Saudi Arabia and South Korea.

The biggest beneficiary
Ernst & Young's 2013 Africa Attractiveness survey, the third conducted by the company, looked at greenfield and some substantial brownfield investments in Africa, excluding mergers and acquisitions or expansion by existing companies, to gauge growth on the continent.

It found that sub-Saharan Africa has been the biggest beneficiary. Investment in North Africa has remained largely stagnant, which Ernst & Young believes is largely due to recent political dynamics.

"FDI projects in sub-Saharan Africa have grown at a compound rate of 22% since 2007, with star performers being Ghana, Nigeria, Kenya, Tanzania, Zambia, Mozambique, Mauritius and South Africa," said Ajen Sita, Ernst & Young's Africa managing partner.

He said despite the global economic crisis, which did cause a slowdown in FDI, the size of the African economy has more than tripled since 2000. The region as a whole is expected to grow 4% during 2013 and 4.6% during 2014, he said.

Sita sees the investment in the continent as a positive trend indicating growing confidence and optimism among "Africans themselves" about the continent's potential.

United Nations Conference on Trade and Development data, which looks more broadly at net flows of FDI capital, found that Africa's FDI had increased almost fourfold since 2000. It also found that foreign companies with existing operations are reinvesting large portions of their local earnings.

Economic downturn affects Africa
Ernst & Young identified a notable trend away from investment in natural resources since 2003. Data now shows that 70.2% of greenfield FDI projects in Africa are in services, while 73.5% of capital is invested in manufacturing and infrastructure-related activities.

In 2003 the oil, gas and metals sectors together accounted for 28.5% of total FDI projects in Africa and 77% of FDI capital, but by 2012 they only accounted for 7.2% of projects and 40% of capital.

The research found that the economic downturn had affected Africa, with greenfield projects around the world down 15% year on year in 2012 and 12% down in Africa. However, Africa saw its proportional share of global greenfield projects growing from 3.5% in 2003 to 5.6% in 2012.

"Its also worth noting the 764 new greenfield projects this year is still higher than the 678 in 2010, and significantly higher than anything that preceded the peak of 2008," Sita said.

Based on the latest research, there is also "no doubt" that South Africa remains the gateway to Africa, said Sita. Some corporates are setting up regional offices in other African countries, but "this is not something South Africa should be concerned about", he said.

The Ernst & Young survey did find, however, that negative perceptions of the continent remain.

The least attractive investment destination in the world
Investors not operating in Africa who took part in the survey listed the continent as the least attractive investment destination in the world. Only 47% of those investors said they thought Africa's attractiveness would improve over the next few years.

However, investors already operating on the continent are very optimistic.

One of the solutions put forward by the study was to tackle some of the issues seen as stumbling blocks to business in Africa, namely the development of transport and logistics infrastructure, and the implementation of anti-bribery and corruption initiatives.

Bribery and corruption remain a concern despite the fact that many African countries fare well against other emerging market countries, according to Transparency South Africa research.