By Ansu Kretzmann and Mandi Krebs (ENS Tax Ensight)
Executive summary (SAIT Technical)
Investors have traditionally looked at established markets in developing countries for investment opportunities. Recently strategies have shifted towards emerging markets such as the BRIC countries and Africa. African countries have several things to promote such investment including tax incentives, establishing investment authorities, bettering rankings in terms of ease of doing business and streamlining processes relating to licensing and registration, cross border trading, obtaining credit and paying taxes.
Traditionally investors have looked towards developed countries for investment opportunities and, more often than not, investment decisions have been based on the economic development and growth of such countries. However, recently investment strategies have shifted towards emerging markets rather than established markets and for this reason an ever increasing number of investors are turning their attention to the African market.
For far too long Africa has been overlooked by investors as they have favoured slightly more developed markets, such as, Brazil, Russia, India and China ("BRIC countries”). Recent studies have shown that a plethora of reasons exist for investors to rethink their outdated investment strategies and to focus their attention on markets which are fairly underdeveloped, by global standards.
It is a well established principle that those investors who enter a relatively new high-growth market first, will often reap the rewards of their bold decision as such markets offer higher returns for investors, due to the fact that the market is not yet saturated. Although in today’s unstable economic environment, the prospect of entering a new emerging market may present many risks, the fact remains that the quest to procure growth opportunities will require investors to reevaluate any ‘risk-averse’ policies they may have. The longer investors hesitate to take action in this regard, the greater the risk of missing out on the growing opportunities and the more challenging the competitive environment awaiting them will be, once they do.
Another noteworthy benefit of investing into African jurisdictions is the low correlation which African emerging markets have in relation to established global markets According to research conducted by the World Bank, emerging markets in Africa are set to experience strong growth within the next few years, whereas much slower growth is expected in established global markets. It is worthwhile pointing out that from an international economic growth perspective; several African countries are included in the list of countries which have the highest rate of five-year economic growth.
As we live in a consumer driven world, an important consideration for many investors, revolves around the available commodities in the relevant country or region and this is an area where African countries have the competitive edge above their more developed counterparts . According to McKinsey Global Institute, at least 10% of the world’s oil reserves and 40% of the world’s proven gold reserves are found in Africa. Africa also accounts for an estimated 90% of the world’s platinum reserves, about 80% of the world’s diamonds reserves and an abundance of other reserves including oil and natural gases. Further, as the African markets grow, so too will the consumption and the demand for commodities. African households spent US $860 billion in 2008 and the estimated projections show that such expenditure will increase to approximately US $1.4 trillion by 2020. These statistics may be a strong indicator as to the reason why so many international organisations have refocused their attention on investment in Africa as a whole. Companies such as Google, Ericson, YUM Brands, De Beers, MTN and Huawei, to mention a few, have branched out into various African jurisdictions in an attempt to capitalise on Africa’s enormous potential profitability, whilst the markets are still in their growing phase.
In preparing a strategic growth plan, it is important to ensure that any actions or decisions are taken at the right time. As mentioned previously, the investors who are able to enter new high-growth markets first, will usually benefit most. At this stage, Africa is set to house some of the few remaining frontier markets in the world. As frontier markets generally have not yet experienced any meaningful economic development, they have a potential for rapid growth and sizable returns, which often attracts the interest of investors having a healthy appetite for risk.
Clearly there are substantial factors to motive investment into African countries However, the important question is: what is being done in the jurisdictions to promote such investment? The answer lies in African countries’ recent reform policies. Several regions within Africa have made immense progress in improving their investment, business and regulatory environments, primarily as a result of the motivation to benefit from increased trade and investment into Africa as a whole. Countries such as Burundi, Rwanda, Kenya, Tanzania and Uganda have all bettered their rankings in terms of the ease of doing business in such jurisdictions and this has been achieved by means of regulatory reforms. In addition to the countries listed above, many other African jurisdictions have improved their rankings in this regard, by streamlining processes relating to licensing and registration, obtaining credit, payment of taxes and cross border trading, to name a few.
Across the board, African countries offer an array of sound investment opportunities as well as incentives for foreign investors for example: investments in real estate and land properties in South Africa, significant tax incentives for import of investment capital goods in Ethiopia, Swaziland’s preferential trading status with the United States and the European Union and most noteworthy are the investment authorities being established in the majority of the jurisdictions in Africa.
It has become evident that investment in emerging economies is no longer a matter of choice, but one of the few remaining options for investors seeking growth in emerging economies.