Monday, December 6, 2021

Stagnant Africa FDI inflows hit hard by Covid-19 pandemic

The United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2021states that the decline in Africa, higher than the decline in the developing-country average, came on top of an existing stagnant trend, with FDI on the continent having remained almost unchanged in 2019 compared to 2018.

According to the report, the continent went into “its first recession in 25 years; the economic slowdown and mobility restrictions weighed down heavily on investment indicators.

“Greenfield project announcements, an indication of investor sentiment and future FDI trends, dropped by 62 percent to $29 billion, while international project finance, especially relevant for large infrastructure projects plummeted by 74 percent to $32 billion”.

It is also reported that cross-border mergers and acquisitions (M&As) fell by 45 percent to $3.2 billion. The FDI downturn in 2020 was particularly severe in resource-dependent economies due to low prices of and dampened demand for energy commodities.

The report also further acknowledges that “amid the slow roll-out of vaccines and the emergence of new COVID strains, significant downside risks persist for foreign investment to Africa, and the prospects for an immediate substantial recovery are bleak. UNTAD projects FDI in Africa to increase in 2021, but only marginally.

“An expected rise in demand for commodities, new opportunities due to global value chain (GCV) restructuring, the approval of key projects and the impeding finalization of the African Continental Free Trade Area (AfCTA) agreement’s Sustainable Investment Protocol could lead to investment picking up greater momentum in 2022”.

The pandemic triggered a cascading health and economic challenges in Africa throughout 2020, affecting FDI inflows significantly. The share of Africa in the FDI inflows of developing economies declined from 6.3 percent to 5.9 percent. Although almost all countries and regions within the continent were affected, “foreign investment inflows were particularly impacted in resource dependent countries”.

FDI inflows to North Africa contracted by 25 percent to $10 billion, down from $14 billion in 2019 with major declines in most countries while FDI to Southern Africa decreased by 16 percent to $4.3 billion, with Mozambique and South Africa accounting for most inflows.

According to the report, in Angola, repatriation of capital by multinational enterprises (MNEs) in the oil and gas industry slowed, and the country registered net inflows of -$1.9 billion, as compared with -$1.4 billion in 2019.

Inflows were steady in Mozambique, increasing by six percent to $2.3 billion. The implementation of the $20 billion investment led by Total (France) in the liquefied natural gas (LNG) project in the country slowed but continued, despite the pandemic and other challenges.

 The report also states that FDI to South Africa, in contrast, decreased by 39 percent to $3.1 billion. South Africa has borne high human and economic costs due to the pandemic and the country gross domestic product (GDP) is estimated to have dropped by eight percent in 2020.

Cross-border and M&As in South Africa dipped significantly (by 52 percent to $2.2 billion) but still accounted for a large part of the total inflows. The largest investment realized in 2020 was PepsiCo’s acquisition of Pioneer Foods after the Competition Tribunal of South Africa approved the deal. The acquisition, announced in 2019, is worth $1.7 billion, to be disbursed over several years.

It is reported further that cross-border and M&As, which a relatively small part of total inflows to Africa fell by 45 percent to $3.2 billion. Although the MNEs from the United State of America accounted for the highest value ($2 billion) of M&As in Africa, transactions from developed economies fell considerably. In contrast, those from developing economies, especially China (at $844 million compared with $131 million in 2019) rose.

The report also notes that foreign investment directed towards sectors related to the Sustainable Development Goals (SDGs) fell considerably in nearly all sectors in 2020. Renewable energy was outlier, with international project finance deals increasing by 28 percent to $11 billion, from $9.1 billion in 2019.

This is consistent with global trends of investment in renewable energy, which has picked up even as the pandemic has constricted investment in other sectors. Renewable energy projects were announced in many countries, including some with weak electricity infrastructure. For example, Schneider Electric (France) announced a $165 million solar energy project in Burkina Faso as a part of its plan to expand its presence in Sub-Saharan Africa (SSA).

In contrast, Greenfield projects fell significantly in food and agriculture (-78 percent to $1.7 billion) as well as in health (-45 percent to $143 million), exacerbating investment gaps in human capital and the enhancement of value addition in natural resources.

In terms of the outflows, the report states that the FDI outflows from Africa fell by two thirds in 2020 to $1.6 billion, from 4.9 billion in 2019. The highest outflows were from Togo ($931 million). Investment from that country was largely directed to other African countries.

For example, Afrik Assurances in Benin and Cote d’Ivoire in the financial services industry. Outflows from Ghana ($542 million) and Morocco ($492 million) were also significant, although they dropped by eight and 45 percent, respectively, compared with 2019.

In addition to intra-continental investment, OFDI from Morocco also included investments in France. Outward investments from South Africa, traditionally a key investor, was negative (-$2.0 billion) as South African MNEs repatriated capital from foreign countries.

As for prospects, the report submits that heading into 2021, “Africa is expected to see FDI rise, but only to a limited extent. The large falls in Greenfield investment (-62 percent to $29 billion) and international project finance announcements (-63 percent to $46 billion) in 2020 indicate the significant downside risks in the immediate future”.

