Africa’s most attractive investment: Egypt top of the pops, SA slides into third

Every year RMB releases the Investment Attractiveness Rankings report, which lists the African countries from top to bottom. It’s unpacks criteria which is used to determine which nation is the most attractive to invest in. This year saw Egypt hold on to top spot, while a surprise saw Morocco leapfrog South Africa into second, with the southernmost country in third. Having lead the pack two years ago, SA is still seen as the springboard for investment into the continent. Alec Hogg spoke to RMB’s Celeste Fauconnier.

This special podcast is brought to you by RMB. Celeste Fauconnier joins us now with a look at the annual most attractive African countries to invest in. Well timed, given that Africa’s coming to South Africa for the World Economic Forum.

It wasn’t done on purpose, but this is usually the time that we publish the Report, so we are very excited for it to be hosted in South Africa this year. Being one of the top-ranked countries in the RMB Investment Attractiveness Rankings, we are very proud of the country being the springboard for investment into Africa.

Why do you do this ranking in the first place?

The main purpose is to give our clients easily digestible information on economic activity, where to invest, and how easy it is to do business on the continent. It brings together a significant amount of data and analysis to make investment decisions easier. Once investors have an idea of the most attractive investment destinations, they can also dig a bit deeper into sector opportunities.

Are your clients getting more or less excited about Africa?

I think it’s a bit of a mixed bag at the moment. Over the past few years we’ve seen African growth rates struggling. Growth is, however, not the only indicator that our clients look at. Growth rates are associated with commodity prices. We have not seen commodity prices recover to that super-cycle that we saw in 2011. We do, however, believe that commodity prices will improve moderately over the next few years, which I think should excite investors. We also need to highlight that there are some anomalies on the continent that have been seeing strong growth rates regardless of commodity prices. This is highlighted in our publication’s overview.

Top of the pops again is Egypt. It’s held onto that position quite comfortably.

Yes. It’s the third year at the top of our ranking. For the past three years, Egypt has made significant strides in changing their business environment, improving external investment into the market and growing their own industries. We have seen signed agreements with the IMF. They also took the difficult decision a few years ago to devalue their currency to be more reflective of what’s happening in the market. Even though these were tough decisions, in the long run it will help with structural changes in the economy. We are also expecting an approximate 5.3% growth rate for the next five years. This is well above the 4% average expected for the rest of Africa.

What is Egypt doing that other African countries can learn from?

They have gone through significant political turmoil, specifically the Arab Spring in 2011.  The government made changes to address the unhappiness of the youth by initiating programmes to help with youth unemployment. They have also changed some of their trade policies to make it easier for countries to trade with Egypt. We have also seen that the government has become pro-business by industrialising their own economy through the implementation of pro-business reforms.

South Africa of course is looking for answers. We think that we’ve got something here, an approach of humility. A learning and listening government has now been installed, but we’ve slipped down one more position to number three, overtaken by Morocco.

When we slipped two years back from the coveted number one spot, it wasn’t a massive surprise because we were in the middle of a political storm. Our government was changing between Jacob Zuma and President Cyril Ramaphosa and investor sentiment was declining. With that, we’ve seen a decline in the overall growth rates of the economy.

Because we are so globally exposed, we’ve been feeling the pinch of a downturn in global growth, which unfortunately has also stymied the levels of growth. We have also seen a lack of significant structural reforms.

I need to highlight though that South Africa remains a hotspot for portfolio investment. It is definitely still the most liquid market in Africa. We’ve spoken to many international clients and South Africa is still the springboard for investment into Africa. But we have to see structural reforms being implemented, specifically at our state-owned enterprises. These changes can easily put us back into the number one spot over the next few years.

But for the moment we’re number three. What’s going on in Morocco that it managed to get past South Africa?

