A law aimed at forcing local majority ownership of firms runs into economic reality and hardline nationalism at the same time
By Owen Gagare
The Zimbabwean government has apparently bowed to pressure by effecting changes to its controversial Indigenisation and Economic Empowerment Act, which compels non-indigenous investors to cede at least 51% of the shares in their companies to black Zimbabweans, but the furor and confusion around the legislation shows no sign of abating. After months of haggling, on January 4th this year Finance and Economic Development Minister Patrick Chinamasa and Youth, Indigenisation and Economic Empowerment Minister Patrick Zhuwao agreed to introduce changes to the Act. The turnaround was seen as an acknowledgment of the need to stimulate foreign direct investment (FDI), but has since been attacked by other members of the ruling party. Despite his apparent agreement to changes in indigenisation regulations, Mr Zhuwao has continued pushing for a hardline stance. On March 23rd he announced that the cabinet had passed a resolution to cancel the licences of non-compliant companies.
“Business has continued to disregard Zimbabwe’s indigenisation laws, as if daring our president and his government to do something about their contemptuous behaviour,” he said. The indigenisation law was enacted in 2007 ahead of the 2008 national elections, when the ruling party, ZANU-PF, turned to populist policies to shore up its waning support. At the time, the Zimbabwean economy was ravaged by hyperinflation, which peaked at 79.6 billion percent in November 2008, according to Professor Steve Hanke, an expert on exchange rate regimes at Johns Hopkins University, Baltimore. The government said it wanted to economically empower indigenous Zimbabweans by ensuring they acquired controlling stakes in foreign companies. Economists, business organisations and diplomats accredited to Zimbabwe questioned the policy, which they blamed for low investment levels in the country as compared to other countries in the region. According to the United Nations Conference on Trade and Development (UNCTAD), Zimbabwe recorded $545m in FDI in 2014.
By comparison, South Africa recorded FDI inflows of US$5.7 billion, Mozambique US$4.9 billion and Zambia US$2.4 billion. Nevertheless, ahead of the 2013 elections, the party again based its campaign on the idea of indigenisation, under the theme “indigenise, empower, develop and create employment”. It gained a controversial win at the polls, but businesses have resisted the regulations, which have proved an obstacle to new investment. The amendments to the Act will maintain a 51/49% ratio of local/foreign ownership for resource-based sectors of the economy such as mining, as well as other resources, including water, air, soil, animals and vegetation. However, non-compliant companies will no longer be threatened with seizure or closure, but will instead be required to pay an “indigenisation compliance levy” as a tradeoff for non-compliance, with a cap of 10% of gross turnover.
The new regulations will allow foreigners to own a controlling stake in companies operating in the non-resources sectors of the economy— including manufacturing, financial services, tourism, construction and energy—for up to 20 years, which may be extended. Previously the Act stipulated that a non-indigenous person could hold a majority share for five years from the date of commencing business. The regulations also make it easier for companies to comply with the legislation by awarding “empowerment credits” to companies that ensure “value addition, skills development and vocational training”, as well as socioeconomic development initiatives that include “enterprise development”, “preferential procurement” and the building of houses for workers. Under the new amendments, companies have until March 31st 2016 to submit their indigenisation plans to the Zimbabwe Investment Authority. Critics say the recent amendments change little, given that companies will still be expected to cede 51% of their shares.
“The fundamental principles remain unchanged and [the amendments] won’t remove the impediments to both domestic and international investors,” Eddie Cross, an economist, legislator and economic advisor to opposition leader Morgan Tsvangirai, told Africa in Fact. “The 10% levy will cripple every company in the country if implemented.” John Robertson, an independent economic analyst based in Harare, says the government should focus on creating an enabling environment that is conducive for both local and international investors. “Indigenisation should be a natural process, not something that is driven by the threat of punishment,” he said. “The amendments [make] everything worse. The new 10% requirement will destroy already existing companies and discourage new investors.” Zimbabwe National Chamber of Commerce chief executive Christopher Mugaga, also an economist, suggests that the term “indigenisation” is itself a problem. “It implies majority ownership by local or indigenous people, even if cosmetic changes are applied,” he told Africa in Fact.
Zimbabwe National Chamber of Commerce chief executive Christopher Mugaga, also an economist, suggests that the term “indigenisation” is itself a problem. “It implies majority ownership by local or indigenous people, even if cosmetic changes are applied,” he told Africa in Fact. Writing in Zimbabwe Independent, a privately owned business weekly, Sternford Moyo, a corporate lawyer who also sits on various boards, called for a balance between the country’s need to stimulate investment and its need to ensure that communities benefit from it. The requirement that investors relinquish a controlling share in their investments is simply unrealistic, he said. “No right-thinking person will feel happy to invest his or her money and immediately lose control over the investment.” Zimbabwe was experiencing serious liquidity problems, he argued. The country’s economic environment was not conducive to sellers obtaining value for their investments, as demonstrated by a recent collapse in the value of securities listed on the Zimbabwe Stock Exchange (ZSE). (On December 31st 2015, the ZSE’s market capitalisation plunged to $3 billion from $4.3 billion in January of that year.)
