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THE average return on equity for investors in Africa is 35%-55%, compared with 5%-7% in the US and Europe, which more than compensates for the risks, Pan African Research chief economist Iraj Abedian said on Friday.
"I believe Africa’s investment boom is on a sustainable path," he told the Afriforesight Commodities in Africa presentation in Sandton.
He said risks investors faced in Africa included weak governance and patchy democracies. However, the picture varied, as some countries, such as Rwanda and Zambia, had made huge strides and others were going backwards.
Another risk was the huge gap in expectations and technology between Africa’s largely youthful population and its older generation, which was causing social and political tensions.
Other risks included the low productivity of civil servants, weak infrastructure and undeveloped capital markets, making it difficult to raise capital. African countries each wanted their own stock exchange but were too small for this to be viable. But regional capital markets would be viable, Dr Abedian said.
The cost of doing business in Africa was high, and economies of agglomeration were at an early stage. This meant that, for example, a housing project in Mozambique still needed to import almost all its material rather than buying from local suppliers.
Dr Abedian said investors in Africa needed policy clarity, regulatory stability and administrative accountability. They also wanted countries to have a credible medium-term infrastructure plan, effective poverty alleviation strategies and a human resource development plan which took into account changes in the workplace. Countries should also have a plan for developing their capital markets.
Foreign direct investment (FDI) had risen consistently in Africa since the 1990s as the continent became more attractive to private capital. Most of the governance improvements in the continent had been driven by private investors, Dr Abedian said. SA’s FDI into Africa had also risen since 1997 and for some South African companies, such as Shoprite and MTN, African operations now contributed more than 50% of their bottom-line profits.
Over the next decade three global trends would override national strategic interests: the increasing old-age dependency ratio in most of the world, including Europe and China; environmental degradation, which was evident in more frequent natural disasters; and the changing nature of the workplace, driven by technology. But Africa was well placed to be least affected by these trends, Dr Abedian said. In particular, countries where more older people will have to be supported by the working population will have to raise taxes to support them.
Afriforesight’s chief commodity economist Kobus Lamprecht said the outlook for iron ore, manganese, copper, gold, platinum and chrome over the next five years was for gross profit margins to stay above 20%.
He said iron-ore prices were expected to fall significantly over the next five years because of increasing production by non-Chinese miners. But margins would remain attractive enough to stimulate supply growth.