Given a projected GDP growth rate in 2021 (3.8 percent) that is lower than the projected average and a slow vaccine roll-out programme, “investment recovery in Africa is likely to lag behind the rest of the world”.

This is in contrast to trade, which is forecast to grow (8.4 percent) in parallel with global growth (eight percent). In the long run, the speed and the scale of the FDI recovery will depend on the extent to which economic and social impact of the pandemic can be contained on the continent, as well as the global economic situation and the pace of implementing key announced projects.

The report also acknowledges that despite significant risks related to investment in 2021, some indicators point to a potential return of FDI to pre-Covid levels by 2022. Although the overall value of planned project finance and greenfield investments fell considerably, “a few large deals announced in 2020 signal that foreign investors are engaged despite the unfavourable investment climate”.

For example, the MTN Group (South Africa) announced that it would invest $1.6 billion to strengthen its 4G network services in Nigeria. Also Eni announced plans to construct a natural gas processing plant as part of a joint venture with a local firm in Angola, with the opening scheduled for 2023.

According to the report, major announcements were also made during the Third South Africa Investment Summit in 2020. Google, for example, announced that it would investment approximately $140 million in a fibre-optic submarine cable that will provide high-speed internet connectivity across the country.

“However, the realization of these sizable investments projects is likely to be drawn out, due to the unfavourable investment, economic and epidemiological conditions”, states the report adding that on the other hand “the adoption of the Sustainable Investment Protocol of AfCTA could also bolster FDI flows to and within Africa in the long term”.

It is also noted by the report that “indications of an increase in commodity prices in 2021, especially for crude oil and natural gas, could also encourage investment inflows to Africa. Oil prices are projected to increase by 21 percent on average and non-oil commodity prices by 13 percent”.

The report concludes that “FDI to Africa face strong headwinds in the short term with significant downside risks. In the longer run, vaccine availability, domestic economic recovery will be critical to the revival of FDI and the post-pandemic recovery”.

In terms of global policy developments, the report reckons that the number of investment policy measures of a regulatory nature more than doubled in 2020. UNCTAD’s monitoring of national investment policy measures counted 50, against 21 in 2019.

The increased use of screening mechanisms driven by national security concerns over FDI in sensitive industries was a key factor. Most measures that liberalized, promoted or facilitated investment were adopted in developing economies; the total number of these measures remained stable. As a result, the share of more restrictive policy measures reached 41 percent, the highest on record.

It is reckoned by the report that “most countries actively encourage domestic as well as foreign investment in the health sector”, according to an UNTAD survey. The range of policy tools deployed varies by region and level of development and includes incentives, investment promotion and facilitation, and dedicated special economic zones.

While the pandemic has led some countries to increase oversight in the health-sector investment, it has also led many governments to double down on efforts to encourage investment in the industry, internationally, these efforts are complemented by market access and national treatment commitments for health services in the GATS and in some free trade agreements, and by treaty regimes for the protection of investment and intellectual property rights.

“However, low – and lower-middle-income countries (LLMCs) face specific challenges  that limit their capacity to attract investment in the health sector. Therefore, UNCTAD proposes an Action Plan for the promotion of investment to build productive capacity in key segments of the health-care industry, in support of SDG3”, states the report.  

The report further notes that the recovery of international investment has started, but it could take some time to gather speed. Early indicators on greenfield and international project finance – and the experience from past FDI downturns – suggest that even if firms and financiers are now gearing up for “catch-up” capital expenditures, they will still be cautious with overseas investments in productive assets and infrastructure.

The focus of both policymakers and firms is now on building back better. Resilience and sustainability will shape up the investment priorities of firms and governments. For firms, the push for supply chain resilience could lead to pressures in some industries to reconfigure international production networks through reshoring, regionalization or diversification.

For governments, recovery stimulus and investment plans focusing on infrastructure and the energy transition imply significant finance outlays. The implications for international investment flows of both sets of priorities are significant.

The report also takes into account the fact that “recovery investment packages are likely to affect global investment patterns in the coming years owing to their sheer size. The cumulative value of recovery funds intended for long-term investment worldwide is already approaching $3.5 trillion, and sizeable initiatives are still in the pipeline”.

Considering the potential to use these funds to draw in additional private funds, “the total “investment firepower” of recovery plans could exceed $10 trillion. For comparison, that is close to one third of the total SDG investment gap as estimated at the time of their adoption”.

The bulk of recovery finance has been set aside by and for developed economies and a few large emerging markets. Developing countries account for only about 10 percent of total recovery spending plans to date.

However, the magnitude of plans is such that there are likely to be spillover effects – positive and negative – to most economies. And international project finance, one of the principal mechanisms through which public funds will aim to generate additional private funding, will channel the effects of domestic public spending packages to international investment flows.

According to the report, “in the coming years, the sustainable investment market needs to transition from a niche to a mass market that fully integrates sustainability in business models and culture, leading up to 2030 and beyond. To do so, the market needs to tackle concerns of green-washing and SDG-washing, and address its geographical imbalance”.

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