Morocco’s economy was not as hard hit by the Arab Spring as other North African countries. They have also implemented business environment reforms. These include simplifying the process of registering a business, improved electronic submissions, and processing of exports. They’ve also improved trade with other countries and customs services operate more efficiently now. All of these small changes have seen Morocco displacing South Africa. We have used indicators from all the overall rankings globally from The World Economic Forum, and The Global Competitiveness Report, to The World Bank Doing Business report.

I guess the next issue for South Africa would be to not to slip another position. How close is number four – Kenya and number five – Rwanda?

From a scoring perspective I think South Africa is definitely still safe in the number three spot, if nothing goes wrong before we publish the Report again for 2021. We are still seen as one of the top five investment destinations on the continent.

I do not think that Kenya and Rwanda can make significant enough changes in a year’s time to be able to displace South Africa. Kenya and Rwanda are currently growing at about 5% and 7% respectively. Only if we see stronger growth in these countries and less growth in South Africa, could we see them overtake our country.

Before we move on to the other parts of the survey, from a South African point of view, has the country bottomed from the analysis that you’ve done? In other words, is it now likely to be challenging for number two and number one again? Do we have to worry about the threat from number four and five?

Let’s go back to the methodology that we use. We look at economic activity – specifically growth rates and market size in billion-dollar terms. Growth rates and business sentiment negatively affected South Africa and caused us to slip. We are seeing investors taking into consideration the potential of a downgrade in the next year, and the surveys used reflect the need to fix our state-owned enterprises in the near future. But I don’t think there will be a significant shift unless there is an unpleasant surprise that hits our market. That’s why we would probably maintain our number three spot.

Looking at the top 10 – Ghana number six, Cote d’Ivoire number seven, Nigeria number eight, Ethiopia number nine and Tunisia number 10. The real action seems to be just outside the top 10 with the big improvement by Senegal.

Not just Senegal. We’ve seen four other countries that have seen significant changes in their rankings such as: Senegal, Mozambique, Guinea and Djibouti. Senegal has seen strong improvement in their growth rates. In fact, it’s one of the strongest growth drivers of the West African region at the moment. Changes in their business environment have resulted in investment flowing into that market.

These markets (specifically Senegal) are very resource rich with large populations and significant domestic demand, which make them quite attractive investment destinations. The four countries that I’ve mentioned, are however still very tricky business environments. They aren’t very well rated by the rating agencies from a sovereign risk perspective.

To go back to the improvement that we have seen in Mozambique for instance: the country has been struggling over the past few years, specifically since 2016, with a debt crisis, but the government will restructure that debt and they are still in talks with the key bondholders. It seems like an agreement will be signed, which means that restructuring debt structures will bring light at the end of the tunnel. The prospects of the oil and gas industry are so big that we cannot ignore Mozambique over the long term. We are potentially going to see double digit growth rates in 2023 and 2024 when these resources come online.

Looking at another smaller country in East Africa that we hardly ever speak about – Djibouti: it has seen the largest move in our rankings, jumping 10 positions. Similarly to what we’ve seen happening in Rwanda over the past few years, Djibouti is finally catching up and we are seeing reforms in areas of new business and easier access to credit for small to medium enterprises. There is a marked improvement in sentiment and more investments that will feed through into growth rates.

When you have a look at the table, the countries that you would probably not be wanting to invest in are headed by Equatorial Guinea, then Somalia, Burundi. A new entrant to the bottom four is Liberia, which has really plummeted in the past year. It is the worst of the performers and the country that needs to assess its situation mostly when talking about foreign investment. What’s been going on there to cause this chaos?

These four countries’ current status comes as no surprise due to the fractious political environment against a disconcerting political backdrop. These countries cannot escape the negativity and are in dire need of quick reforms.

Countries like Liberia (because it’s so small) has a slow growth with a very low GDP and high inflation – all of which does not help its government. The very same can be said about countries like Burundi, Somalia and Equatorial Guinea. We can’t see this changing anytime soon. Equatorial Guinea is a country that has one of the largest GDP per capita of more than US$10,000 annually, but it is obviously concentrated around the oil and gas industry. It’s extremely unequal in these four specific markets.

