Certain danger: Extreme investing in Africa

July 12, 2012

The Arab Spring, for all its democratic and political virtues,  put a big economic dent in the side of participating North African countries, particularly when it came to attracting foreign investment in 2011.

According to a recent UNCTAD report:

Sub-Saharan Africa drew FDI not only to its natural resources, but also to its emerging consumer markets as the growth outlook remained positive. Political uncertainty in North Africa deterred investment in that region.

So far, so logical. Except that simply can’t be all there is to it.

Why? Because plenty of African countries marred by political uncertainty have succeeded in attracting inward FDI.

The Democratic Republic of Congo is a good example. According to political risk consultancy Maplecroft, the country ranks as “extreme” in its risk index for governance framework, regulatory and business environment, conflict and security and human rights and society. It scores 0.00 on business integrity and corruption. And yet in 2011 it attacted over a billion dollars in FDI, according to the UNCTAD report.

Sudan tells a similar story. Its risks are high or extreme for every category that Maplecroft lists, and while its business integrity and corruption score comes in at a comparatively virtuous 0.10, it doesn’t scream out to investors as attractive. Yet Sudan too attracted over $1bln in FDI.

The reasons why Sudan and the DRC may be attractive to investors are clear enough; they possess vast mineral, commodity and oil reserves. Yet previously that has not been enough to attract FDI on this sort of scale. Conversely, Libya’s oil revenues only attracted negligible investment in 2011.

In short, there seems to have been quite a role reversal between North and sub-Saharan Africa in light of the Arab Spring.

Traditionally, investment in sub-Saharan African has been seen as potentially very rewarding, yet dogged with risk. And North Africa was seen as a stable and rewarding destination for FDI; its mineral riches and political inertia the perfect cocktail for investor success.

This was reflected in FDI flows. In 2007, for example, North Africa FDI inflows amounted to $24.775bln, nearly half of the total inward investment into Africa, according to UNCTAD.

Compare this to 2011. FDI for the whole region is down, albeit marginally, for the third successive year, but FDI to sub-Saharan Africa has actually increased from $29.5bln in 2010 to $36.9bln in 2011. In 2007, it was around $26bln.

By far and away the biggest reason for the contraction in FDI to Africa is the reduction in flows to North Africa, with inflows halving between 2010 and 2011 to $7.69bln, with over a billion dollars of this accounted for by Sudan, which is sometimes classified as a sub-Saharan African country and yet to suffer an Arab Spring-style revolt.

In this context, the stability that used to be offered by the autocrats of North Africa seems to be better supplied by those areas which seem to have incredibly high levels of political risk. By contrast, even though Libya’s post-Arab Spring risk ratings never surpassed the levels of Sudan and DRC, the absolute value of risk wasn’t as newsworthy as its trend, and that was from a very stable position to an incredibly unstable one.

Perhaps it’s a case of better the devil you know, but there seems to be a distinction between the “political uncertainty” cited in UNCTAD’s report as the reason for declining North African flows, and political risk as measured by Maplecroft’s indices. What happened in Libya was unknowable, unexpected and caught investors on the hop. The cost of doing business in already dangerous environments, however, is to an extent knowable, and can be built into the expectations of firms over time. And as long as the level of risk is fairly stable, even extreme risk seems to be no obstacle to certain investors.

(by Alistair Smout)


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I don’t even consider Africa an emerging market yet. Considering that countries like Brazil and China have economies that are falters, I’ve been extremely cautious with my non US investments.

Posted by tim223 | Report as abusive

while clearly investment in places such as the DRC is not for the faint of heart, I don’t mean to paint the whole of Africa with the same brush. Consider Rwanda, for example, which has posted double digit growth over the last decade, or Botswana, whose growth is as impressive as its record of uninterrupted democracy since 1965. no part of the world is untouched by the current slowdown, but still it is emerging and frontier markets which are proving the most resilient when it comes to staying out of recession.

Posted by Alistair Smout | Report as abusive