A law that made it compulsory to dispose of shares in such an environment, said Mr Moyo, would be inherently unfair. The government’s attempts to develop empowerment legislation should not focus on shareholdings in existing entities, he added, questioning the logic of the government’s approach to resources, particular in mining. “One cannot have mining companies buying [the right to mine] a mineral in exchange for their shares and at the same time paying royalties for extracting a resource they will have paid for with their shares.” Like other commentators, Mr Moyo was also critical of the proposed empowerment levy, which would be impossible for most corporates to carry, and would in any case be virtually unenforceable given an environment in which no money was available to purchase shares. He called for further amendments to the Act. “Investors need confidence that they will be allowed to control and benefit from their investments,” he concluded. Currently Zimbabwe is experiencing a crippling liquidity crunch that has resulted in company closures and high unemployment.
Zimbabwe Congress of Trade Unions secretary general Japhet Moyo told Africa In Fact that 95% of Zimbabweans were not formally employed, with only 5% in formal employment, due to massive job losses. Zimbabwe‘s public debt is around $8.4 billion, according to the 2015 Mid-Term Fiscal Policy Review presented to parliament in August 2015 by Mr Chinamasa. Since his appointment in 2013, Mr Chinamasa has worked hard to reengage key institutions such as the IMF and the World Bank in an effort to create conditions that attract new finance from international lenders. Under the terms of a new programme, negotiated by Mr Chinamasa, the IMF has resumed its monitoring of the country, which includes evaluating the implementation of the country’s economic programmes. As part of this, the government has committed itself to clarifying and amending its indigenisation law. However, Mr Chinamasa has drawn flak from hardline ministers who view the amendments as an admission that the ruling party has failed to implement the programme and thus that it won the 2013 election on empty promises, according to senior ZANU-PF officials who spoke to Africa In Fact in confidence.
These ministers believe that amending the regulations will hurt the ruling party ahead of the 2018 elections. Mr Chinamasa announced changes to the indigenisation law on December 24th last year. On Christmas Day he was roundly criticised by the empowerment minister, Mr Zhuwao, who accused him of “treachery” for suggesting that the indigenisation legislation should be amended. Mr Zhuwao was supported by Higher Education Minister Jonathan Moyo, who tweeted that Mr Chinamasa was “out of order”. Although the indigenisation law is yet to be amended, Mr Zhuwao’s March announcement regarding the cancellation of the licences of noncompliant businesses has added further confusion and uncertainty to Zimabwe’s business environment.
Sub-Saharan Africa: on the periphery
Political violence often means that those countries that most need investment are least likely to get it
By Brian Klaas
Conflict in Africa can result in economic devastation that lingers on far beyond the last crack of gunfire, because aid and trade matter more to the continent’s economic growth than they do to others. The loss of international partners—and foreign direct investment in particular— can drain an African country of its economic lifeblood for years after a coup d’état or a civil war. International ventures are naturally risk averse, and foreign investment is inherently volatile. For investors in Paris, Beijing, London, or New York, nothing seems quite so risky in Africa as a group of men in uniform taking power, or rebels in convoys headed toward the capital. Uncertainty is a surefire way to steer international capital elsewhere— either to another corner of Africa, or to another region altogether. However, not all volatility is created equal. The damage wrought by political violence—and the degree to which foreign direct investment flees bullets and bloodshed—is largely dictated by international responses to unconstitutional power grabs, coups and civil wars.
A country’s geo-strategic importance, particularly as regards economic interdependence and security, is a critical determinant of whether violence and volatility will lead to a devastating loss of foreign direct investment and a prolonged economic recession. Certain types of countries suffer more from conflict than others. The current scholarly consensus is that middle-income democracies, for example, suffer more economic fallout from coups than do poor authoritarian states. In short: comparatively richer democracies have more to lose from an autocratic military takeover than poor authoritarian states. For the latter class of countries, by contrast, a coup can sometimes even improve the economic outlook. But these findings overlook a key variable that accounts for significant variation in the economic trajectories of post-conflict nations: how the international community—and Western governments in particular—respond to conflict. This factor is particularly salient in the 21st century, since the international community has, at least rhetorically, affirmed a strong norm against coups and civil wars.
Since the end of the Cold War, international norms have shifted to uniformly oppose unconstitutional, and particularly violent transfers of power. This also became a regional norm in writing, as African Union’s main prohibition against “unconstitutional change of government” was codified in the Lomé Declaration in July 2000. African countries that experience coups are likely to face regional and international isolation. In research recently conducted for One Earth Future, an anti-conflict think tank based in Denver, Colorado, Jay Ulfelder and this author found evidence that the reactions of Western governments to conflict in other countries can create self-fulfilling economic prophecies. In some cases at least, there is evidence that the economic fortunes of a country after a coup, civil war, or an unconstitutional change of government may be largely dictated by international actors— particularly major powers in the West. Western governments may choose to isolate a country that has succumbed to a military takeover or a rebellion.
Isolation reduces international support for an illegitimate regime or an illegitimate rebel group that has taken power. Such isolation is based on the presumption that governments installed by unconstitutional means will find it hard to find allies or investors. In turn, prospective coup plotters or rebels may be deterred. But reinforcing the anti-conflict message with diplomatic and financial isolation comes at a cost: the economy concerned is likely to experience a severe downturn. On the other hand, Western governments can take a “business as usual” approach. They may use scathing rhetoric and call for a return to civilian government or to an end to a rebellion while not pursuing meaningful policy shifts with regard to the country concerned—be it aid, trade, or foreign direct investment. In such cases they may determine that a severance of ties is out of the question for short-term security reasons, or because they favour stability over a competing concern for democracy. In these cases, an economy is less likely to be affected. These diplomatic responses are not random.
