Many investors see Africa as the final frontier of emerging markets. With a population of approximately a billion people and vast reserves of natural resources, the African continent has been steadily gaining popularity year over year. According to a research from Asosko Insight, 861 deals were undertaken by investors between 2015 and 2018:
- 44% of these transactions have a disclosed value, for a total topping $44bn, a significant injection of cash into Africa’s economies that is expected to continue trending upwards.
- Though global economic headwinds may slow inbound investment from developed economies, inter-African investment has started to pick up the slack as efforts to strengthen regional integration accelerate.
- Private equity (PE) is playing an increasing role in financing Africa’s private-sector growth, with equity stakes rising from just over half of the deals in 2015 to two-thirds in 2018. The local economy is expected to benefit both from the added capital and the improved governance and management expertise that accompanies PE involvement.
Top 5 reasons to invest in Africa
Africa is full of opportunities. With a fast-growing youth population, paired with an expected increase of 50% in urbanization by 2050, the continent might well be on tracks to feed a new gold rush. These forecasts and trends have been the main drivers of growth in Africa.
Why is it a good time to invest?
1. Africa is pushing back trade barriers
Recently, 54 continental nations came together to setup a free-trade agreement. With a deal of that size, even the smallest African countries will directly benefit from this boost. In a near future, it is expected that duties are lowered, and incentives introduced. This would bolster the manufacturing sector as setting up production and assembly operations in multiple African countries will be drastically lower compared to other parts of the world.
Currently, Africa’s share of global trade amounts to a meagre 3%. The only way to increase this is by ramping up the production of a broad array of goods and services, both for the home markets and international exports. This could also encourage the processing of local commodities (such as minerals, cotton, coffee, vanilla, etc..) in country, rather than exporting them as raw materials.
2. Africa is going digital
Africans are getting more and more connected. The continent leads the world in mobile adoption, which continues to offer the biggest cross-sectoral economic opportunities. Mobile payment networks, pioneered in East Africa, opened the wired, global economy to poor, unbanked city and rural dwellers. Companies such as Novartis are using mobile communications to manage their supply chain, while others such as Olam has used mobile to reach out to new African suppliers and farmers.
Moreover, tech giants from across the globe are working towards ‘connecting’ Africans – both Google and Facebook have been pushing their efforts into circling the whole continent with undersea internet cables. Chinese behemoth, Alibaba, has made it a point to empower 1,000 entrepreneurs on the continent over the next 5 years.
3. Africa is diversifying
African economies are finally beginning to diversify beyond commodities, though this is still in the early stages. Africa is seeing a returning diaspora that recognizes the potential and opportunities in their own countries. This population supports local economic growth with their skills and talent, by acting as “first movers”, investing back in their communities.
At the same time, African countries are beginning to place bets on non-commodity areas where they can be competitive. And they are packaging themselves to appeal to a broader set of investors. Recognizing they can no longer count on growing investment from China, every country now has what are called “Investment Promotion Agencies”, which act as one-stop shops for investors, assisting with registration, taxes, and other steps to establish companies locally.
4. Africa needs more ‘connectors’
Missing across much of sub-Saharan Africa are the roads, rails, ports, airports, power grids and IT backbone needed to lift African economies. This lack of infrastructure hinders the growth of imports, exports, and regional business.
Companies that can connect Africans and markets can prosper. Sub-Saharan Africa is plagued by power outages – almost 700 hours a year on average – sapping productivity, adding cost and leaving businesses captive to back-up and alternative power options. Massive investment is leading to major upgrades and expansion at African ports and airports, but much of Africa’s growth potential depends on in-country and intra-African road, rail and air connections.
Lessons from Dubai and Singapore tell us that once an infrastructure race is on in a rapidly expanding market, being the first mover is a significant advantage for investors.
5. Promising investment opportunities
The easiest way to invest in Africa is through exchange-traded funds (ETFs) and mutual funds. Not only are these funds traded on U.S. stock exchanges, but they also contain built-in diversification and cost far less than manually building a portfolio with American Depositary Receipts (ADRs) or foreign stocks that trade on foreign stock exchanges.
The most popular South African ETF is the MSCI South Africa Index Fund (NYSE: EZA), which represents the only pure play to invest in the country. However, the SPDR S&P Middle East & Africa ETF (NYSE: GAF) also has more than 80 percent exposure to the country, which makes it a more diversified play on the country and region.
