Africa: The Last Frontier

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Earlier this year, Foreign Affairs published a series of articles entitled “Where to Bet Now: Six Markets to Watch”. Pointing to such places as Mexico, Turkey, Indonesia, and South Korea, the articles identified those regions around the world that supposedly heralded the greatest potential for investment. What was striking about the feature, however, was not the markets it identified, but rather the conspicuous absence of an entire continent: Africa.

For many years—and with good reason—investors around the world have viewed the economies of sub-Saharan Africa with a skeptical eye. Political turmoil, rampant corruption, and economic underdevelopment have effectively combined to make the region a nightmare for individuals and corporations looking to generate high returns for investment. Those investors who sought to capitalize on the high potential of emerging markets looked instead to the more stable and less corrupt markets in Southeast Asia and South America.

But the once “hopeless continent”, as The Economist labeled it in 2000, is undergoing rapid growth, and with it, a transformative change in investment possibilities. In the past decade alone, foreign private capital in the continent has increased fivefold from $12 billion to $67 billion, with a comparable growth of inflow from public sector financing. West Africa, in particular, has spearheaded the growth underlying such a transformation. Recent political reform and socioeconomic developments in such countries as Nigeria and Ghana have attracted a swath of nations, corporations, and equity funds to try to capitalize on the resource-rich lands and consumer-driven markets, instituting a new age of investment to a region just entering the globalized world.

A Changing Economy

The history of investment in sub-Saharan Africa is grounded in uncertainty and short gains. As early as the 1970’s, the widespread discovery of commodities—oil, cocoa, gold, and minerals, to name a few—formally introduced the region’s economies to the commercial world. But what might have heralded the prospect of proper economic development eventually led to stagnancy and inactivity. Extractive, rather than investment-driven foreign input, coupled with internal conflict over allocation of profits, failed to boost the otherwise burgeoning economies. By the turn of the century, African income per capita had yet to surpass that of the mid 1970’s.

In the past decade, however, political and economic liberalization have reversed this trend of stagnancy. Nigeria, for example, decreased volatility by separating the international price of oil from the country’s budget. Mozambique changed the country’s foreign investment regulation to allow developments in the mining industry. Other initiatives, as well as access to better technologies, have increased income per capita on the continent by 40% in the past decade, with the stock markets in areas like Nigeria rising by 50% in the past year alone.

Alluring Prospects

If the past has shown a shaky, albeit, improving African economy, future metrics paint a picture of an emerging market conducive to rapid and substantial growth. At its core, the impetus to invest comprises two central factors: first, the commodities available in the region, and second, the growing demographic of laborers and consumers. While commodities have always played an important role in the region’s economies as an export good, their full potential has yet to be harnessed. According to some estimates, revenue from oil alone in the next several decades will yield trillions of dollars as a result of new discoveries, such as the Jubilee Oil field discovered off Ghana’s coast in 2007. Exports of other commodities, minerals included, could similarly increase fivefold as a result of finding yet untapped resources.

More important than the presence of commodities, however, is the population increase and the associated demand. While much of the population of Western Africa used to live in rural areas with little access to traditional financial or technological instruments needed for large-scale demand, current estimates point to a middle class in the Sub-Saharan continent as large as 350 million people. For investors, these metrics open up a wide range of industries: consumer goods, telecommunications, and financial services, which, according to McKinsey will generate five times as much revenue as the natural resource sector by the end of the decade, a trend which the African Venture Capital Association calls “the overriding investment theme in Africa.”

Indeed the quantitative prospects of investment mirror the qualitative analyses. In the future, middle-class consumption is projected to increase from $256 per year today to $827 billion by 2030, with a demand for oil alone rising 4% annually between 2012 and 2018—more than triple the current global average.

To be sure, these prospects of investment are not lost on investors. The salience of these aforementioned trends is particularly evident from a 2013 report from the Emerging Markets Private Equity Association. The prominence of Africa in the report was unmistakable: close to 60% of the limited partnerships interviewed expected returns of around 16%, a number that was second only to Southeast Asia. And whereas most regions are seeing LP’s move their expectations for return downward each year, sub-Saharan Africa was the only region where the number of LP’s expecting 16% returns actually increased last year, from 57% to 64%.   

The Fervor of Investment

Contrary to most expectations, the countries spearheading national investment are not Western countries with a history of providing aid and development, but rather eastern countries like China, and to a lesser extent, India. Much of China’s investment heretofore has focused on mineral and oil extraction to provide for its own domestic growth, but nonetheless represents a sizeable finance project that has far reaching effects. China alone has financed 34% of infrastructure projects in the past 10 years, and together with the BRIC countries, it accounts for more than a quarter of all investment on the continent. Just last year, China doubled its $20 billion commitment from several years earlier, and offered to pledge an additional $3 billion along with the International Finance Corporation to private equity firms across the world, most notably in Africa.

China’s active influence in Africa contrasts starkly with investment from the United States, for which Africa receives only 1% of total US foreign direct investment, more than half of which is concentrated in extractive industries. However, this is bound to change. The Overseas Private Investment Corporation, an investment arm of the US government has invested nearly close to $2 billion in the past 25 years, a number that is likely to increase with the African Growth and Opportunity Act (AGOA) passed several years ago to improve commercial relations between the US and Sub-Saharan Africa.