They are carefully constructed with reference to geopolitics. Unfortunately, sub-Saharan Africa is in the geopolitical periphery. As a result, some countries outside of the region may receive more favourable diplomatic treatment in the wake of political violence, thereby ensuring continuity or even an increase in foreign direct investment. Government signals provide an important cue to investors, particularly when sanctions are involved—as they often are—with post-conflict, and particularly, post-coup governments. For example, an obscure and rarely enforced 1961 law explicitly forbids the US government from providing “any assistance to any country whose duly elected head of government is deposed by a military coup or decree”. In practice, however, the law is selectively applied. The military takeover in Egypt in 2013 was surely a textbook example of a coup d’état. Yet, challenged on this, a US State Department spokesperson said that the 1961 law did not require a “formal determination” as to whether a coup had taken place in Egypt, and that it was not in national interest to make such a determination.
US foreign direct investment to Egypt actually increased by 17% between 2013 and 2014, from $4.1 billion to $4.8 billion. Sub-Saharan Africa rarely gets this kind of treatment. The continent is home to far fewer Western geo-strategic priorities—with the exception, perhaps, of anti-terrorism cooperation in the Sahel region. Recent scholarship has shown that perceptions of African stability need to be built up over many years, but can be destroyed by a single event, such as a coup or a civil war; and government responses regularly prime FDI responses. Also, the reputational risks to Western firms of doing business in a place that is diplomatically isolated often cause firms to look elsewhere. However, international responses to African conflict can be comparatively less damaging if the country concerned serves Western economic interests in some way. Côte d’Ivoire’s 2010-11 post-election civil war, in which about 3,000 people died, created immense uncertainty. The country had just emerged from another civil war, so a pattern of political violence existed.
Yet foreign direct investment fell by only 16% after the conflict, and rebounded quickly. Why? Well, Côte d’Ivoire produces 40% of the world’s cocoa. Americans and Europeans want cheap chocolate, whether there’s a civil war or not. Foreign investors respond to African conflict in the same way they make investment decisions more generally: their decisions are based on their perceptions of future returns. When investors put their money into a country that is closely intertwined with Western interests, or the interests of a major global power such as China, then they are more likely to be insulated from capital flight after an episode of political violence. The US is more willing to stick to its diplomatic commitments with Egypt, or other perceived lynchpins of geopolitical security, even if that has economic consequences, than with a country like Madagascar. Being on the international periphery, as most of sub-Saharan Africa is, virtually ensures that political conflict will drive international investment elsewhere.
In addition, unlike Chinese firms, Western businesses are extremely hesitant to do business in regimes that are being routinely condemned for human rights abuses, undemocratic governance, and political violence This creates a Catch-22 effect: those countries that are least well equipped to weather the storm of conflict are more likely to lose foreign investment, while countries that have sufficiently strong international partners are more likely to continue to receive investment. Africa, the most conflict-prone continent, is often punished most harshly by international investors when volatility strikes.
Sub-Saharan Africa: Islamic investment
Investors from Organisation of Islamic Cooperation member countries are increasingly looking at opportunities in sub-Saharan Africa
By François Misser
The Islamic world is increasingly seeing Africa as a destination for foreign investment, both on the institutional and corporate fronts. One sign of such interest was the recent forum on investments in Africa, held in Marrakech from December 17th -19th 2015 and organised by the Organisation of Islamic Cooperation (OIC), which groups 57 countries. The OIC has been active on the continent on the humanitarian and diplomatic fronts since its creation in 1969. More recently, the organisation’s financial arm, the Islamic Development Bank (IDB)—whose main shareholders are Saudi Arabia (23.6%), Libya (9.5%), Iran (8.3%), Nigeria (7.7%) and the United Arab Emirates (7.5%)—has become a major player in development finance in Africa. Some 30% of the $12 billion invested in 2015 by the IDB went to sub- Saharan Africa, says its regional director, Sidi Mohamed Taleb.
The bank is now focusing on removing obstacles to African development, among them poor infrastructure and agricultural productivity. The strategy, which has been largely designed by the OIC’s 22 African member states, according to Mr Taleb, will invest mainly in Africa’s energy, telecoms, transport and agriculture sectors. In the Sahel region the bank is financing the flagship Dakar-Port Sudan railway and key energy projects in Mali, Mauritania, Guinea and Côte d’Ivoire, in some cases with the geo-strategic aim of stabilising the region. Another major IDB initiative in Africa is the OIC Cotton Action Plan, first created in 2007 to rehabilitate decaying cotton and textile industries in OIC member states. The bank has a $400m portfolio in Mali, where it is building a new international airport. It is also financing a road between Algeria and Kidal, the capital of northern Mali, which fell to the extremist group Al Qaida in the Islamic Maghreb, in 2013.
