THE trend of declining foreign direct investment (FDI) to Africa is set to exacerbate significantly in 2020 amid the dual shock of the coronavirus pandemic and low prices of commodities, especially oil.
FDI flows to the continent are forecast to contract between 25 percent and 40 percent based on gross domestic product (GDP) growth projections as well as a range of investment-specific factors, according to the UN Conference on Trade Development’s (UNCTAD’s) World Investment Report 2020.
‘Although all industries are set to be affected, several services industries including aviation, hospitality, tourism and leisure are hit hard, a trend likely to persist for some time in the future,’ said UNCTAD’s director of investment and enterprise, James Zhan.
Manufacturing industries intensive in global value chains are also strongly affected, a sign of concern for efforts to promote economic diversification and industrialization in Africa.
Overall, there is a strong downward trend in the first quarter of 2020 for announced greenfield investment projects, although the value of projects (-58 percent) has dropped more severely than their number (-23 percent).
Similarly, as of April 2020, the number of cross-border merger and acquisition (M&A) projects targeting Africa had declined 72 percent from the monthly average of 2019.
The trend of declining foreign direct investment (FDI) to Africa is set to exacerbate significantly in 2020 amid the dual shock of the coronavirus pandemic and low prices of commodities, especially oil.
Hope for recovery
However, two distinct factors offer hope for the recovery of investment flows to the continent in the medium to long run. The first is the higher value being assigned to ties to the continent by major global economies, promoting investment in infrastructure, resources, but also industrial development.
Investments from these countries, which have varying degrees of political backing, despite being affected by the joint impact of Covid-19 and low commodity prices to some degree, could be relatively more resilient.
The second is deepening regional integration due to the commencement of trade under the African Continental Free Trade Area (AfCFTA) after years of deliberation and the expected finalization of its investment protocol.
In the short term, curtailing the extent of the investment downturn and limiting the economic and human costs of the pandemic is of paramount importance.
Longer-term, diversifying investment flows to Africa and harnessing them for structural transformation remains a key objective. Both of these objectives will require a prudent, coordinated and timely response from countries on the continent.
FDI was already on the decline before the crisis
The Covid-19 crisis has arrived at a time when FDI was already in decline, with the continent having experienced a 10 percent drop in inflows in 2019 to $45bn.
The negative effects of tepid global and regional GDP growth and dampened demand for commodities inhibited flows to countries with both diversified and natural resource-oriented investment profiles alike, although a few countries received higher inflows from large new projects.
FDI inflows to North Africa decreased by 11 percent to $14bn, with reduced inflows in all countries except Egypt, which remained the largest FDI recipient in Africa in 2019, with inflows increasing by 11 percent to $9bn.
Sub-Saharan and Southern Africa
After a significant increase in 2018, FDI flows to sub-Saharan Africa decreased by 10 percent in 2019 to $32bn.
Southern Africa was the only sub-region to have received higher inflows in 2019 (22 percent increase to $4.4bn) but only due to the slowdown in net divestment from Angola.
FDI inflows to South Africa decreased by 15 percent to $4.6bn in 2019, despite key investments in mining, manufacturing (automobiles, consumer goods) and services (finance and banking).
FDI to West Africa decreased by 21 percent to $11bn in 2019. This was largely driven by the steep decline in investment in Nigeria due to new investment regulations for multinational enterprises in the oil and gas industry.
FDI flows to East Africa also decreased, by 9 percent to $7.8bn. Inflows to Ethiopia contracted by a fourth to $2.5bn caused to some degree by political tensions in parts of the country.
Similarly, inflows to Kenya dropped by 18 percent to $1.3bn despite several new projects in IT and healthcare.
Central Africa received $8.7bn in FDI, marking a decline of 7 percent. The key highlight in the sub-region was the decrease in flows to the Democratic Republic of the Congo (9 percent to $1.5 bn).
The Netherlands overtook France as the largest investor by stock
On the basis of FDI stock data through 2018, the Netherlands overtook France as the largest foreign investor in Africa.
The investment stock held by the United States and France in Africa declined by 15 percent and 5 percent respectively, owing to profit repatriation and divestment. Meanwhile, the investment stock of the United Kingdom and China increased by 10 percent each.
FDI outflows also fell in 2019, by nearly a third
FDI outflows from Africa decreased by 35 percent to $5.3bn. South Africa continued to be the largest outward investor despite the reduction in outflows from $4.1bn to $3.1bn.
Outflows from Togo increased significantly, from a mere $70 million to $700 million, a tenfold increase. In North Africa, Morocco also increased outward FDI, to about $1bn from $800 million in 2019.