But the most prolific increase in investment has been the rise of private equity in the region. Within the past decade, a host of indigenous funds as well as funds of larger multinational banks have cropped up in Africa, the investments of which vary in size and scope. The Carlyle Group, for example, recently opened a fund in Nigeria that has partnered with domestic equity funds to invest $210 million in an agricultural business centered in Benin, while The Blackstone Group has partnered with a company named Kosmos to explore offshore oil drilling outside of Ghana. Morgan Stanley, meanwhile, recently introduced the Institutional Frontier Emerging Markets Portfolio, which has increased more than 25% this year alone through a combination of investments in international oil companies that service the African population and breweries out of Nigeria.

A third form of investment, into which many private equity firms are channeling their funds, comes in the form of foreign direct investment via multinational companies. Consumer goods producers like Unilever and Nestlé have always had a presence in Africa, but a growing population and a greater availability of transportation and access to different areas has made investment even more lucrative. Procter & Gamble, for example, increased its spending by $250 million last year to deliver baby products to West Africa. The agricultural commodities trader, Cargill, headquartered in Minnesota, is similarly beginning investment in Nigeria through a farming initiative to grow canvassa for the production of sweeteners.

The Results

Have all these investments paid off? One of the issues with the recent spurt of investment is the absence of data officially recognizing the predicted gains. The lack of demonstrated traction is due partially to the relative lack of investment compared to other regions of the world, and partially to the long time horizons of investment, many of which have yet to realize their gains for several years. In fact, one of the central reasons that investment has yet to soar is the lack of proven success, particularly in a region as volatile as sub-Saharan Africa.

Nonetheless, the data that do exist show nearly unmatched returns to capital. An article from McKinsey describes a growth rate of publicly traded companies in the manufacturing and services sector from 2002 to 2007 that was nearly 70% greater than that in Southeast Asia, and points to another study that indicates greater marginal return on capital for manufacturing in Africa than in any other region in the world. Other studies show average annualized returns of 11.2% over the past decade, though for specific firms it has been much higher: the Morgan Stanley portfolio gained 25.19% last year, while the Ghanaian stock exchange rose by 65%.

Too good to be true?

The available figures suggest that Africa is a sure-footed and high yielding region for investment. Yet it would be premature to declare Africa a profitable gamble in light of the many problems still remaining for the region, issues which undermine the otherwise auspicious economic growth. Many of the problems are remnants of ones that discouraged potential investors years ago, such as the risks and costs associated with political turmoil and domestic corruption. Nigeria, for example, despite receiving the most FDI on the continent, ranks 144 out of 177 countries on the Corruption Perception Index. There and in other countries in the region, a lack of transparency, obscure banking practices, and transaction costs in dealing with other governments all dissuade investment: 36% of investors cite political risk as a deterrent, and 17% cite challenging regulatory tax issues.

A much larger issue are the costs of infrastructure and most notably, power, which the finance minister of Nigeria calls “the single largest constraint on investment”. Tapping the demand of the population is difficult in places like Liberia, where 1% of the urban population has access to electricity, and even in more developed areas, where a lack of roads can force farmers to lose nearly 50% of their produce in attempts to bring it to market. While a variety of investors—countries, domestic governments, and private sector firms—have established extensive infrastructure initiatives, recent estimates suggest that the cost of utilities (power and water) and technology (internet and mobile phones) are twice as expensive in Africa as in other emerging markets.

Related to the lack of technological and infrastructural instruments is a lack of financial instruments. As Yale developmental economist Christopher Udry notes “people don’t have access to formal sector finance…insurance markets, credit markets, capital markets are just on the margins of most people’s lives”. Udry believes that the lack of these instruments, as well as the absence of credit reporting and well-defined property rights, preclude significant investment into the agricultural sector in particular. More broadly speaking, such financial instruments are prerequisites for any type of significant growth, even outside of the agricultural sector.

The Last Frontier

What, if any, conclusions can be reached? Looking forward, it does not appear that the problems discussed are in any way exacerbated by current trends. If anything, political stability is increasing, and economic growth forms a positive feedback cycle. With investment comes infrastructure and, in turn, more investment. Thus, while these issues persist, they do not pose a significant problem. One article in The Economist put it best: “Investors in Africa are buying a big-picture story of progress towards a formal and regulated economy with stable politics, the rule of law, independent central banks and stricter accounting rules.” How long it takes for this progress to occur and what degree of economic and political stability is needed is still unclear.

What is clear is the prospect of growth when that progress does come. A wealth of commodities, a rising middle class, and a more interconnected economy all pave the way for rapid growth in the infrastructure, agriculture, and manufacturing sectors. The ability of some investors to harness that potential has already been made clear, as has the wide scale recognition of prospective growth—having been ranked below Latin America, Brazil, India, and Eastern Europe in terms of market attractiveness in 2010, sub-Saharan Africa has now surpassed them all. It is only a matter of time before the rest of the world finds out.


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Benjamin Marrow

Benjamin Marrow is a senior editor of Yale Economic Review. Contact him at

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