The business of Africa?is on the rise

2013-09-29 14:00

Mining is no longer the continent’s Mecca as the services sector begins to gain traction, writes Mamello Masote

There is a silent shift happening on African stock exchanges, and in the wheeling and dealing in boardrooms across the continent.

No longer is mining the Mecca of African investment – new sectors are emerging.

In a recent survey of the top 250 companies in Africa by market capitalisation, conducted by African Business, some of the top mining companies either fell out of the top 20 or moved down in the rankings.

Companies such as gold producers Gold Fields and AngloGold Ashanti fell completely out of the top 20, not even making top 25, while platinum producers Impala Platinum and Anglo American Platinum moved down a few notches.

Michael Lalor, an analyst at Ernst & Young, said: “Resource sectors remain very important, but there has been a significant shift in investment into services sectors – financial services, business services, communications, and retail and consumer products.”

This is reflected in the rankings, with financial services dominating the top 20, followed by telecoms and consumer goods.

Nema Ramkhelawan-Bhana, an analyst at Rand Merchant Bank, said: “We see a shift into some of the consumer-driven industries and we especially see a lot of South African companies going north as demographics change and populations change, and higher-income growth leads to consumers having more sophisticated needs and wants.”

Despite South Africa’s image being sullied by labour unrest in various sectors and stuttering economic growth, analysts agree it is still the number one investment destination in Africa.

Said Lalor: “We do not believe South Africa’s relative importance is declining. Our research indicates that in terms of both perception and reality, South Africa remains the most popular investment destination in Africa.”

South Africa is also driving investment into the rest of Africa.

“South Africa has become a major source of foreign direct investment for other African countries. South African firms invested the most in FDI (foreign direct investment) projects in Africa outside of South Africa.”

Inherent with the number one position is competitors snapping at your heels trying to knock you off your throne and South Africa isn’t any different.

According to Ramkhelawan-Bhana, South Africa’s Achilles heel is its moderate economic growth.

“We see growth of 3.2% over the next six years, which is below the world average as well as that of sub-Saharan Africa. This is partly because our economy is demand-driven and resource-based,” she said.

So who are the new powerhouses that are ready to give South Africa a run for its money as an investment destination? Both Ramkhelawan-Bhana and Lalor agree that Nigeria is an obvious contender for the title.

“But one thing that Nigeria falters on is their operating environment. They still have weak institutions, corruption and some political unrest, especially now in the north and the south,” said Ramkhelawan-Bhana.

On Nigeria versus South Africa, Lalor said South Africa’s economy was far more diverse and attracted three times the number of projects than Nigeria, while Nigeria attracted more capital because of its oil sector, which is very capital intensive.

Lalor said Ghana and Kenya were also shoo-ins for popular investment destinations, “with Tanzania, Mozambique and Zambia emerging behind them”.

“Over the last 18 months, there has been quite a lot of foreign direct investment into Zambia because of its copper and cobalt industries,” said Ramkhelawan-Bhana.

The Zambian government recently announced it received about $3.5?billion in foreign direct investment in the first half of the year, an amount that already surpasses its target for the year.

“Sustained economic growth in Angola and Ethiopia is also opening up interesting consumer-related opportunities,” added Lalor.

Zimbabwe has had trouble attracting investment due to political uncertainty and its indigenisation policy, which dictates to private companies to surrender half of its equity to the state.

“In relative terms, Zimbabwe has quite a lot of potential. It will depend on how the government treats the indigenisation policy over the next while, but it does attract investment.”

The challenges of investing

1 Repatriating funds: Huge corporate giants such as MTN have had issues with getting money out of countries riddled with political turmoil such as Iran and Syria.

2 Inadequate infrastructure: Ramkhelawan-Bhana said: “For example, in Nigeria, for the amount of crude oil they export, they import almost all of it as refined products because of a lack of infrastructure.”

3 Diversity and fragmented nature of its markets – Lalor said if companies wanted to gain critical mass in African operations they had to operate across multiple countries with differences in language, culture and regulatory systems, and this could be incredibly challenging.

4 Lack of government investment: Spending is biased towards current patterns like wage bills, rather than infrastructure, and can make investors wary, according to Ramkhelawan-Bhana.

5 Corruption: Not only does this steal development from ordinary people, but it can make the cost of doing business much higher for investors.

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