Since the rest of Africa isn’t quite as popular, there are only a few broad options to invest in the region. The first option is to purchase Middle Eastern and Frontier Market ETFs that include exposure to African countries. Since many African countries have enormous natural resources, the second option is to invest in commodity ETFs, like those focused on copper and gold.
The most popular ETFs to invest in Africa include:
Market Vectors Africa Index ETF (NYSE: AFK)
SPDR S&P Middle East & Africa ETF (NYSE: GAF)
MENA Frontier Countries Portfolio (NYSE: PMNA)
Middle East Dividend ETF (NYSE: GULF)
Frontier Markets ETF (NYSE: FRN)
High return investment sectors
A growth scenario is the one expected on African pharmaceutical market. The predicted growth in the global pharmaceutical market between 2012 and 2021 is estimated at 26% (according to PROPARCO’s SP & D publication), but the African drug market could increase by 200% according to a realistic assumption, or by 300% according to an optimistic hypothesis within this same period. Based on African Pharmaceuticals Market Report of Frost and Sullivan of 2016, the pharmaceuticals market in Africa is expected to reach a business opportunity of $45 billion in 2020. Goldstein Research analyst forecast the Africa pharmaceuticals market size is set to reach USD 160.7 billion by 2024, at a CAGR of 20.4% over the forecast years.
This rapid growth could be dependent of a convergence of changing economic profiles, rapid urbanisation, increased healthcare spending and investment, and increasing incidence of chronic lifestyle diseases. Major driving factor for Africa pharmaceutical market is the expansion of healthcare capacity which according to the World Bank Africa acquired 70,000 new hospital beds, 16,000 doctors, and 60,000 nurses, adding up to a total of 1,050,000 beds, 498,370 doctors, and 1,250,000 nurses between 2005 and 2012.
Roughly 1 billion people – or about 13 percent of the world’s population – live without electricity. In Africa, today, one in three people don’t have access to electricity, often having to resort to using kerosene or spending hours in darkness. Almost 87% of those without electricity live in rural areas. Those who do have electricity often find it unreliable or expensive. Sub-Saharan Africa’s share in the global access deficit has more than doubled between 1990 and 2016.
Still not convinced?
- In Nigeria, the World Bank-funded Nigeria Electrification Project aims to expand cost-efficient access to electricity to nearly 80 million people who currently lack access to it. Mini grids are expected to be part of the solution, with an estimated 850 mini grids extending electricity access to at least 300,000 households and 30,000 businesses.
- In Mozambique, the International Finance Corporation (IFC) is supporting the country’s first utility scale solar power plant which will help increase electricity sector climate resilience and deliver power to rural areas. The project also includes support from the Climate Investment Funds. It will deliver power to the national grid and produce enough energy to serve about 175,000 households.
- In Senegal, the Multilateral Insurance Guarantee Agency (MIGA), is supporting the country’s first utility-scale wind farm. The project is expected to provide approximately 300,000 households with electricity, especially in rural areas. As the largest wind project in Sub-Saharan West Africa, the project will also have a useful demonstration effect, showcasing the technical, financial, and institutional feasibility of large-scale wind projects in the country and in the region.
- In Zambia, the Scaling Solar Program brought together a suite of World Bank, IFC investment and advisory, and MIGA services and instruments under a single engagement aimed at creating viable markets for grid-connected solar PV power plants. The electricity generated from the 48MW plant located outside the capital city of Lusaka will be sold to the Zambian utility company through a 25-year power purchase agreement.
- In Ghana, the World Bank is bringing renewable energy to rural communities by investing in solar mini grids. The project will provide reliable electricity to about 10,000 people in island communities around Lake Volta, with an aggregated installed capacity of 1.7 MW.
How to get started in Africa the smart way
If you are looking to develop your business in Africa, this may not be an easy task; governing laws pertaining to business operations, employment, tax compliance, offshore services or even expat immigration will vastly differ depending on where you want to settle down. Registering an entity in many regions across the continent can take a long time.
Africa HR Solutions can give you a considerable advantage over the competition. We offer a range of services tailored for businesses expanding on the African continent.
- Simplest and fastest way to hire people without having a registered entity
- We manage the payroll and employment duties
- Single solution for all your HR requirements in Africa & a central point of contact for all your queries
- Always available for your queries and reports
- Full compliance with local legislation’s – expert across Africa
- Centralizing of payroll functions
- Team dedicated to quality and flexibility to meet your requirements
- Up to date statutory changes through multiple sources
- Professional indemnity and employer liability