It is hard to image that the six men and five women that make up the US Federal Reserve’s key decision-making body, the Federal Open Market Committee, gave much thought to Africa when they gathered in Washington DC on 15 June. But their decision to raise interest rates by 75 basis points – the most dramatic move in the increasingly desperate efforts to contain runaway inflation in developed markets – is sure to have major impacts on the continent.
Until very recently, multiple indicators had pointed to Africa enjoying a solid rebound in investment following the drastic downturn brought about by Covid. Foreign direct investment reached a record $83bn in 2021, of which $39bn was in ‘greenfield’ projects. Meanwhile, private equity and venture capital investment surged to $7.4bn, after slumping to a nadir of $3.2bn in 2020.
But now the worsening global macroeconomic environment threatens to stamp out the green shoots of recovery. Economic theory dictates that higher interest rates in the United States and other major economies will draw capital away from emerging markets, say analysts.
“A brisk uptick in US interest rates alongside a stronger US dollar, accompanied by smaller rate hikes in most rich-country markets, will inevitably reduce the appeal of riskier emerging-market assets,” says Pratibha Thaker, editorial director for the Middle East and Africa at the Economist Intelligence Unit.
“Trends therefore point to lower inflows of foreign capital into Africa on aggregate, despite compensatory monetary tightening in key markets (such as South Africa).”
Asset managers will now have a harder job in convincing private investors to put money to work in Africa following the rate rises. Kenny Nwosu, CEO of Norsad Capital, an investment firm providing debt financing to African companies, says that the likelihood of investors “coming to Africa to chase yield” has declined. “There’s a general inward focus,” he says, with investors “looking at the current environment, looking at the risks, looking at yields they can get in other markets.”
The Fed’s policy of monetary tightening, which began in March, has also contributed to a strengthening of the US dollar relative to other currencies. The South African rand has fallen to its lowest level against the greenback since October 2020; Egypt devalued the pound by 14% in March; and the Ghanaian cedi has lost more than a fifth of its value since the start of the year
“Countries with large external financing requirements, and heavy debt burdens denominated in foreign currency – Ghana and Kenya for instance – are most exposed,” says Virág Fórizs, Africa economist at Capital Economics. “Currencies in these economies are set to come under further pressure if capital inflows slow as a result of higher interest rates in the US.”
Countries such as Nigeria are benefiting from higher oil and gas prices, thereby partially offsetting the rising costs of imports. Kenya and other East African countries, on the other hand, enjoy no such advantages. Irmgard Erasmus, senior financial economist at Oxford Economics Africa, points out that the region’s “import bill has soared,” due to fuel-related products become more expensive following the Russian invasion of Ukraine.
Erasmus adds that East Africa’s key export industry, horticulture, has not recovered well from the pandemic amid a lengthy period of drought. As such, the Kenyan shilling has fallen to record lows against the dollar, while the country was forced to cancel a planned Eurobond issue in June.
Currency crises will hit investors in some sectors harder than others. “Investors in consumer-facing sectors, such as retail and hospitality, are more vulnerable to higher interest rates and weaker currencies,” says Thaker. She notes that “inflationary pressure will erode disposable income, curtail discretionary spending and heighten the risk of unrest.”
Moreover, investors’ ability to mitigate these trends is often limited. “Borrowing in local currency is a viable strategy in countries with well-developed banks and equity markets (such as South Africa), but offers limited opportunities in many others,” warns Thaker.
Key sectors remain resilient
On the brighter side, several sectors appear in a strong position to continue generating investment. Europe’s shift away from Russian oil and gas means that investors have an obvious incentive to accelerate hydrocarbons developments in Africa, particularly where they can bring supply to the market while Europe remains in deficit.
Similarly, a host of African countries are poised to benefit from growing demand for minerals that will play a critical role in the energy transition – if they offer an attractive environment to investors. Erasmus notes that Zambia is now “reaping rewards” after President Hakainde Hichilema, who took office last August, implemented a “significant improvement in the investment climate”. First Quantum Minerals, a Canadian-headquartered mining company, announced in May that it will invest $1.25bn in expanding a copper mine in Zambia, while also ploughing an extra $100m investment into a nickel project in the country.
Nwosu lists healthcare, ICT and the food value chain as other sectors that could be well-placed to attract investors. Indeed, the disruption to Ukraine’s grain exports to Africa, with its disastrous implications for food security, is focusing minds on the need to make the continent more self-sufficient.
Bryan Turner, partner at Spear Capital, a private equity firm that focuses on Southern Africa, agrees that companies that produce foodstuffs in high demand can attract investors – “provided they are set up to take advantage immediately.” He also notes that renewable energy and digital transformation are “sectors of the future” that will continue to benefit from investment tailwinds.
Green energy and digital infrastructure account for many of the largest FDI projects announced over the past year in Africa. Examples include UK-based Hive Energy’s planned $4.6m investment in a green ammonia plant in South Africa and US company Vantage Data Centers’ $1bn ‘campus’ in Johannesburg.
Turner adds that the performance of the current wave of FDI projects will play a vital role in determining the future outlook for investment in the continent. “The key is for Africa to prove success stories,” he says.
“This would attract foreign investment, reward local investors, and foster a culture of growth in the region.”