Despite a global recovery, investments to Africa fall sharply in 2015
Foreign direct investment (FDI) flows towards Africa have experienced a sharp decline in 2015, according to the United Nations Conference on Trade and Development (UNCTAD). The data informing this trend were released by the UN agency in a report entitled “Global Investment Trends Monitor”, a periodic report detailing global investment developments. The consolidated version of these statistics will be published this year in the UNCTAD World Investment Report 2016.
On the global scale, investments stood well during the past year with FDI flows reaching an estimated total value of US$1.7 trillion, the highest level since the 2008-2009 economic and fiscal crisis. But behind this increase of 36.5 percent over the previous year is a key factor: the rise of FDI towards developed economies (+ 90 percent), particularly North America (+ 193 percent), and the European Union (+ 68 percent).
However, the situation has deteriorated in Africa in 2015, with a general decrease by 31.4 percent of investment flows from abroad, falling from US$55 billion in 2014 to US$38 billion last year. According to the UNCTAD, the main cause of this contraction is the end of the "super-cycle" of raw materials, which reduced investments to the natural resources sector.
In regional terms, while FDI experienced a rise in North Africa, the continental average was pulled down by sub-Saharan Africa. Central Africa and South Africa saw the sharpest falls, with a collapse of 74 percent in FDI to South Africa, an impressive figure. Investment flows to Nigeria fell by 27 percent due to the sharp drop in oil prices, also indicates the report.
The situation contrasts sharply with the year 2014, during which the case was completely reversed. While at the global level there had been a significant decline in investment flows, FDI remained relatively stable in Africa. North Africa had experienced some decline, which was offset by a slight increase in sub-Saharan Africa.
An overall increase without real impact
Some might welcome the resumption of investment flows across the globe. In its World Investment Report 2015, UNCTAD actually expected a recovery in FDI for 2015, but not of the magnitude to that observed. While investments worth a total of US$1.4 trillion were anticipated, reality finally exceeded expectations by nearly US$300 billion. Nevertheless, given the nature of this growth - and not just its magnitude - enthusiasm must immediately be tempered, according to the UN agency.
Indeed, the overall increase in FDI in 2015 is not the result of new investment projects in productive assets, but rather the result of an increase in cross-border mergers and acquisitions, as well as corporate reconfigurations not involving significant movements in terms of real resources. While cross-border mergers and acquisitions experienced a 61.4 percent increase, climbing from US$399 billion in 2014 to US$644 billion in 2015, the value of new investment projects has not increased by even 1 percent. For the UNCTAD, "FDI recovery is unexpectedly strong, but lacks productive impact."
In Africa too, mergers and acquisitions have greatly increased (+ 304 percent) during the past year, to a total of US$5 billion in 2014. Investment flows into new projects have meanwhile fallen sharply, from US$88 billion during the 2014 year to US$71 billion in 2015.
Morose outlook for 2016
Unless we are witnessing a new wave of reconfigurations of companies and mergers and acquisitions, FDI should again experience a decline in 2016, says UNCTAD. The UN organisation links this prediction to the fragility of the global economy, the volatility of financial markets, the weakness of aggregate demand, and the marked slowdown in some emerging economies. Moreover, increased geopolitical risks and regional tensions could further amplify these challenges. In an environment marked by low investment flows targeting new projects, the recovery of FDI could be particularly fragile.
However, the UNCTAD also indicates that a possible improvement in macroeconomic conditions, in the case of a modest recovery in some emerging economies, could also enhance investor confidence and encourage them to invest more. A currency devaluation in some emerging economies could also stimulate investment, the statement said.
This article first appeared in Passerelles, 29 January 2016