Africa records 50% drop in FDI- EY Report

In 2020, Africa recorded its worst economic recession in 50 years, thanks to a 50 percent drop in Foreign Direct Investment (FDI), a new report by multinational professional services network Ernst & Young Global Limited has shown.

According to EY’s 11th Africa Attractiveness Report, the broad services sector, which includes business services, telecoms, media and technology, financial services, and consumer, attracted 72 percent of Africa’s FDI in 2020.

On an FDI score basis, which is a combined measure of the number of projects, jobs created, and capital invested, the report showed Southern Africa ranked highest with an FDI score of 45.4, followed by North Africa (36.7), West Africa (32.6), indicating that in 2020 Southern Africa was the favored FDI destinations, while the West region outpaced East Africa.

On a country basis, South Africa had the highest FDI score of 31.1, followed by Morocco at 17.7 and Nigeria at 17.5, which were the top 3 FDI destination countries in 2020.

The report acknowledged Africa’s extractive sector which includes mining, oil, and gas, on the other hand, accounted for only 4 percent of FDI inflows in 2020.

“This could be ascribed to its still largely resource-export dependent economies, which felt the impact of commodity price declines and rapidly decreasing demand, particularly from China, causing them to fall into recession,” according to Anthony Oputa, EY Regional Managing Partner for West Africa and EY Nigeria Country Leader.

The report further exposes how Africa’s overall GDP contracted by 2.4 percent in 2020, a development that was less lthan the 3.6 percent contraction in the overall global GDP.

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For Oputa, Africa along with the rest of the world was significantly impacted by the COVID-19 pandemic, causing lots of business disruption across industries and sectors.

“All hope is not lost, noting despite the drop in FDI, Africa is on the path to multi-speed recovery. While Foreign Direct Investment fell sharply in 2020, this is only half the story. The share of FDI into services sectors is rising rapidly, which will support job creation over time.” said Oputa said.

The report noted that investment flows are changing with the services sector enticing the lion’s share although environmental concerns are among the factors driving this shift.

“FDI is shifting away from extractive industries as an increased global focus on environmental sustainability requires a step change across the corporate world. This addresses the green energy transition and related concerns that form part of the corporate embrace of ESGs—environmental, social, and governance issues,” the report notes.

EY’s report admitted that though extractives accounted for a considerable portion of inbound capital (31 percent) between 2016 and 2020, however, they rank low in comparison with both services and industry in project numbers ( 7 percent) and the share of jobs created (11 percent).

“Over the last five years, service-based sectors received the highest capital investment (45 percent, amounting to $158billion) of the three industry groups, created more jobs (55 percent, 400,000) and accounted for 69 percent of Africa’s FDI projects,” the report noted.

Olufemi Alabi, EY Partner, and Strategy and Transaction said Africa’s economies have been rapidly transforming through the first two decades of the new millennium, “making them less dependent on extractive industries, as they aim to become more sustainable and competitive”.

Also, the report states that, across Africa, East Africa was most robust, with Tanzania and Ethiopia growing fastest in 2020. But Southern Africa was greatly affected, with South Africa falling into a deep recession.

In other emerging markets, as well as the key mature regions, the Report also reveals that in Europe, it was (-23 percent) and North America (-19 percent). Only Asia-Pacific’s decline was close (-43 percent).

France was the largest investor in Africa in 2020, followed by the US, the UK, and China-based on FDI project numbers. China had been the largest investor in 2018, but in capital investment, China still leads, the report noted.

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