Executive Summary
Sub-Saharan Africa’s investment landscape is becoming more diverse as the digital economy, financial services, mobility, logistics, and health tech are attracting more local and foreign investments.
The region is a growth market with a 4% increase in GDP in 2021 and expected 3.6% in 2022, an increase in the number of SMEs and an annual infrastructure gap of USD 100 billion.
China surpassed the EU in 2020 as Sub-Saharan Africa’s largest trade partner, not least thanks to its Belt and Road initiative, which the G7 now aim to counter with a Partnership for Global Infrastructure and Investment.
Implications for
International Businesses
The new free trade area will harmonize policies on investment, competition, and intellectual property rights, and reduce the risks of shifting regulations to attract more FDI and boost foreign trade.
The political uncertainties around upcoming elections In Nigeria and the Democratic Republic of the Congo (DRC), two resource-rich regional powers, have an impact on regional security and economic policy.
The region’s startup ecosystem is expanding into sectors like climate control, edutech, healthtech, and agritech, in addition to existing unicorns such as digital payment infrastructure companies Flutterwave and Interswitch and global talent network Andela.
State of Play World powers courting a continent on the rise
Sub-Saharan Africa has traditionally been a market for American and European goods and a fertile ground for the promotion of US strategic interests. However, US and EU investments in Africa are often tied to strict fiscal and political conditions. China, in turn, takes a more pragmatic, trade-driven approach to engaging with the region. With its Belt and Road Initiative, it has aggressively expanded its economic interests over the last decade. It sees the region as a source of key raw materials, such as cobalt, platinum and oil, as well as agricultural products. A large population offers relatively cheap labor and a growth market for Chinese goods. China has expanded access to the Chinese market for African exporters and has now replaced the EU as Sub-Saharan Africa’s largest trade partner.
Besides being a sought-after trading partner of the world powers, Africa has begun to develop its own form of economic integration. The African Continental Free Trade Area (AfCFTA) has begun its pilot phase in September 2022 comprising seven states: Rwanda, Cameroon, Egypt, Ghana, Kenya, Mauritius, and Tanzania. As the agreement gets implemented over the coming years, participating countries will gain access to regional markets at preferential tariff rates, and identify comparable policies in customs, logistics, and legislation to ultimately facilitate continent-wide integration.
At the same time, insecurity has been on the rise in the region over the past five years, with a direct impact on irregular migration, transnational crime, and global terrorist activity. The Western Sahel region has become a hotbed for terrorist activity linked to the Islamic State; similarly, there has been a marked uptick in such activity in eastern Africa. Potential threats to progress include conflicts like the civil war in Ethiopia and military coups like recently in Mali, Burkina Faso, Chad, Sudan, and Guinea. South Africa’s economy has been negatively affected by social unrest as a result of the prosecution of former President Jacob Zuma, poverty and unemployment. Generally, graft, inflation, and weak institutions are the main sources of risk in the region.
Key Issues The region’s growing geostrategic importance drives the quest for closer partnerships
With substantial oil and gas reserves, Nigeria, South Africa, and Angola are among the most important resource-rich countries in Sub-Saharan Africa. Other countries such as the DRC produce strategic minerals like lithium and cobalt, which are in high demand by both Western and Chinese manufacturers. Still, the region consistently ranks low in global development indices and includes some of the world’s poorest countries, characterized by corruption, political instability and a lack of infrastructure. China is present in almost all countries but seems to focus on the resource-rich ones with weak democratic structures, such as Angola, Zambia, and the DRC. It also makes inroads in such larger countries as Nigeria and Kenya, investing in flagship projects like upgrading the Standard Gauge Railway between Kenya’s capital Nairobi and the port city of Mombasa. China’s growing presence opposes Western interests in the region. The US has raised questions about Chinese debt diplomacy and loan sustainability, starting a Prosper Africa initiative in response to Beijing’s growing strategic advantage. Yet, Sub- Saharan countries ignore US concerns and continue to pursue deals with China because of its track record of engagement, regional economic pressures, and a lack of alternative financing on similar terms. The disproportionally high number of abstentions and non-votes on the UN resolution condemning Russia’s invasion of Ukraine shows that many African countries are unwilling to lean too heavily to one – or, indeed, to the Western – side. China’s BRI investments are projected to increase, and Russia and India also have stakes in the region. This makes it even less likely that the G7 investment initiatives will reverse the trend of waning Western influence. Competition between China and the West will provide more financing opportunities for firms, but could weaken fiscal discipline, increase corruption, and worsen the debt profile of a number of countries.
Sub-Saharan “rising stars” offer plenty of economic opportunities
South Africa and Nigeria have long been the leading economies in the region, accounting for about 40% of Sub-Saharan Africa’s GDP. However, both countries have also been plagued by high levels of corruption, which has limited their ability to maximize revenues from mineral resources and use them to meet the urgent needs of the population. Despite recent inflationary pressures, countries such as Ghana and Rwanda are among the rising economic stars, having consistently demonstrated a degree of fiscal discipline and growth. Ghana’s top exports are oil, gold, and cocoa, while Rwanda’s economy has benefited from investments in tourism, agriculture, and mining. In addition, Kenya and Côte d’Ivoire are buoyant with diversified economies driven by agricultural exports and investments in construction, infrastructure, and other sectors. Kenya is East Africa’s economic hub and Cote d’Ivoire’s economy grew by an average of 8% annually between 2012 and 2019. In Côte d’Ivoire, the government is currently implementing economic reforms to restructure the banking sector and broaden the tax base.
The substantial infrastructure gap in Sub-Saharan Africa offers great investment opportunities for international firms. As AfCFTA begins to be implemented, investing in a single African country can potentially provide access to a continental market of 1.3 billion people. By linking the low tariffs, ease of doing business, tax incentives, and regional integration offered by AfCFTA with the new infrastructure initiatives of the US, EU and G7, Western companies can tap into medium-risk opportunities in various sectors. The digital and knowledge economies are also promising, as the region is home to a young population that increasingly uses the internet to shop, trade, and acquire skills relevant to a global market. Potential risks for Western companies seeking to invest in Sub-Saharan Africa include political instability (as recent coups possibly indicate a trend), corruption (especially in the oil sector in Nigeria and Angola), inconsistent government policies, and in some cases difficulties in repatriating profits due to financial regulations, e.g., for foreign airlines in Nigeria due to stricter forex controls.