“There is an absolute necessity to break the isolation of this region,” says Mr Taleb. It would appear that the OIC’s aim there is to restore political stability, including mediating between the government and the rebels. The Khartoum headquartered Bank for Economic Development in Africa (BADEA), established in 1973 by the Arab League member states, is another important institutional player in the Islamic world. Between 1975 and 2014 it allocated some $3.69 billion in loans. In 2014, it provided $200m in loans to 22 sub-Saharan countries, 57.6% of it to infrastructure, 22.6% to agriculture and rural development and the rest to the non-profit and private sectors. Certain gulf states rank high among Islamic partner countries. In 2014, the Saudi Fund for Development (SDF) supported 13 projects in 11 African countries, which received a total of SR1.27 billion ($340m). In November 2013, Kuwait said it would extend $1 billion in soft loans to the continent over the next five years.
Since its inception in 1961, the Kuwait Fund has contributed over $6.4 billion to projects in 48 African states. The Abu Dhabi Fund for Development (ADFD) has provided 65 billion dirhams (about $17.7 billion) to 76 countries around the world since its creation in 1971. It financed Egypt’s Sheikh Zayed Canal, built using a Dh348m (about $94.74m in 2012) grant (the canal has yet to be completed). Meanwhile, Qatar also has ambitions to be a major player in Africa. Its department of international aid spent more than $1.7 billion on development assistance in 2013, one third of it in Africa. Companies from several Islamic countries have also developed commercial and private investment ties with Africa. According to a 2015 report by the Economist Intelligence Unit (EIU), East Africa is attracting most of the Gulf’s non-commodity investment, with manufacturing in Ethiopia; leisure, retail and tourism in Mozambique and Kenya; and education in Uganda of particular interest.
Retail and hypermarkets, automotives, commercial banking and tourism are key sectors. However, trade between the Gulf Cooperation Council (GCC) and Africa is still modest. In 2014, GCC exports to sub-Saharan Africa totalled $19.7 billion, according to the IMF. However, direct investment flows are growing significantly. Gulf firms invested at least $9.3 billion in sub- Saharan Africa between 2005 and 2014, and $2.7 billion in the first half of 2015, according to the EIU. South Africa, Kenya and Uganda have attracted most Gulf investment. The trend is likely to continue. The UN Conference on Trade and Development (UNCTAD) recorded 17 bilateral investment treaties between the Gulf and sub-Saharan countries in 2013, one third of which were signed that year. Most GCC capital goes into Africa through listed stocks and bonds, including locally domiciled funds such as Invest AD’s Emerging Africa Fund in the UAE, which is co-managed with the Morrocan Attijariwafa Bank.
Significant investments recorded in 2014 were the purchase by Qatar National Bank of a 23% stake in Ecobank of Togo and the acquisition of $300m of Nigeria’s Dangote Cement shares by the Investment Corporation of Dubai. Morocco’s banks, insurance and agribusiness are expanding fast in Africa, helping to boost Moroccan exporters. The Attijawariwafa Bank now has subsidiaries and branches in 14 African countries, mostly in west Africa. The world leader in fertilisers, the Office Chérifien des Phosphates (OCP), a Moroccan company, is aggressively promoting its products south of the Sahara. Meanwhile, Turkish Airlines is expanding its presence on the continent, with 44 African destinations; Royal Air Maroc has 22 and Emirates Airlines 19. Turkey is becoming increasingly involved in FDI to Africa. It held two summits with Africa, in Istanbul in 2008 and in Malabo (Equatorial Guinea) in 2014. Turkish Airlines was one of the first airlines to resume international flights to Somalia in 2011. Turkish trade with Africa has risen nearly fourfold from $5.4 billion in 2003 to $20 billion in 2014, according to a 2015 research paper by Chatham House, the UK’s Royal Institute of International Affairs.
Turkey has signed investment treaties with 12 countries in sub-Saharan Africa and aims to sign a free trade agreement with the East African Community by 2019. At the end of 2011, then Turkish Foreign Minister Ahmed Davutoglu estimated Turkish investment in Africa at some $1 billion. It is likely much higher today. An Ethiopian Investment Agency official noted in 2014 that Turkey had invested about $1.2 billion in Ethiopia in recent years, particularly in the textile industry, as compared to China’s $836m over the past decade. Islamic finance is gaining momentum in sub-Saharan Africa, where about 30% of the population is Muslim, according to the Pew Research Center, a think tank in Washington D.C. Gulf African Bank, which offers sharia-compliant products, now has 14 branches in Kenya, with a rising portfolio of small and medium enterprises. Islamic finance is one of the fastest growing financial segments at global level. This is one reason why the World Bank Group’s International Finance Corporation (IFC) has invested in the Gulf African Bank.
In September 2015, South Africa issued its first $500m sukuk, a sharia-compliant and interest-free Islamic bond, in the international capital markets to broaden its investor base and diversify funding for infrastructure. Côte d’Ivoire plans to issue its first sukuk, for 350 billion CFA francs (roughly $700m), with the support of the IDB. According to the ratings agency Standard & Poor’s, new regulations and fiscal incentives around the continent “could accelerate Islamic finance development in Africa”. However, the low oil price may cause some disruption to Islamic foreign investment. Saudi Arabia has withdrawn tens of billions of dollars from global asset managers since September 2015, according to the Financial Times. Money transfers from Islamic countries or charities to Africa have also faced regulators’ concerns that networks could be used for criminal financing. Kenya suspended the operations of 13 firms in the first half of 2015 over concerns that funds were flowing to al-Shabab militants. In May 2013 Barclays said it would close the bank accounts of 250 money transfer companies as part of a drive to meet stricter money laundering rules.
