Covering around one-fifth of the Earth’s total land surface, Africa is an extensive continent comprising 54 countries. With 65% of the world’s arable land, over 70% of Southern Africa’s rural population relies on agriculture to survive, although the sector has been dramatically impacted by drought and climate change. In 2022, Africa’s GDP hit almost three trillion USD, up from around two trillion USD in 2010.
Africa is rich in natural minerals and holds 30% of the world’s reserves. In fact, the continent has 40% of the world’s gold and around 90% of its platinum. As commodities accounted for over 60% of the total exports in 45 African nations in 2022, the continent is extremely sensitive to fluctuations in commodity prices worldwide. This, along with enormous amounts of mineral reserves unseen elsewhere, is one reason why Africa should focus on welcoming higher levels of Foreign Direct Investment (FDI) for economic growth.
Despite its high potential, some foreign investors may feel hesitant at the prospect of investing in Africa. Africa has high levels of extreme poverty, with approximately 431 million cases of their total population of 1.4 billion recorded in 2022. Furthermore, potential investors may be concerned about gaps in infrastructure and potential transport challenges deeply impacted by adverse weather conditions and the Covid-19 pandemic. However, recent geopolitical uncertainties and the Russian invasion of Ukraine saw many countries eyeballing Africa as a nation to fulfill their demand for commodities in 2022. So why is Africa the next best choice for potential investors?
Many African nations have fast-growing Gross Domestic Product (GDP) and huge growth prospects for 2023 and beyond. Although global macroeconomic challenges like the Russia-Ukraine war impacted economic growth in 2022, many African nations have continued to soar.
Even eCommerce giant Amazon is jumping on the African bandwagon. In 2022, the company announced plans for expansion into South Africa and Nigeria, in a bid to boost their e-commerce revenue set to hit US $46 billion by 2025. The company hopes that the investment will encourage local start-ups and eCommerce trading.
Africa’s total population surpassed 1.4 billion in 2022. Africa houses 17% of the global population, with 60% of the young population under 25 years old. By 2030, Africans will account for a staggering 42% of young people worldwide.
Nigeria is one example of an African country with a growing population. The country’s current population totals 223 million, which is 2.41% higher than 2022, and up from the 2019 count of 208 million. Likewise, Cameroon’s current population is 28 million, a 2.63% increase from 2022, and up from 26 million in 2019. Sudan tells a similar story. Its current population is 48 million, with a 2.63% increase from 46 million in the previous year.
Hopes for the future of Africa are pinned on its younger generation. With such a huge young population, there is potential for a larger workforce and employee talent pool, many of which will find employment in its thriving mining and commodities sector. This abundance of labor gives rise to industrialization potential and ensures there will be enough young people to withstand even more FDI in Africa in the years to come.
FDI levels reveal a country’s general attitude toward foreign investment and has a positive impact on economic growth. Potential foreign investments also push local governments to improve their economic climate and promote a positive environment for investors.
In 2021, the government of The Democratic Republic of Congo issued a statement outlining an urgent need for FDI outside of the petroleum sector and welcomed investments from countries such as France, Egypt, and the United States as a result. The country has no limitations on foreign business ownership or control, and the government has an overall positive outlook toward foreign investment.
Before its cancellation in 2021, The World Bank offered a ranking of the most business-friendly countries in the world used to promote foreign investment. Factors for consideration included: ease of starting a business, getting credit, and registering property. The latest data showed South Africa ranked number 84 out of 190 countries in 2019, up from 82 in 2018. Zambia ranked number 87 in 2018, improving by two places to 85 in 2019.
In 2022, the South African Reserve Bank estimated that South Africa’s FDI in 2021 was approximately US $37.6 billion, a substantial jump from just US $3.1 billion in 2020. In 2022, low foreign investment in South Africa was largely due to extended lockdowns during the Covid-19 pandemic, which left potential investors in the lurch. Furthermore, the South African government introduced the Competition Amendment Act in 2019 and 2020, respectively, which states that the South African President must consider whether the foreign acquisition of domestic companies will have an adverse risk to the country’s national security prior to approval.
South Africa generally welcomes foreign investment and understands its importance to economic growth and development. The country’s abundant mineral reserves mean there are many potential investment opportunities in South Africa. Furthermore, the country’s Home Office Affairs considers mineral benefaction and infrastructure development an industry of national interest, which is a positive sign for foreign investors.
The African Continental Free Trade Area (AfCFTA) was launched in 2021 and aims to become the largest free trade zone in the world. The free trade area is expected to span a market of 1.2 billion people and achieve a GDP of US $2.5 trillion, providing a continent-wide goods and services market. Participating nations will enjoy improved cross-border financial transactions, trade expansion, and increased collaboration opportunities, and the agreement will likely relieve some 30 million people of extreme poverty by 2035.
But FDI opportunities are not enough to shield African nations from the negative impacts of inflation and a rising US dollar, the currency many African countries use to pay for imports. In 2022, Ghana’s currency, the Cedi, lost 40% of its value against the dollar, which reflects flagging investor confidence. Other African countries that do not reap the benefits of strong commodity exports, such as Kenya, are also suffering. Kenya has an import-dependent economy, and inflation rocketed to 9.1% in December 2022 as the Russia-Ukraine war had a detrimental impact on the country’s economy. Moreover, the Kenyan Shilling fell to historic lows in early 2023 after losing around 10% of its value in 2022.
With an estimated population of over 60.6 million in 2022, South Africa recorded the continent’s second-highest GDP worth US $418 billion in 2021. The country is rich in coal reserves, which accounted for 24% of its total mining production in 2022. South African coal exports to Europe jumped by 720% from 0.5 million tonnes in the first half of 2022 after Russian coal imports were banned. Russia previously supplied 45% of Europe’s coal demands, but the Russia-Ukraine war caused them to look elsewhere.
Elsewhere, Zambia has a strong mining industry which accounted for 77% of the country’s entire export earnings in 2019. The mining industry contributed 12% of its total GDP in 2022. Zambia produced around 20% of the world’s emeralds in 2022, and holds reserves of cobalt and nickel.
Although some potential investors may be hesitant, now is a great time to invest in Africa. Geopolitical factors and economic uncertainties have impacted global supply chains for minerals and gas, prompting more and more countries to consider Africa as their go-to region for commodities — and with good reason. With vast mineral resources, growing financial controls, and an increasingly positive attitude towards foreign investments, Africa is a lucrative nation of untapped potential for alternative investors.
*Price references are taken from Trading Economics and intended to provide a reference only.