one hundred US dollars notes.
Despite the African continent recording its worst economic recessions in 50 years with 50% drop in foreign direct investment (FDI) inflow, the broad services sector, including business services, telecoms, media and technology, financial and consumer services, attracted 72% of Africa’s FDI, according to the just released EY 11th Africa Attractiveness Report.
The EY Africa Attractiveness survey provides an in-depth analysis into foreign direct investmentand economic progress in Africa.
The extractive sector—mining, oil and gas, on the other hand, accounted for only 4% of FDI inflows in 2020. This, in essence, does not mean that Africa is not still heavily reliant on commodities. This is one of the key findings in the report, which noted that FDI into Africa last year fell by 50%, the hardest-hit region worldwide.
Anthony Oputa, EY regional managing partner for West Africa and EY Nigeria country leade, said: “This could be ascribed to its still largely resource-export dependent economies, which felt the impact of commodity price declines and rapidly decreasing demand, particularly from China, causing them to fall into recession.”
The report further revealed that Africa’s overall GDP contracted by 2.4% in 2020, but this less than the 3.6% contraction in the overall global GDP. For Oputa, Africa, along with the rest of the world was significantly impacted by the COVID-19 pandemic, causing lots of business disruption across industries and sectors.
All hope is not lost, noting despite the drop in FDI, Africa is on the path to multi-speed recovery. While Foreign Direct Investment fell sharply in 2020, this is only half the story. The share of FDI into services sector is rising rapidly, which will support job creation over time.”, notes Oputa.
But investment flows are changing, and it is the services sector that is enticing the lion’s share. Environmental concerns are among the factors driving this shift. “FDI is shifting away from extractive industries as an increased global focus on environmental sustainability requires a step change across the corporate world.This addresses the green energy transition and related concerns that form part of the corporate embrace of ESGs—environmental, social and governance issue,” the report notes.
Though extractives accounted for a considerable portion of inbound capital (31%) between 2016 and 2020, they rank low in comparison with both services and industry in project numbers (7%) and the share of jobs created (11%).
“Over the last five years, service-based sectors received the highest capital investment (45%, amounting to $158billion) of the three industry groups, created more jobs (55%, 400,000) and accounted for 69% of Africa’s FDI projects”.
According to Olufemi Alabi, EY partner and strategy and transaction lead, who is also the EY Parthenon Leader for West Africa, Africa’s economies have been rapidly transforming through the first two decades of the new millennium, making them less dependent on extractive industries, as they aim to become more sustainable and competitive. Investors are moving away from oil exploration and mining to ‘new age’ sectors, including ICT, retail and business services. This trend is likely to accelerate as energy investors are increasingly compelled to meet stringent zero net carbon emission targets.
Also, the report states that, across Africa, East Africa was most robust, with Tanzania and Ethiopia growing fastest in 2020. But Southern Africa was greatly affected, with South Africa falling into a deep recession.
In other emerging markets, well as the key mature regions, the Report also reveals that in Europe, it was (-23%) and North America (-19%). Only Asia-Pacific’s decline was close (-43%). According to the Report, Francewas the largest investor into Africa in 2020, followed by US, the UK and China based on FDI project numbers. China had been the largest investor in 2018, but in capital investment, China still leads.
On an FDI score basis, which is a combined measure of number of projects, jobs created, and capital invested, Southern Africa ranked highest with an FDI score of 45.4, followed by North Africa (36.7), West Africa (32.6), indicating that in 2020 Southern Africa was the favoured FDI destinations, while the West region outpaced East Africa.
On a country basis, South Africa had the highest FDI score of 31.1, followed by Morocco at 17.7 and Nigeria at 17.5, which were the top 3 FDI destination countries in 2020.
Cross-border investments across Africa have also gained traction over the last five years, with South Africa being the largest investor into the rest of the continent. In 2020, the country announced two large-scale investment projects into Nigeria in the communication sector, worth $2.5bn.