A February 2016 study by the IMF concludes that there is no evidence that Islamic finance faces different risks from those of conventional finance as regards terrorism and crime. However, it concludes that an in-depth analysis of the intrinsic characteristics and arrangements used in Islamic finance is still required, and that Islamic financial institutions need to build more experience with regard to the risks they face in dealing with money laundering and terrorism financing. If so, this would apply also to the Islamic world’s investments in Africa.
South Africa: policy failure
Africa’s most sophisticated economy faces global headwinds, but problematic governance compounds its challenges
By Rob Jeffrey and Johannes Jordaan
The South African economy has made great strides since 1994, when apartheid was replaced with a democratic system. One useful measure of this is the country’s FDI liabilities—FDI stock held by foreign companies in the country. In 1996, these were $14.4 billion in nominal terms, but by 2015, they were $148 billion, having reached a high of $179 billion in 2011. However, the tide of FDI to South Africa is turning. In 2015, world FDI flows increased an estimated 36.5% to $1.7 trillion, according to the United Nations Conference on Trade and Development (UNCTAD). Meanwhile, FDI flows to Africa decreased 31.4% to $38 billion in the same year, and FDI flows into South Africa decreased 74% to $1.5 billion. Data from the SA Reserve Bank (SARB) shows that FDI to South Africa reached a record level of R80.1 billion ($8.3 billion) in 2013 and was still high at R62.6 billion ($5.78 billion) in 2014, but that it dropped to R22.6 billion ($1.77 billion) in 2015. FDI flows tend to be volatile, but the 2015 level is the lowest level in nominal terms since 2006.
According to UNCTAD, the large decline in FDI to African countries is due to the recent end of the commodity “super-cycle”, which has seriously affected the flow of FDI to resource-rich countries. In 2015, FDI flows into Mozambique were down 21% to $3.8 billion while FDI to Nigeria declined 27% to US$3.4 billion, for example. However, both of these figures were higher than South Africa’s FDI of $1.5 billion in the same year. (UNCTAD preliminary data for 2015. Differences in value with respect to the previous paragraph may be due to different definitions of FDI used by SARB and UNCTAD.) Meanwhile, South African companies are increasingly investing elsewhere. According to SARB data, South African FDI flows into the rest of the world were R83.2 billion ($7.7 billion) in 2014 and R68.3 billion ($5.4 billion) in 2015. This demonstrates the entrepreneurial qualities inherent in South African business, but it is also an indication of a lack of confidence in the domestic economy.
In 2014, South African companies held more foreign FDI assets as compared to the FDI liabilities held by foreign companies in South African companies. It was the first time we have seen this since 1998. The sharp decline in FDI to South Africa is highlighted by its performance on the AT Kearney FDI Confidence index. While the country occupied the 11th position out of the top 25 rated countries in 2012, it dropped to the 13th position in 2014. More ominously, it was not included in the 2015 ranking at all. According to the 2015 EY Africa Attractiveness survey, FDI flows into new green- and brown-fields projects in South Africa declined in 2015, for a second consecutive year. Internally, South Africa has seen a dramatic slowdown in key goods producing sectors in recent years, mainly in agriculture and agricultural processing and in the mining and manufacturing sectors.
Following the global recession of 2008/9, many of the country’s economic sectors faced sharply reduced domestic and export demand levels. Key sectors of the economy have also seen longer-term declines. Manufacturing contributed about 30% of GDP in 1986, but that share is currently at about 21%. The share of mining fell from 13% to 7% in the same period. Meanwhile, services have grown from 51% to 69% of GDP. The UK remains the largest FDI investor in South Africa, according to SARB data. The FDI assets (stocks) held by UK companies in South Africa were 45.6% of the total South African FDI liabilities in 2014. However, this share decreased from 54% in 2009. As against this, companies from the Netherlands held 16.6% of South African FDI liabilities in 2014, an increase from 10.6% in 2009. In another development, foreign investors are changing their interest in South Africa, with more emphasis on the service industry and less on value-added industries such as mining and manufacturing.
FDI liabilities in manufacturing decreased from a share of 27.9% in 2009 to 16.5% in 2014. However, the FDI share in finance, insurance, real-estate and business services increased from 27.1% in 2009 to 44.4% in 2014 from R235 billion ($27.8 billion) in 2009 to R715 billion ($65.9 billion) in 2014 (in nominal terms). FDI liabilities in mining and quarrying accounted for 33.4% of total FDI liabilities in South Africa in 2009, but dropped to 23.5% in 2014. The increased share in the service sector was mainly driven by foreign investment in South African banking. This could change, depending on who buys the Barclays share in Barclays Africa Group. In early April this year, London-based Barclays plc confirmed its plans “to sell down its 62% stake in Barclays Africa (Absa) over the next two to three years, to a level at which it can de-consolidate it, probably below 20%”, according to the Johannesburg daily newspaper, Business Day.
