MAMOKETE LIJANE: Three investment challenges Africa needs to overcome

While Africa represents one of the last true frontier investment markets, three core headwinds need to be faced if the continent is to realise its potential as an investment destination of choice.

This was a key theme that came out of the recent Absa macro conference entitled “Sustainably securing Africa’s tomorrow today”, an event that brought together globally recognised thought leaders to discuss sustainable investing on the continent.

Judging the mood of an investment conference like this is always interesting — it is clear there is a level of optimism on the investment potential for Africa, yet it is also clear that the challenges are structural in many cases and this is contributing to a lack of confidence in African capital markets.

If we cut through some of the emotion related to environmental, social & governance (ESG) issues and sustainable investing, there are three key issues Africa needs to zero in on if it expects to move to a new level.

The first relates to issues around hard currency debt exposure. While the commodity boom has helped to some degree to bring in foreign currency, many African countries have dollar-denominated debt that they battle to service.

The problem is compounded by the fact that many African countries have loaded up on dollar- and euro-denominated debt at a time when global interest rates are at record lows. If the interest rate cycle begins to shift, the cost of servicing of this debt will rise.

If one considers that countries such as Angola, Egypt, Ghana, Mozambique and Zimbabwe all have debt-to-GDP ratios of greater than 70%, it takes only a small shift in global interest rates to have a significant effect on borrowing costs.

The second issue is the lack of a sustainable tax base in most countries and the lack of internal revenue to cover the cost of running a country. According to data from the Organisation for Economic Co-operation & Development (OECD), the tax-to-GDP ratio for 30 surveyed African countries was 16.5%, compared with the OECD average of 34.3%. Countries such as Seychelles, Tunisia and SA sit around the 30% mark, but places like Nigeria, Equatorial Guinea and the Democratic Republic of the Congo are all the way down at 7.5%.

If one considers that the average middle-class taxpayer in SA is already stretched in funding government initiatives, it is clear that they cannot continue to be the main source of government revenue. 

This leads us to the third issue: if we are potentially walking into a debt trap and we cannot continue to tap a small tax base, the only other option is genuine economic growth.

The African growth story was sorely curtailed in 2020 due to the Covid-19 pandemic, and while a rising oil price and a broader commodity boom have helped, the big growth regions are likely to be Kenya, Morocco, Ghana, Egypt and SA. The problem is that “big” growth is likely to be 4% GDP growth per annum — a healthy rate, but certainly not fast enough to match either population growth or disruptions in the financial markets as a result of a change in global interest rates.

A common theme that came through at the investment conference was the type of growth that was being created. Africa now has access to a variety of funding mechanisms, including development finance institutions, the World Bank and countries like China that are investing a lot of capital into the continent. The risk is that in a rush for growth, money raised by governments will not be deployed for its intended purposes. Funders want to see sustainable growth backed by sound fiscal and monetary systems.

ESG and sustainable investment goals are all very topical at the moment — particularly in the African context — but it is important that we do not lose sight of the fact that the continent needs to tackle the three issues highlighted above to even start to look at providing sustainable investment destinations.

• Lijane works in fixed income sales and strategy at Absa Corporate & Investment Banking.