Africa is becoming an attractive investment destination

As the world’s developed economies battle to come to grips with a deluge of economic problems and challenges - from the lingering impact of the 2008/2009 financial crisis, a sovereign debt crisis, ageing populations, a fast changing energy resource environment to the risks associated with cavalier exploitation of resources so horrifyingly illustrated by the BP disaster in the Gulf of Mexico – Africa may just be on the verge of a (for the continent, unprecedented) economic renaissance. Some political risks remain for potential investors, but they are not necessarily more daunting than the risks elsewhere.

Investors interested in Africa's resources, but afraid of its political risks, should consider that recent events in Europe and the United States have shown they are far from risk free, British fund manager David Murrin recently told Reuters.

"We need to wipe out that smug Western view of more risk in Africa... As Western belts tighten and we start to deal with fiscal situations, the political risk differential is closing rapidly. People need to wake up to that," said the chief investment officer at United Kingdom-based Emergent Asset Management.

He acknowledged that Africa could be hazardous for investors, but cited by comparison Greece's debt troubles and the banking crisis in Europe and the US.

Budget deficits of many developed countries over the past couple of years have jumped to unprecedented levels in the aftermath of the US subprime mortgage crash, the global credit crunch and the recession.

Sub-Sahara’s economic prospects

The Global Economic Prospects 2010 report by the World Bank, released last week, stated that economic growth in the sub-Saharan region is expected to continue its gradual post (financial) crisis recovery between 2010 and 2012. It will be driven by rising commodity prices and stronger external demand.

At the end of May, the head of regional studies at the International Monetary Fund (IMF) African department, Abe Selassie said the continent’s economic performance in the face of the recent global recession has improved its growth potential and its attractiveness to investors.

The IMF’s regional outlook, published at the end of May, showed that the region’s sound fiscal policies ahead of the global financial crisis had provided it with a buffer against the recession, and two-thirds of its countries were in a position to implement counter-cyclical policies. Most of the region did better than so-called advanced economies.

Among the factors - beside previous debt relief bringing down sovereign debt levels for 100% of gross domestic product to 40% by 2008 - responsible for the region’s relative healthy financial position was that private investment flows had held up as investors saw Africa as an attractive destination relative to other parts of the world.

In its report, however, the World Bank does warn that Europe’s debt crisis made it difficult to forecast the medium-term growth outlook and that projections at this stage were based on the assumption that European debt restructuring would avoid defaults.

Africa and China

Murrin predicted that Africa's mining industry would grow to meet China's insatiable appetite for metals. China is the world's largest consumer of industrial metals such as copper, taking more than 30% of global consumption, estimated at around 19 million tonnes this year.

"Africa could rival China as the world's largest copper producer at some point in the future," he said.

"Chinese demand will fuel prices over the next decade, causing problems for the West because we are not growing and we will import their inflation, we get stagflation," Murrin predicted.

The shift in economic power toward Asia has been predicted by many analysts for some time, and Murrin said that the “dollar rally we are seeing now is, in my opinion, the last time the world will go to dollars for safety."

Economic threats

Selassie, however, warned that there are also threats to the economies of African countries. Some, for instance, suffer from an inability to forecast revenue streams accurately. This made planning difficult in those economies.

A broader danger, also for South Africa, is that increases in social spending to alleviate the impact of the recession are likely to become permanent cost factors.

The World Bank further cautioned that the strong recovery currently reflected in monthly data for the global economy is expected to lose some steam in coming months. Annual growth rates should, however, continue to strengthen, particularly in developing countries which “are responsible for a growing share of global growth, a trend which is expected to continue in the years and decades to come."