Nigeria, South Africa score high on risk, losing investment appeal to militancy, political instability, others – Report

Despite recent recovery in Nigeria and South Africa, a newly released Africa Risk-Reward Index developed by Control Risks and Oxford Economics, says the two African economic giants, together with Egypt, have stumbled recently and may face increasing competition for investment from Kenya and Ethiopia.

“Africa’s economic giants, Nigeria, South Africa and Egypt, have been stumbling recently. Rising security risks and political instability in Egypt, economic downturn and militancy in Nigeria and escalating political risks in South Africa led to doubts whether the balance between risks and opportunities in these markets is still favourable for businesses,” the report says.

The Africa Risk-Reward Index, which provides investors with a synthesis of risks and opportunities across the African continent, specifically indicated that Nigeria, with an energy sector too big to lose investors’ appeal, got a reward score of 6.0 (out of 10), ahead of South Africa and Egypt.

The report claims that Nigeria’s charms, however, fade against a risk score of 7.3 (out of 10), as President Muhammadu Buhari’s government struggles through its first term, adding that a fall in oil prices and lower production due to insurgent attacks in the Niger Delta have slashed growth from 6.3 percent in 2014 to 2.7 percent in 2015 followed by a sharp contraction of 1.6 percent last year.

On the other hand, South Africa’s risk is adjudged at a score of 5.0, which remains below the region’s average, but the reward score of 4.6 is also low.

“Whilst the country enjoys a deserved reputation as Africa’s pre-eminent constitutional democracy, several of its key institutions have gradually weakened over the past decade. Economic prospects are closely linked to the outcomes of the ANC’s national conference in December,” the report noted.

The forecast real GDP growth of 0.5 percent for 2017 is below population growth and certainly insufficient to reduce South Africa’s staggering 27.7 percent unemployment rate.

Egypt, on its part was handed a risk score of 6.0 due to socio-economic grievances, a government crackdown on opposition and Islamist groups, and persistent militancy, which are seen to continue to have an impact on the business environment. Its reward score is 5.5 percent

Conversely, Ethiopia outperforms every African peer with its high reward score of 8.0. Notably, it attracted $3.2bn of foreign direct investment in 2016 – more even than Nigeria, and double the figure for Morocco.

The East African nation is one of Africa’s fastest growing economies and continues to offer strong prospects. Growth averaged 10 percent from 2010 to 2015 and although 2016 growth was slower at 6.5 percent the expansion remains impressive. However, the omnipresent role of government in the economy raises concerns relating to public sector efficiency and financial management. External debt is expected to increase to 38.7 percent of GDP by the end of this year, leading to a risk score of 5.8.

Kenya has achieved a period of strong GDP growth amid relative political stability: real GDP growth averaged at 6.0 percent in 2010-16. The 2017 growth forecast is at 5.4 percent.

The country’s reward score is 6.7. A well-educated workforce and an innovative service sector, the government’s continued investments in upgrading critical national infrastructure, and deepening integration with its neighbours through the East African Community (EAC) all allow the country to act as a gateway into the larger East Africa region.

Current fiscal concerns and a political system that remains closely tied to ethnic affiliation contribute to a risk score of 5.6 and reflects considerable room for improvements.

“Experienced investors – not only in Africa, but around the world – know that risk and reward are close companions. While no serious investor should overlook the economic giants of the continent, real competitive edge can only be achieved when investors manage to stay ahead of the pack in knowing what’s next.

“The Africa Risk-Reward Index helps investors to identify some of the more hidden investment opportunities in times where the heavy-hitters are struggling,” says Paul Gabriel, senior analyst for Africa at Control Risks and lead-author of the report.