Just to close off with Gabon. It continues to slide like Equatorial Guinea in a similar part of the continent. Although richly endowed it doesn’t seem to be getting things right.

Gabon actually featured in one of our previous documents as being an up-and-coming retail sector. But unfortunately, we haven’t seen that coming to fruition. The operating environment has declined significantly since 2015, and as I’ve mentioned, it doesn’t help that it’s a small market.

We’ve also seen significant volatility in the oil price, which has had an impact on countries like Nigeria, Angola and Gabon that are still heavily dependent on the revenues from oil. Once you see oil prices going down, smaller markets like Gabon will immediately feel the pinch. There’s a massive risk of social unrest, so unfortunately things are not looking good for those small economies at the moment.

When a multinational is looking at Africa, would it be considering regions? It was very interesting in your report to see how divergent the prospects are for the various regions – East Africa on top and Southern Africa unfortunately being at the bottom.

When we look at our rankings, we usually use the latest foreign direct investment stats, as well as the UN stats. This shows where investment is physically flowing in from a cash perspective. It was usually highly concentrated in Southern and West Africa because of the ease of doing business and the amount of resources respectively. But now we have started seeing more of an equal footing.

Four of the five regions in Africa are now almost on the same footing when it comes to the share of the continent’s foreign direct investment projects. Unfortunately, Central Africa is still a hard investment environment because of the political instability. East Africa is going to be the growth driver of Africa in the next few years and that is why we see investment going into that market – specifically because of the discovery of oil and gas across the region. We’ve already started seeing significant infrastructure investment in this industry. Investment has been heading into more alternative sectors because of a commodity price downturn in the past few years. Investors are looking for alternative areas of investment like information, communication technology and manufacturing. In East Africa, these are two areas that investors have paid a lot of attention to.

China is the number one investor into Africa, followed by the United States. Interesting to see number three is India.

Many investors believe that China is the largest investor into Africa and while from a dollar perspective that is true, when looking at projects, China is number three. The private sector in India has been looking for alternative sectors to invest in. India cannot meet all of its demands with their own industries, so they have to look elsewhere. India and Africa have traditionally had good relations, specifically East Africa. We have seen investment into specific service sectors like healthcare and education. China is still mostly operating in the resources sector.

Is it concerning to your client base that South Africa has fallen?

Absolutely. The reasons are twofold: we’ve been having our own economic issues and the balance sheets of many companies have felt the pinch because of this. What we’ve seen is that because the African markets have not been growing significantly over the past four years, some of our corporates have actually been looking elsewhere.

South America and the Eastern European economies have been receiving attention from South Africa. South African corporates have traditionally shown interest in countries like Botswana, Namibia, Zambia and Mozambique. Botswana and Namibia are still experiencing strong activity. In Zambia and Mozambique, corporates are now thinking twice before investing into these markets. We advise clients that these current problems are cyclical, and when governments are getting involved in business through stringent regulations, we suggest that investors maintain their positions in these markets and see these difficult cycles through.

Is there any improvement in Zimbabwe from the research you’ve been doing?

Yes. We have seen improvements reflected in the political stability component of our methodology. We are positive that we will see changes within the market over the next few years, but unfortunately these changes aren’t reflected in the numbers yet.

In our rankings, we’ve seen Zimbabwe slipping from Number 34 to number 37, but the key reason is the liquidity in the market. We have seen significant difficulties with the currency in that they are going to print more money, which in turn has been affecting inflation. But the changes in the political stability rankings will eventually filter through. If the government makes changes to the indigenisation laws, we will start seeing reinvestment into refurbishing of infrastructure and as a result, a very quick improvement in the rankings.

A little bit like South Africa, the springboard potential does exist.

Absolutely.

Celeste Fauconnier is with RMB and this special Podcast was brought to you by RMB.