Despite current tightening of global financing conditions and rising protectionist agenda, the so-called “Trump Effect”, Africa remains a key investment destination for investors seeking high returns. Sub-Saharan Africa (SSA) has produced an average of 6% GDP growth in the past decade largely due to an increase in Foreign Direct Investment (FDI). However, growth in SSA has slowed down in the past 18 months with a 2016-reported figure at 1.5%, this is projected to recover to 2.5% in 2017. Increase in local consumption, infrastructure investment, tourism and improvements in commodity prices will strengthen growth beyond 2017. Other key drivers include government fiscal discipline in the key African economies of Nigeria, South Africa and Angola.
With all of its potential and the opportunities which Africa offers investors, the region is still regarded as a high-risk investment destination by foreign financial institutions and private investors. In fact some view Africa as a charity case rather than investment opportunity. There is no question that investing in Africa has its inherent risks but so is investing in Latin America, Asia, Middle-East, Europe and North America. Perhaps the risk tagged with Africa is over exaggerated due to perception.
Global FDI flows increased by 38% to $1.76 trillion and the developing economies saw their inflows reaching a new level at $765 billion. Developing Asia remains the highest recipient of FDI in this segment while Africa Latin America and the Caribbean faltered. Total FDI to Africa declined to $54 billion this represent 3% of global FDI. This inflow to Africa is considered small if one thinks of the vast opportunities that the region offers.
The perceived risks associated with Africa are security threats, political uncertainty, weak economic reforms, corruption, volatile currency and most importantly a repatriation of fund “exit strategy”. Whilst all of the above mentioned risks are genuine the conditions in SSA have significantly improved over the past decade. For example, Central Bank of Nigeria introduced the issue of CCI (Certificate of Capital Importation) by local banks. The certificate confirms inflow of capital either in the form of loan or equity. This provide assurance that there will be no impediment to any form of repatriation and also it will guarantee access to the official foreign exchange market for repatriations of capital and returns on investment (dividend, interest, and capital on divestments).
Kenya’s Foreign Investment Protection Act (FIPA) guarantees capital repatriation and remittance of dividends and interest to foreign investors, who are free to convert and repatriate profits including un-capitalized retained profits (proceeds of an investment after payment of the relevant taxes and the principal and interest associated with any loan).
Africa’s political landscape has been changing for some time now and many countries have had non-violence transition of power from one party to another. Also there is improving governance awareness in the region together with a strong commitment to fight against corruption. Tanzania and Nigeria are good examples of nations within SSA who are determined to tackle corruption. The process of eradicating corruption is a tough challenge and requires a gradual process to ensure it does not lead to violence and even war. By conducting interviews with key business leaders and young entrepreneurs in the region, our view is that there is a strong desire for change. Also, we believe that the associated risks are manageable from investment decision stand-point .
SSA is a high-risk and low competition region hence the investment returns will outweigh the risks attached to investing in Africa. SSA has a diverse market and offers many opportunities in the following asset classes; infrastructure, consumer goods, banking –wealth management and, natural resources. Most SSA countries are plagued with deficiencies in power supply, healthcare, transportation and housing. Whilst these are seen as challenges to trade & investment, it also presents opportunities to those companies and investors looking for long-term growth. The African middle class is growing and demand for consumer goods is on the upward trend. According to World Population Review, Nigeria is estimated to have over 178.5 million people although United Nations projections have placed the population as high as 186 million. As at 31 March 2017, total GSM (Global System for Mobile Communication) subscribers in Nigeria was 152 million. This represent an 82% distribution penetration.
To support foreign investors in understanding the associated risks and to assess variable opportunities across the continent, there are a number of measures that can be undertaken by financial institutions as well as foreign private investors to mitigate risks particularly corruption and repatriation of funds. First and foremost investors need to conduct a thorough due diligence investigation into any investment target and secondly, to adopt a Partnership & Alliance strategic model. By working with established reputable local firms, risks can be shared and mitigated. Finally companies have to be agile in order to respond and adapt quickly to changes.
If your organisation is thinking of taping into the Africa market, Gradient Consulting can assist in navigating through the complex and challenging terrain. We have established a strong network with business leaders across SSA. We will connect you with the right people and assist in the due diligence process.
The author is an experienced offshore finance professional, founder – Gradient Consulting Africa and Vice President Belgium-Luxembourg-Nigeria Chamber Of Commerce.
 World Bank Report April, 2017-05-04
 World Investment Report 2016, UNCTAD
 World Population Review; http://worldpopulationreview.com/countries/nigeria-population/