One contributing factor to the lower inflow of FDI to South Africa in 2015 was the sale by UK pharmaceutical giant GlaxoSmithKline of half of its 12.4% stake in South African drugs manufacturer Aspen Pharmacare for R10.5 billion ($823.5m). Steinhoff bought control of Pepkor, a South African holding company with extensive interests in retail, from South African business tycoon Christo Wiese and Brait, an investment company with South African roots but a primary listing in Luxembourg. The deal also involved Brait Mauritius, which was holding Brait’s 37% of Pepkor, and “therefore counted as a foreign investor disinvesting from a South African asset for balance of payments purposes,” according to the Rand Daily Mail, a South African website. These deals resulted in a net FDI inflow of -R13.9 billion (-$1.09 billion) in the first quarter of 2015, but this was followed-up with positive net inflows of R6.9 billion ($541.2m), R15.9 billion (1.25 billion) and R13.7 billion ($1.07 billion) in quarters two, three and four respectively, according to SARB data.
Nevertheless, the recent sharp decline in FDI to the country is clear evidence that foreign investors are losing confidence in the South African economy. Given the sluggish growth of the South African economy, investors were looking elsewhere, according to the 2015 EY investment attractiveness report. Significant investment from other countries, notably the Brics grouping, which consists of Brazil, Russia, China and India, as well as South Africa, has not been forthcoming. These countries are also facing economic challenges caused by the global economic slowdown and the fall in prices of commodities. South Africa’s economic performance has certainly been influenced by low commodity prices, but the end of the commodity super-cycle tells only part of the story. Resource-rich countries, particularly in Africa, have generally failed to develop much-needed infrastructure and to develop their potential downstream supply and other industries.
They have also suffered the twin scourges of corruption and poor policymaking. Sadly, South Africa is now no exception. In particular, policy uncertainty generated by the South African government and the resulting poor sector performance are negatively shaping the situation. As in other African countries, government policy decisions are impeding economic growth and discouraging foreign investment—particularly from Western industrialised countries, traditionally the major source of FDI to the country. Without improved economic growth, the country’s domestic consumer growth will be limited. Currently, South African households are in serious debt. Government investment growth is limited because the government is short of funding. Realistically speaking, the only source of growth in the near future will be a significant increase in domestic investment, and in particular, foreign direct investment.
If the country is to turn its economic fortunes around—and hence its ability to deliver services and a decent quality of life to its citizens—a number of measures will be necessary.
• Restrictive legislation that leads to inefficiencies and low productivity must be withdrawn.
• Legislation that promotes both domestic and foreign investment must be encouraged, rather than discouraged.
• The country’s infrastructure must be enhanced to support growth.
• South Africa’s goods-producing primary and downstream industries must be developed.
• Many of the country’s state assets, which are performing inadequately, must be privatised, and control handed to the private sector.
Individual freedom and true economic independence will only come by focusing on those factors that increase economic growth. Countries that do not participate in the process of globalisation, or which introduce inferior or inadequate policies as compared to those of developed or other developing countries, run the risk of becoming comparatively less competitive in the global economy. Such a fate awaits South Africa, unless its political leadership wakes up.
Nigeria: attractive investment?
Africa’s largest economy plans to double its foreign direct investment (FDI) by removing impediments to investment, but this may be a tall order
By Ini Ekott
Within the first nine months of his administration Nigerian president Muhammadu Buhari has travelled 26 times to 23 countries. His incessant foreign travels have attracted many comments from the nation. In March, a poster from a 2003 election campaign emerged in which Mr Buhari promised not to “spend over 110 days in a year globetrotting”. It was a jab at former President Olusegun Obasanjo, who at the time faced crushing criticism for his many trips. Yet, thirteen years later, Mr Buhari— like Mr Obasanjo a former general—is being denounced for the same travel habit. Critics say the 73-year-old president should stay home instead, to deal with a severe economic crisis. His government says the central plank of the trips is to attract foreign investment— the same reason Mr Obasanjo gave. “You do not run a country by being isolated,” Information Minister Lai Mohammed told journalists on February 17th this year at the presidential villa in Abuja. He added that it was important that the president be seen in various international contexts because before now, Nigeria was “almost a pariah state”.
The country’s association with issues of terrorism and corruption was driving investments away, he said. Nigeria’s economic growth last year hit a 16-year low of 2.8%, according to the IMF, with an $11 billion budget deficit projected for 2016 and an acute foreign exchange shortage caused by sustained low oil prices. Foreign direct investment (FDI) into Nigeria plummeted from a peak of $8.9 billion in 2011 to $3.4 billion in 2015, according to the Global Investment Trends Monitor of the United Nations Conference of Trade and Development (UNCTAD). Most FDI in Nigeria has gone to the oil and gas sector, according to Nigeria’s National Bureau of Statistics. But with the collapse of oil prices and loss of billions of petrodollars, Nigeria is now seeking to improve its business outlook and address more complex factors that kept investors away in the past. Nigeria aims to attract between $10 billion and $20 billion in FDI a year, according to trade and investment minister Okechukwu Enelamah.
That sets the bar far higher than the $3.4 billion invested in the country in 2015, according to the UN Global Investment Trends Monitor. “We are working with foreign investors proactively and we’re also trying to bring them in as part of the foreign exchange supply problem,” Mr Enelamah told Bloomberg in February. He says that range of FDI is the minimum Nigeria needs going forward. But analysts counter that Mr Buhari has yet to formulate clear economic policies, and that his clearest response to the crisis has been to travel abroad. The Buhari government has been clear on its intentions with regard to the Boko Haram crisis as well as its anti-corruption effort, says Malcolm Fabiyi, who coordinates the Governance Accountability Initiative of Nigeria (GAIN) poll, and has served as a visiting professor at Lagos Business School. “The lack of clarity is only in the economic sphere,” he says The World Bank’s Doing Business 2016 report ranks Nigeria at 169 out of 189 countries in terms of ease of doing business, a drop of 30 places since 2005.
