Africa: Still the ‘hopeless continent’ for investment?

As Africa shows signs of economic growth, a violent mining strike in South Africa has sent shockwaves through the continent’s strongest economy, begging once again the perennial question: will volatile Africa ever be a smart choice for international business relationships and investors, especially those from Qatar and the GCC?  By Mark Van Dijk.

CRY, THE BELOVED COUNTRY

It started as a national tragedy, and quickly mutated into an international public relations nightmare for South Africa. In mid-August 2012, a workers’ strike at a platinum mine near Marikana in the country’s northwest heartland had turned violent, leaving approximately 44 people dead including 38 miners, most of whom were shot in the back by armed police officers.

Reporting on the country’s worst such incident since 1960, in late October, London-based news magazine The Economist ran a damning cover story titled Cry, The Beloved Country, echoing the title of a famous and painful 1948 book by Alan Paton regarding South Africa’s path to apartheid.

The sub-heading, South Africa’s Sad Decline gave a taste of what was inside the article. “In the past decade Africa to the north of the Limpopo river has been growing at an annual average of six percent, whereas South Africa’s rate for the past few years has slowed to barely two percent,” reported The Economist. “Foreign investment is drying up. The unemployment rate, officially 25 percent, is probably nearer 40 percent; half of South Africans under 24 looking for work have none. Of those who have jobs, a third earn less than US$2 (QR7) a day. Inequality has grown since apartheid, and the gap between rich and poor is now among the world’s largest.”

In South Africa, the reaction to Marikana was mixed. Instead of leaping to their country’s defence, many locals admitted that, yes, all was indeed not well. In an opinion piece in South Africa’s Business Day, the opposition party’s leader in parliament, Lindiwe Mazibuko, wrote: “We live in an interconnected world; one of opportunities and risks. It was Qatar based Al Jazeera which provided the first pictures of South African police crouching behind armoured vehicles firing upon mineworkers in Marikana in August. Why does this matter? Qatar is the wealthiest state in the world per capita and the emirate has a great deal of footloose capital waiting to be invested elsewhere in the world. Will an investor sitting in Doha look towards our state as an investment destination, or rather to Botswana, Mauritius or Angola?”

South Africa’s ruling party, the African National Congress, issued an equally strong response. Presidential spokesman Mac Maharaj issued a statement saying: “In direct contrast to The Economist article, a strong vote of confidence was given in the last week by the international business community with the country’s inclusion in Citigroup’s World Government Bond Index…Our success is also visible when benchmarking the country against other emerging market economies such as the BRICs and Next 11 countries.”

Thanks to its natural resources, tourism, agriculture and a comparatively well educated population and solid infrascruture, South Africa is by some distance the strongest and most stable African economy. It is, after all, often referred to as the capital ‘S’ in BRICS – an association of leading emerging economies which also includes global heavyweights Brazil, Russia, India and China. As The Economist itself pointed out in its piece: “At the turn of the millennium [South Africa] accounted for 40 percent of the total gross domestic product of the 48 countries south of the Sahara, whereas Nigeria, three times more populous, lurched along in second place with around 14 percent. The remainder, in raw economic terms, barely seemed to count.”

But post-Marikana, the damage had been done and it seemed to many analysts that the swathed socio-economic and political problems South Africa has been facing are starting to come to a head. And while Marikana and The Economist cover story remained a South African scandal, the implications echoed across the continent, long troubled by political strife, violence, disease, corruption and exploitation.

And, the thinking went, if this sort of decline could happen to South Africa, what hope for the rest of sub-Saharan Africa?

ARAB INVESTMENT

It is only natural at a time like this that Africans would look nervously towards a wealthy state such as Qatar. In April, Hussain Al Abdulla, senior executive of the Qatari sovereign wealth fund, revealed that the fund would invest at least US$30 billion (QR109 billion) in 2012 – with a key focus on commodities.

Abdulla added that the fund was looking especially for opportunities for direct investment in Africa, despite the inherent difficulties. “To invest large amounts in Africa, we need a mechanism,” he said. “No-one yet has the knowhow to invest large amounts in Africa. This is not easy, but we are looking for direct investment.”

If South Africa’s economy is still considered volatile, what hope does the rest of Africa have?

In September 2012, Qatar confirmed that it would invest US$18 billion (QR66 billion) in Egypt over the next five years. Qatar had already entered Tunisia, acquiring a 75 percent of the telephone operator Tunisiana, and has made significant investments in Algeria, Mauritania, and Morocco.

However, investments in sub-Saharan Africa – specifically in central and southern Africa – have not been quite as plentiful. In November 2012 a group of investors led by Qatar’s sovereign wealth fund and by Polish billionaire Jan Kulczyk were reported to be bankrolling a US$700 million (QR2.5 billion) company investing in mineral exploration and extraction in Africa and South America.

