Global Economy
The economic rise of Africa opens new FDI frontier
By Michael Hennigan, Finfacts founder and editor
Aug 21, 2013 - 10:42 AM

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World Bank report

The IMF (International Monetary Fund) said in a report last May that growth remained strong in Sub-Saharan Africa in 2012, with regional GDP (gross domestic product) rates increasing in most countries (excluding Nigeria and South Africa). Projections point to a moderate, broad-based acceleration in growth to around 5½% in 2013¬14, reflecting a gradually strengthening global economy and robust domestic demand. The belated economic rise of the region is opening a new FDI (foreign direct investment) frontier.

fDi Intelligence, a unit of the Financial Times says that in the five years or so since the financial crisis made its impact felt, global FDI remains 20% lower than figures recorded in 2008. "Any hints of global recovery in FDI in 2010 and 2011 have been overshadowed by the 14.3% decline in 2012. In the context of this decline, the number of investments into the African continent fell to a lesser extent than any other world regions, down 7.9% in 2012. However figures for the first five months of 2013 signal that FDI into Africa is falling at about the same rate as global averages, down 27% compared to 28% globally."

Unrest, corruption and severe income disparities persist in Africa, though an emerging middle class with increased disposable income, a marked improvement in governance and the availability of natural resources present an attractive opportunity for investors. According to a recent report by the African Development Bank, Africa’s economy is growing faster than any other continent. Of the 54 African countries, 26 have now achieved middle-income status, with some countries, such as South Africa, Morocco and Mauritius, significantly outperforming the likes of Somalia and the Democratic Republic of Congo.

UNCTAD, the United Nations trade and development agency, said last month that some of the potential of the region is apparent in existing trade flows: African countries tend to export a higher percentage of manufactured goods to each other (43% of all intra-African trade), while manufactured goods account for only 14% of total African exports to overseas markets.

The agency said: "The challenge is clear, too. Africa accounts for only 1% of global manufacturing. And manufacturing represents about 10% of African GDP, compared to 35% for East Asia and the Pacific and 16% for Latin America and the Caribbean. The low level of manufacturing development in Africa means that manufactured goods – such as cars, machines, and electronic gadgets – must be imported from overseas, a problem that is also an opportunity. If various national markets can be effectively integrated into a larger regional market, the report says, there should be sufficient numbers of customers to support the expansion of industry within the region.

An additional challenge noted by the report is that Africa has some of the highest costs in the world for transporting goods. In Central Africa, transporting one ton of goods along the route from Douala in Cameroon to N’Djamena in Chad costs $0.11 per kilometre, which is more than twice the cost in Western Europe ($0.05) and more than five times the cost in Pakistan ($0.02)."

Rising FDI has attracted interest from offshore centres and Mauritius, the island nation in the Indian Ocean that boasts one of Africa’s largest offshore financial centres, is leading the way, the FT says. The country, which over the past decade has accounted for 40% of all FDI flows into India thanks to a favourable tax deal with New Delhi, has already signed 19 tax deals with African countries and it is negotiating another three.

Several other African countries have signalled intentions to vie for business while offshore, Singapore, Hong Kong, the Netherlands, the Seychelles and Luxembourg are playing catch up, but from a much lower base.

The publishers of International Financial Law Review (IFLR) says Chinese investors typically establish offshore subsidiaries to make investments and do business without regulatory intervention. But new Chinese tax laws have made utilising holding companies (holdco) jurisdictions more difficult.

At  an IFLR forum in June, Deloitte China partner Lillian Xiao affirmed this trend. The 2008 tax law in China includes clauses against tax evasion or avoidance, she said.

She warned that although the government understands that Chinese companies are looking to go global, and that there are a lot of foreign companies in Chinese markets, it does not want to see illegal taxation structures and has requirements related to anti-tax avoidance laws.

"If there is no business substance in holdco jurisdictions, tax regulators will see through it," she said.

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