Issues such as access to electricity, poor enforcement of contracts and difficulties with cross-border trading contributed to the poor score, which measures the ease of starting and operating a firm. Mr Buhari has said his government will address deficiencies in power, transportation and in other areas. In December last year the president said he would unveil policies to ease the challenges of doing business in Nigeria but these are also still to appear. “All impediments like delayed processing of permits, multiple taxation and corrupt practices would be removed,” he said in Doha, Qatar, at a February 29th meeting with prospective investors from Qatar’s Chamber of Commerce. But details on these matters have yet to be provided. Vice President Yemi Osinbajo says the administration will work with the World Bank to improve Nigeria’s Ease of Doing Business ranking within 18 months. Mr Osinbajo, who heads the government’s economic team, said the administration’s seriousness could be seen in its decision to allocate 30% of Nigeria’s $32.8 billion budget in 2016 to infrastructure—the highest in two years.
Previous FDI targets have failed. The target for 2013 was $16 billion, for instance, but the government only realised $5.6 billion of that, according to the UN. “There is nothing wrong in aspiring. But there is a difference between aspiration and reality,” said Nwakanma Chinaecherem, chairman of the council of Nigeria’s Chartered Institute of Financial and Investment Analysts. “When it comes to FDI, every country is competing and investors will always direct their funds to places with high return and minimal risk.” Mr Buhari, who finally named his cabinet some five months after taking office, says his government is now focused on revamping the country’s agriculture and solid minerals sectors. “With the downturn in the global prices of oil, we now have to prospect our solid minerals. We have to return to agriculture,” he told the Council of Saudi Arabia’s Chamber of Commerce and Industry in Riyadh in late February. “We will welcome investments in these areas. We will appreciate an inflow of more resources and expertise to help us achieve our objective of economic diversification.”
Meanwhile, Nigeria’s foreign exchange crisis may have grim implications for FDI into the country. The government has pegged the naira’s official rate at 197 against the dollar, but in February the currency plunged to an unprecedented 400 on the black market. To protect local industry and stave off inflation, which is already choking businesses, imports and foreign exchange have been restricted. On March 2nd, South African dairy company Clover said it was withdrawing its future investments from Nigeria, citing the country’s financial crisis. The move followed a withdrawal by Truworths, a South African retail line. Despite the setback, Mr Fabiyi, a former management consultant with McKinsey & Company, said the government could take advantage of the crisis to rebuild neglected infrastructure and secure foreign investment and exchange at the same time. To address the country’s shortfall of 20 million houses, for instance, and draw in foreign investment, the government could aim to build 10 million housing units within the next 10 years, he said. A fund could be established, to which equity in the form of 10 million plots of land would be transferred.
At about $10,000 per plot, this would amount to about $100 billion. Homes built on the plots would add further value—he estimated between two and three million naira per home—which would raise the total value of the fund to between $200 and $300 billion. Any overseas subscription to the fund—he estimated between $100 and $200 billion—would yield “immediate foreign exchange” for the country. Mr Chinaecherem says the government should focus on agriculture and manufacturing, on combatting private sector corruption and on creating policies that assure foreign investors. “There must be economic agents and individuals ready to partner foreign investors in a way that foreigners would be assured they won’t have their fingers burnt,” he said. Without them, the government’s hope of doubling FDI into the country is mere wishful thinking.
Namibia: the new nationalism
A raft of legislation introduced since last year may have the opposite effect from the one claimed
By Frederico Links
Since taking office on March 21st last year, President Hage Geingob’s administration has cast itself as business-friendly and welcoming of foreign investors. Yet developments since the last quarter of 2015 suggest that its policies are damaging Namibia’s attractiveness as an investment destination. The country faces several longstanding challenges, among them pervasive poverty, rampant unemployment (more than 40% of youth are unemployed, according to the Namibia Labour Force Survey (NLFS) 2014) and staggering income and wealth inequality. A prolonged drought has contributed to widespread malnourishment and reportedly decimated the livelihoods of rural, communal and subsistence farming households, which account for roughly half of Namibia’s estimated 2.3m population. Like other emerging economies, Namibia is feeling the effects of the global collapse in commodity prices.
A substantial part of its export earnings and foreign currency reserves derive from diamonds, uranium and copper: mining accounts for approximately 12% of GDP and more than 50% of export earnings and foreign currency reserves, according to the Namibia Statistics Agency. A depreciating currency and constrained state fiscal position have necessitated deep cuts to government spending through 2018. Yet, in the face of all this, as well as emergent social restiveness, the government appears to have adopted an increasingly nationalist and populist approach to economic policy and regulation. This is evident in a raft of bills and policy documents proposed since late 2015. In October 2015, parliament passed the Public Procurement Act (PPA), which replaces the Tender Board Act of 1996, as well as the Regional Councils Amendment Act (RCAA).