Nevertheless, the heavy investment in North African economies does not represent the large amounts of investment that these countries have been hoping for. It is not entirely surprising, though, given the parochial nature of Middle East and North Africa (MENA) investors. The third-quarter 2012 Qatar Financial Centre Authority/FTSE Global Markets MENA Asset Management Survey revealed that over one third of the respondents have all their assets invested in the Middle East and North Africa. Given that natural resistance to investing outside the MENA region, what possible incentive could Qatari investors have for investing in sub-Saharan Africa, of all places?

THE GOOD AND THE BAD NEWS

Based purely on its natural resources, Africa should be an easy sell. After all, the continent – which, those with longer memories have not forgotten, was dismissed in 2000 by that same The Economist as “the hopeless continent” – sits on 13 percent of the global reserves for oil, 50 percent of proven gold reserves, 50 percent of proven iron ore reserves, 60 percent of cobalt and 90 percent of the platinum group reserves. More than 100 African companies have annual revenues exceeding US$1 billion (QR4 billion), and the continent is home to nine of the world’s 15 fastest-growing countries.

But all that good news is overshadowed by the all-too-familiar reports of the bad. In 2010, the international watchdog group Transparency International (TI) ranked six African nations among the 10 most corrupt countries in the world. Those six – Sudan, Chad, Burundi, Angola, Equatorial Guinea and Somalia (listed as the most corrupt nation in the survey) – were joined by the majority of the continent. According to TI’s scorecard (which works on a 10 point scale, with zero being the most corrupt), 44 of the 47 African countries in the 173 country survey earned a score of less than five. The least corrupt African nation, Botswana, could only muster a score of 5.8 out of 10.

25% The official unemployment rate in South Africa, in what is supposed to be sub-Saharan Africa’s ‘strongest’ economy.

Perhaps the most damning assessment of Africa’s continent-wide leadership crisis comes from the Mo Ibrahim Foundation. Established by Sudanese-born British billionaire Dr Mohamed Ibrahim, the Foundation offers a US$5 million (QR18.2 million) annual prize in recognition of excellence in African leadership. In its six-year history, the prize has only actually been awarded three times. No award was given in 2009, 2010 or this year – simply because no worthy candidate could be found anywhere in Africa. “If we said we’re going to have a prize for exceptional leadership, we have to stick to that. We are not going to compromise,” Ibrahim said after announcing in October that the prize would again go unclaimed in 2012.

But the negative publicity that has for so long plagued Africa as a business destination is becoming increasingly outdated. A recent report by the African Development Bank paints the continent as being less like the same old Africa, and more of the new Asia. That report – titled Africa in 50 Years’ Time, and published in September 2011 – projected that “by 2030 Africa will likely reach US$2.2 trillion (QR8 trillion) in annual expenditures and comprise about three percent of worldwide consumption”.

The African Development Bank report continues: “The emerging middle class in the continent which some estimates equates roughly to the size of the middle class in India or China, will continue to grow, from 355 million (34 percent of Africa’s population) in 2010 to 1.1 billion (42 percent of the population) in 2060.”

Perhaps it is no wonder, then, that China has proposed or committed about US$101 billion (QR367 billion) in investment to commercial projects in Africa since 2010, with 19 percent of that in oil and natural gas, and 19 percent in rail and roads.

Qatar itself has already started a small amount of investment in South Africa. In 2007 Qatar Petroleum and South African petrochemicals firm Sasol entered a joint venture (named Oryx) to construct a second-generation gas-to-liquids complex in Ras Laffan Industrial City. In June 2011 South Africa and Saudi Arabia set up a US$2.4 billion QR 10 billion), 50-50 joint venture holding company for farming, mining and petrochemical investments. And in January 2012 Qatar Petrochemical Company (QAPCO) opened a representative office in Cape Town, South Africa.

But while Qatar represents one of South Africa’s largest investments in the Middle East (as witnessed by Oryx GTL), the feeling in South Africa’s capital Pretoria is that bilateral trade and investment between the two countries have still not reached
full potential.

FUTURE GROWTH POTENTIAL

Despite the Marikana crisis and a litinay of social ills, health problems such as malnutrition and AIDS, and the greatest concern of all, corruption, investor interest in South Africa specifically – and Africa in general – is still positive. As South Africa’s finance minister Pravin Gordhan said in the wake of Marikana, “Will it impact on growth? I don’t think so, not in any significant way. It is important that we communicate to the rest of the world that South Africa is still hard at work, that most of it is still highly productive, and available for investment opportunities.”

Added to this, Africa is becoming increasingly connected. In Q2 2012, according to market analysts Wireless Intelligence, there were 700 million cellular connections across Africa. Markets like Eastern Africa (26 percent), Southern Africa (21 percent) and Middle Africa (25 percent) were showing remarkable annual growth rates in mobile sales.

It seems that telecommunications – along with manufacturing, transportation, and wholesale and retail commerce – is becoming more and more of a driver in African economies. The continent’s most famous resource, mineral wealth is no longer its only lucrative investment, and though countries in Africa south of the Sahara remain risky, there are also potentially lucrative options for brave investors.