An increasing number of investment and trade opportunities are presenting themselves for foreign corporates in sub-Saharan Africa. And while there are risks associated with investing and operating in Africa that cannot be ignored – as is true of any emerging market – it should not mean that the opportunities in the region are overlooked. Florian Witt, Head of Africa at Commerzbank, looks at Africa’s growth and what it means for those looking to do business in the region
Sub-Saharan Africa has shown itself to be remarkably resilient in the face of the global economic crisis. In fact, the region has been growing sustainably for the past decade and is expected to see economic growth of 6 percent this year1. According to the African Development Bank (AfDB), Africa’s economy is growing faster than any other continent in the world.
Behind this positive economic growth lies improved political and economic stability in sub-Saharan Africa as a whole, which has helped the region rise up and become more resilient to external shocks, such as import and export price volatilities. Other factors helping to kick start the African economy are the recent commodities boom and the burgeoning African middle class, which is generating demand for consumer goods and services, many of which are imported.
And this increased demand for consumer goods imports brings a host of business opportunities for foreign exporters. Indeed, many have already recognised the region’s potential and have established a presence on the continent.
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However, not only is there enormous trading potential, there are also opportunities for investment in productivity and manufacturing that could transform the composition of a number of African economies. Indeed, Africa is now beginning to move up the production value chain (evolving from being an extractor of raw materials to a producer of finished products) thanks in part to foreign direct investment and international trade, which is improving resource-processing and manufacturing capabilities. But in order for Africa to keep moving up the value chain, continued investment and imports of specialist equipment and machinery will be needed to develop the continent’s value-added industries.
While the opportunities for doing business in Africa are therefore clear, it is also important that companies understand the risks involved in trading with the heterogeneous region. In this respect, having a global banking partner on side that has strong relationships with the local banks and expert “on-the-ground” knowledge is essential for mitigating these risks.
Seizing the opportunities
Of course, some sub-Saharan African countries have already begun their transition from raw material exporters to producers of value-added products and this process is providing vast opportunities for foreign corporates.
In this respect, Nigeria is an interesting example. For example, the agriculture sector now accounts for around a quarter of Nigeria’s GDP following the recent rebasing of the economy. And the country has wide expanses of arable land that are rich in hydrocarbon, but in order to be able to produce food locally, value-added chains in the form of harvest, storage and transport are required.
The good news is that moves towards building these value-added chains are already underway. For example, construction of the world’s largest fertilizer plant in Nigeria is due to be completed in 2015. The planned gas-to-urea fertilizer plant will cost approximately US$1.2 billion and will be privately financed with foreign companies bidding for the contract. The plant is aimed at transforming Nigeria from a major importer to a key exporter of fertilizer, and is expected to significantly boost agricultural production in the country.
There are also emerging opportunities in Nigeria’s most lucrative sector: oil. This commodity is the driving factor in Nigeria’s economy – accounting for 96 percent of exports and 75 percent of government revenues2 – making it one of the most oil-dependent economies in Africa. However, Nigeria has very few oil refineries, meaning the country is reliant on imports of the by-products of crude oil. Therefore, in order to reduce the country’s exposure to the fluctuations in oil prices, huge investment is needed to boost the country’s refinery output, as well as for oil exploration and development projects.
There’s no doubt that sub-Saharan Africa’s potential is attracting investors who have recognised the strong and sustained economic growth displayed by the continent in recent years – particularly in the fastest-growing African countries such as Nigeria. And it is expected that further foreign direct investment in these countries will help to kick off a higher growth phase.
Understanding the risks
Of course, in sub-Saharan Africa – as with any emerging market – there are risks that go hand in hand with the opportunities. However, the key to reducing exposure to these risks is acknowledging them and taking the right approach to doing business in the country.
For example, corruption remains a large risk factor in sub-Saharan Africa. In this respect, Commerzbank has 60 years’ experience in Africa and has learnt that time can play an essential role in mitigating this risk. While investment in marketing, for example, is required to break into a mature market, such as Germany, in Africa what corporates need to invest is time in order to avoid unethical business practices.
Credit and counterparty risk is also a factor to address. Given the levels of political risk associated with many of Africa’s developing markets and the ‘unknown’ factor when it comes toforeign trade counterparties, letters of credit are still one of the safest ways to mitigate this risk. This trade finance instrument is useful when exporters cannot easily obtain reliable credit information about a foreign buyer – instead passing the risk on to their own advising or confirming bank. This bank can then leverage its local expertise based on its correspondent banking relationships.
In this respect, long-standing relationships with local African banks are important. Commerzbank, for example, works together with approximately 350 sub-Saharan African banks meaning that it has a unique risk appetite for confirming letters of credit issued in the region where other banks may have chosen to withdraw their commitments and are scaling back their correspondent-banking networks to reduce risk.
While the risks of doing business on the continent sometimes seem to be at the forefront of many corporates’ minds, simply ignoring the potential for growth is not advisable. Indeed, with the help of the right local banking partner to navigate the risks, the opportunities for foreign corporates are limitless.
1 Please see Page 3 of Commerzbank’s “Renaissance in Sub-Saharan Africa” study, published in January 2014
2 Please see Page 18 of Commerzbank’s “Renaissance in Sub-Saharan Africa” study, published in January 2014