Emerging Africa Expected To See Rise in Investment

• Africa's new trading partners seeking direct investment opportunities
• Asset managers looking for countries that inspire investor confidence
• Coherent macroeconomic policy, foreign exchange regimes vital

Having demonstrated resilience during the global financial crisis, Africa’s emerging market countries have good prospects for 2011.

Foreign direct investment, particularly from Africa’s new trading partners in Asia, is expected to strengthen and demand for African bonds is set to increase.

Such diversification of financing sources for much-needed public investment would be welcome, but would also require a coherent macroeconomic policy and foreign exchange regime to cope with capital flow surges, especially if they have historically been prone to debt problems.

More private capital ahead

Advanced-industrial-country policy measures, albeit needed to shore up their own growth prospects, have led to historically low yields and, in some cases, significant increases in public debt. These trends, coupled with strong growth prospects in many emerging markets, have led investors to look further afield.

Economic analysts, investors, and the media are increasingly able to single out countries in sub-Saharan Africa with good track records and prospects that inspire investor confidence, such as those globalization researcher Steven Radelet has dubbed “emerging Africa”

In turn, half a dozen African countries that had plans to tap international capital markets before the crisis hit in 2008 are dusting these plans off and seeking private financing, notably for ambitious infrastructure investment programs. This development will contribute directly to building critically needed African infrastructure. Establishing a benchmark bond yield will also help speed the development of capital markets and financial services for the African private sector.

But while such financing is welcome, it also comes with at least two requirements. First, countries will need to manage new debt carefully, limiting market financing to high-return projects, to avoid the risk of future debt crises. Second, these emerging African countries, as many emerging market economies have done before, will confront the task of making their economies robust to capital flow surges in the face of historical volatility.

New linkages, new partners

As discussed in the IMF’s Regional Economic Outlook for sub-Saharan Africa in October 2010, African trade is already shifting toward the dynamic emerging markets, notably China. Trade between China and Africa has been expanding rapidly, growing by an average of 30 percent a year over the past decade, and likely exceeded $100 billion in 2010.

These new partners will continue to show strong demand for goods that Africa can supply, and will be alert for opportunities to invest directly. For Africa, the key priorities will be negotiating fair and durable deals with big multinational firms and making the best use of the revenue windfalls, especially when the resources are nonrenewable

Financing the infrastructure catch-up

With new financial resources—from windfall natural resources revenues, new-found access to private capital, increased tax effort, or additional official development assistance—African countries can fund transformative investments. Solid investment projects, especially in transportation and power, could radically improve growth prospects and the ability to efficiently deliver public services that contribute to attaining the United Nations’ antipoverty Millennium Development Goals.

The needs are massive: the World Bank has estimated that in sub-Saharan Africa alone the total financing needed is $93 billion a year, of which a third remains unfunded.

Besides more financing, tackling the infrastructure gap will take a concentrated effort to improve how public investment projects are selected and managed. Many African countries have only recently emerged from comprehensive debt relief and will need to be mindful of the debt-sustainability ramifications of new financing. However, the IMF’s new debt limits policy offers additional flexibility to countries with IMF-supported programs, tailored to their debt management capacity.

Foreseeable pitfalls

If growth in advanced industrial and dynamic emerging economies falls short of expectations, the effects will be felt in Africa. This is potentially worrisome because most African countries have yet to rebuild the policy buffers that helped to mitigate the adverse effects of the last crisis. Rebuilding these buffers is therefore urgent.

Although the overall inflation outlook remains moderate, there are notable upside risks in food, fuel, and other commodities, suggestive of a rerun of the 2008 food and fuel price crisis that was only extinguished by the global financial crisis. These risks call for continued effort on agricultural policies on the supply side, and efficient social safety nets on the demand side.

Notwithstanding the rapid gains of the last decade, poverty, often extreme, remains pervasive in sub-Saharan Africa. In far too many places, more rapid growth has not yet translated into local employment opportunities, a better social safety net, or a higher quality of life. In addition, weak governance, limited administrative capacity, or political instability (and even outright conflict) have suppressed or reversed per-capita-GDP gains.

In 2011, the IMF will continue to assist its African members to make their macro and foreign exchange policies robust to capital flows, to manage the burden of new debt, and to seize new natural resource and infrastructure investment opportunities.