FDI to Southern Africa jumped to $42 billion due to a large corporate reconfiguration in South Africa.
West Africa saw FDI increase by 48% to $14 billion mainly from the resurgence in oil investment and expansion in gas.
Investment flows to East Africa increased by 35% to $8.2 billion1
From its fast economic growth to its natural resources, Africa has become one of the most promising regions for business in the world. However, there are increased global events causing friction on the continent that can make it challenging for companies and investors to safely conduct business.
To date, China has been one of the biggest investors and lenders across Africa, but that is rapidly changing. As more multinational corporations explore business opportunities in Africa, there will be a higher demand to protect multinational companies from financial and political peril.
From 2020 to 2021, foreign direct investment (FDI) rose in three of Africa’s regional economic groups, including:
There are several reasons why multinational corporations are looking to increase their partnerships in Africa.
“There are 54 countries in Africa, and each offers its own market for products and services based on the natural resources available. We are all working towards a new sustainable future and Africa has massive resources to reach that goal. We will not be able to reach a sustainable future if we do not utilize these resources in a mindful way that benefits African countries, local communities, and the world,” says Osama Elshiekh, senior underwriter for credit and political risks at The Hartford.
Africa currently possesses some of the highest percentages of critical minerals necessary to enable the energy transition. For example, Africa holds 48% of global cobalt reserves, 48% of magnesium and 22% of graphite, all of which are necessary to produce products such as electric vehicles and batteries.2
FDI into the continent is also helping African countries meet their own energy and food security requirements.
“Instead of importing petroleum products, corporations and governments in this region can now build their own refineries. Not only is this beneficial for African countries, but also the corporations that conduct business within these countries. In a refinery you are going to have international U.S. or European contractors who are tasked with building. Then you have domestic businesses that are no longer having to import products, which has a chain effect of what it can do for the country, like creating more local jobs,” says Elshiekh.
With more corporations looking to conduct FDI into Africa, it is important to consider the risks that could directly affect business ventures. Elshiekh highlights two of the greatest risks for corporations:
As global tensions continue to rise related to the Russia-Ukraine war and we witness an increase in trade-barriers between countries, corporations are looking for new places to source critical resources. While Africa can provide these rich resources, it is not immune to political tensions and localized conflict. Many countries in Sub-Saharan Africa have seen considerable wars, forced migration and regime changes.
“Africa is unique. That is why it is broken down into North, Central, South, West and East. Each has its own demographics, dynamics, resource-pool and risk appetite. One should look at each country and region individually when assessing potential risk,” says Elshiekh. “It is also important to stay informed of which countries pose the greatest risk. Will these political tensions move to neighboring countries or stay localized? While it might not affect a business today, that doesn’t mean it won’t in the future. Staying informed is the first step to successfully conduct foreign direct investments.”
Global inflation and monetary policy changes across the world have a far-reaching, and often multiplied, effect on emerging markets. This is very much true to Africa. Inflation rates are exceeding traditional limits, which impacts operation costs and ability to execute projects.
“If a business goes into a project anticipating spending $1 million dollars, but inflation drove up the cost of goods and by the end they are now paying $1.2 million, who is covering that additional cost? Can the business afford it? That creates instability for companies and additional financial risks,” says Elshiekh.
There is a large gap between FDI that the African continent would benefit from and the available capacity in the private insurance market, with many insurers reaching their capacity limits on certain countries. Historically, export credit agencies and multilateral development banks have often operated in parallel to the private insurance markets when supporting FDI into emerging markets. However, this is now changing with innovative structures that combine public and private players on the same transaction.
Such collaborations are game changers for the industry and emerging markets. They bring the strength of public players (including their preferred credit status and/or their ability to support long-tenors) with the financial capacity of private players. They have already proven their success in a number of countries, with large-scale projects being executed in countries such as Angola.
The benefits of these innovative structures not only support African countries as recipients of FDI, but they also enable public insurers to achieve their developmental and local development goals while providing an attractive risk-return proposal for private insurers.
With any new business venture, there are increased risks. A key consideration for success is financial and political protection. “Having credit and political risk insurance helps in protecting the viability of an investment. If a business is not insured, they might not take on the project. The same goes for political risk. Often, a multinational company won’t even consider entering certain markets if they are not protected from country risks such as political violence or unfair government action,” says Elshiekh.
Having the right coverage to defend against credit and political risks can open up new markets for a company. Additionally, working with a trusted advisor who can educate a business on the risks of potential opportunities is an important aspect of planning for foreign investment. The Hartford’s team utilizes their exclusive research hub, the Global Insights Center, to understand the trends that shape our global economy. The team is led by a senior economist who partners with both brokers and The Hartford’s underwriters.
“It is important to stay informed because new risks and opportunities are going to emerge in coming years. Businesses should take a dynamic position and work with an insurer who is knowledgeable and willing to continue learning to stay current while being as protected as possible,” says Elshiekh.
1 “Investment flows to Africa reached a record $83 billion in 2021,” Business Insider Africa, August 2022
2 “Africa’s Rise As a Global Supply Chain Force,” United Nations Conference on Trade and Development, August 2023
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