In November 2015, a controversial Local Authorities Amendment Bill (LAAB) was introduced, while a long dormant approach to black economic empowerment, the New Equitable Economic Empowerment Framework (NEEEF), suddenly re-emerged after fading from the policy discourse following its introduction in 2011. In late January, the Local Authorities Amendment Bill was quashed by the National Council for proposing residential area segregation along class lines, though it had been passed by the National Assembly. These and other pieces of legislation seek to restrict the activities of foreign investors. Foreigners may be prevented from owning urban land or property (RCAA and LAAB). To qualify for state contracts, foreigners must meet “Namibianisation” criteria requiring local empowerment and beneficiation through joint ventures, the ceding of sizeable equity stakes to locals or the substantial sourcing of inputs from local enterprises (PPA).
Along with local white owned businesses, they may also have to sell off a minimum of 25% shareholding in their Namibian business to local black or “previously disadvantaged individuals” if the NEEEF is accepted in its current form. In addition, probably from 2017 a “solidarity tax” will be levied on all taxpayers above a certain income level—about $5,500 or more—to pay for newly proposed pro-poor social welfare measures. This will add to an already relatively heavy tax burden on a small moderate-to-high income earning tax bracket. An Export Levy Bill is also in the offing, which, if finalised this year, will apply a new tax to unprocessed mineral exports from 2017. This is very unpopular with mining companies. Other legislative amendments covering minerals and marine resources are in the pipeline, due this year or next. Then there’s the Investment Bill, which will replace the Foreign Investment Act of 1990 and its 1993 amendment. Critics suspect that these amendments will aim at maximising direct Namibian control and exploitation of natural resources while relegating foreign investors to bit-parts as “enablers”.
Investors, both local and foreign, are irked by the Namibian government’s claim to be open and consultative. In fact, it rarely consults sectoral stakeholders and appears to enjoy springing legislative surprises on the business community. “This is not the way to go about doing things if you want to brand yourself as a small open economy,” a South Africa-based consultant told Africa in Fact in late February 2016. The consultant, who asked not to be identified, was on an extensive due diligence mission for American interests regarding the proposed provisions of the new NEEEF Bill. The consultant said international investors are sceptical of the Namibian government’s claimed purpose with the NEEEF. The government says it will encourage wider participation in the economy and increase economic growth and prosperity, but to some outsiders it looked like an attempt at economic capture by politically connected elites. The latest regulatory tinkering also ran the risk of dis-incentivising local entrepreneurship, with the knock-on effect of severely limiting investment opportunities for foreign capital, the source added.
The same concern is expressed by Tim Parkhouse, Secretary General of the Namibian Employers’ Federation (NEF), which represents local and foreign companies. The recent law and policy moves would “scare off” foreign investment, he said. Economic stagnation or downturn was “highly likely” if the government continued to haphazardly intervene in the economy, he says. This would potentially include company closures and the resulting industrial and social unrest as a consequence of job losses. The government’s approach would “make doing business harder” for both local and foreign investors, Brian Black, chairperson of the Namibia Manufacturers Association (NMA), told a workshop on the introduction of the NEEEF hosted by the office of the Namibian prime minister, Saara Kuugongelwa-Amadhila, in mid-February 2016. “Emotive politicking” was guiding policy and law design and development, he said. Like the Local Authorities Amendment Bill—by then already rejected—the NEEEF had not been well conceived or thought through.
One source, who was in regular contact with foreign investors and wanted to remain anonymous, says that the Namibian government could already have endangered about $500m in multi-year foreign direct investment (FDI) earmarked to begin flowing into the country from 2016. Critics from a range of sectors privately question the government’s underlying motives and express concern at the government’s “unilateral and undemocratic” approach. Stakeholder discussions around the NEEEF Bill commenced in mid-February this year. Various sectoral umbrella bodies have issued statements critical of the NEEEF Bill in its current form. During a radio discussion in early March, a number of young black Namibians, who are arguably among the first-line beneficiaries of the proposed empowerment dispensation, expressed suspicion and cynicism regarding the intentions behind the proposed legislation. At a meeting of the Namibia Chamber of Commerce and Industry on March 30th, attended by Africa in Fact, a range of black businesspeople also expressed also expressed substantial reservations with it.
Past experience would indicate that the Geingob administration will ignore these criticisms. It appears to think that the country can rely on its currently favourable investment ratings: Moody’s rates Namibia’s sovereign debt at Baa3 while Fitch’s rates it at BBB, both ratings indicating a low investment grade. The country is perceived to enjoy distinct advantages: a well regarded and independent judiciary and respect for the rule of law, moderately well functioning public and private institutional environments, and a reasonably sophisticated and dynamic financial sector, among other factors. If so, it is ignoring other evaluations. In a June 2014 report the Institute for Public Policy Research (IPPR), a Namibian think-tank, listed several negative assessments by international and local organisations, among them the World Economic Forum’s Global Competitiveness Index (GCI), the World Bank’s Ease of Doing Business rankings and the Namibia Business and Investment Climate Survey.
“Serious investors looking at Namibia from outside will pick up on these negative indications before they make a decision about coming here,” the report concluded. The discussions around the NEEEF Bill are set to conclude on April 29th, 2016, while the Investment Bill is still nowhere to be seen. Even so, a national investment conference is planned for some time in May 2016, according to recent statements by the minister of finance, Calle Schlettwein.