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Investment: Post-pandemic prospects for Africa

By Alain Faujas
Posted on Thursday, 24 June 2021 19:19

An aerial view of roads and the construction site of The Iconic tower skyscraper, which is being built by China State Construction Engineering Corp (CSCEC) in the New Administrative Capital (NAC) east of Cairo is pictured through the window of a plane, Egypt 10 April 2021. REUTERS/Amr Abdallah Dalsh

Foreign investment in Africa plummeted in 2020, however, certain sectors – such as energy and mining - and a certain number of countries managed to weather the storm.

2020 was a particularly mediocre year for foreign investment in Africa due to the pandemic and the fall in commodity prices.

However, with a drop of 16% ($40bn in 2020 against $47bn in 2019), Africa does not seem to be doing as badly as Europe (-80%) or North America (-40%), according to the World Investment Report 2021 published on 21 June by the United Nations Conference on Trade and Development (UNCTAD).

Renewable energy resists

“Yes, Africa is doing less badly than other continents, but we need to look at this in more detail,” says Alexandre Dabou, a specialist in the investment and enterprise division of UNCTAD. “The sharp drop in developed countries is due to the fall in transit flows or inter-company loans. In Africa, the drop is in new projects and also in mergers and acquisitions.”

Announcements of new projects dropped by 62% ($22bn in 2020 compared to $77bn in 2019). Cross-border mergers and acquisitions fell by 45% ($3.2bn compared to $5.8bn).

The good news is that renewable energy investment projects are an exception to this general decline, as they have increased by 28% to $11bn, compared to $9.1bn in 2019.

African progress

Although North Africa was the most hard-hit region (-25%), Egypt remained the continent’s leading destination for foreign investment, while investment in Morocco also grew in 2020 (+3%).

Global recovery will generate an increase in demand for metals and energy, of which Africa is a producer, and therefore investments in these sectors.

After the north in terms of the downturn is West Africa (-18%), with an exception of countries like Senegal – which had a 39% rise due to its energy policies, particularly in solar energy; Guinea – where the flow of investment in the mining sector has increased sixfold; and to a lesser extent, Nigeria (+3%).

It was also energy projects that enabled Central Africa – despite its poor macroeconomic situation – to benefit from an increase in foreign investment (+3.3%).

East Africa (-16%) and Southern Africa (-12%) were also hit hard.

Weak stimulus budgets

The top five recipients of foreign investment on the continent in 2020 were Egypt, the Republic of Congo, South Africa, Ethiopia and Nigeria. The five countries that saw the biggest drop in investment in 2020 were Malawi (-88%), Guinea Bissau (-72%), Swaziland (-69%), Rwanda (-62%) and Mali (-52%).

The five countries that saw the most growth were Sao Tome (+95%), Togo (+85%), Central African Republic (+36%), Republic of Congo (+19%) and Equatorial Guinea (+17%).

According to the UNCTAD report, the prospects for recovery seem modest, with an average estimate rise in of 5% in 2021. “Investment in Africa is not going to return quickly to its previous growth,” says Dabou. “Many [African] countries have structural weaknesses that are holding back investors, and they have little fiscal space to revive their economies.”

AfCFTA, training… Reasons to keep the faith

There are several factors that give hope for recovery. “Global recovery will generate an increase in demand for metals and energy, of which Africa is a producer, and therefore investments in these sectors,” says the analyst, who also expects global value chains to be reconfigured and “take on a more regional dimension”.

In this sense, “the adoption of the investment protocol of the African Continental Free Trade Area (AfCFTA) agreement will give a boost to intercontinental investments,” says Dabou.

And the trillions of dollars that rich countries will be injecting to boost their economies will inevitably have a knock-on effect on Africa. It could thus benefit from an increase in industrial investment by groups tempted by the continent’s proximity to Europe or Asia.

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