THE most attractive destination "by far" for foreign direct investment in sub-Saharan Africa is still South Africa, despite the lull in inflows experienced during the first half of this year, Ernst & Young says.
The professional services group has broken ranks with other commentators, including rival KPMG, who are saying South Africa is fast losing its perceived status as Africa’s gateway for foreign investors.
Some economists say Nigeria will overtake South Africa as Africa’s largest economy in two years after it rebases its gross domestic figures.
But Ajen Sita, CEO of Ernst & Young Africa, says that will not necessarily mean this will make Nigeria the preferred gateway for investors. "There is a lot of hype created around Nigeria becoming the largest economy in Africa.
"It is good for the continent, but the truth is that being the largest does not make it the gateway. Yes, some investors might want to invest direct in other regions, but South Africa is still the main entry point."
Mr Sita says South Africa attracts investors because of its sophisticated economy and its developed infrastructure, and financial and legal systems. He admits foreign direct investment in South Africa fell in the first half of this year by more than 46%, according to some estimates.
However, he points out that this has to be taken in the context of a global lull in foreign direct investment in the same period. Mr Sita says the fall in foreign investment does not necessarily translate into a loss of South Africa’s preferred gateway status for investors.
"That is a conclusion based on sentiment rather than fact and we have decided to go against the grain and release facts which show that South Africa remains the preferred investment destination in Africa."
Whereas other countries might have experienced a surge in investment, most of it was mostly for single large projects. By contrast, investment in South Africa was spread across sectors such as construction, retail and financial services.
"This is because we have a diversified economy which has a better chance of attracting more investment that create more jobs than a single infrastructure project, for example," says Mr Sita.
To support the CEO’s argument, Ernst & Young has released a new report highlighting the country’s potential and attractiveness as an investment destination.
Last year, South Africa attracted investment in new capital of $12.7bn (2011: $6.81bn), 159 new foreign projects (2011: 104) and 22,320 new jobs were created, compared with 17,685 last year.
"Over the period 2007-11 (that is, through the worst global economic crisis in living memory), foreign direct investment into South Africa has grown substantially at a compound rate of almost 25% for (foreign direct investment) capital and almost 29% for projects," Ernst & Young says.
"And in both instances, (the inflows were) well above the average numbers for the African continent," it says.
Ernst & Young says between 2007 and last year, foreign direct investment capital into South Africa grew at a faster rate than into any of the other African countries.
It grew by 25% compound annual growth compared with negative growth in Angola and just more than 1% growth in Nigeria, Africa’s second-largest economy.
"In contrast, some other African markets, such as Ghana, Kenya, Mozambique, Tanzania, and Zambia, have seen spectacular growth in foreign direct investment over that period, in excess of South Africa, but all off a much lower base," it says.
But the most revealing conclusion from Ernst & Young’s statistics is that when measured by the number of foreign direct investment projects — as opposed to capital value — South Africa is "far and away" the leading investment destination on the continent.
"Again, while investment into many of the other leading African markets tends to be focused on capital-intensive sectors such as oil, mining and other extractive industries, South Africa’s economy is far more diverse, and a large proportion of investment into the country tends to be into less capital-intensive manufacturing and service sector projects which generally provide higher job-creating potential," says Ernst & Young.
The report also acknowledges that the window of opportunity for South Africa to further entrench its dominant position is narrowing unless the government and the private sector work closer together to solve some of the structural economic and social problems facing the country.
They include reforming the education system to improve and widen the skills base, investing in infrastructure and creating a closer partnership between the government and the private sector to explore investment in Africa.
"South Africa has a window of opportunity of, say, five years. The decisions and choices we will make over this period to me will be critical for the future for the next 30 years," he says.
Mr Sita also says promoting regional integration, trade and investment is key to luring investment to South Africa and countries in the region. "Currently, intra-Africa trade accounts for only 11%-12% (of total trade) compared with 50% in Asia and (up to) 32% in South America. There is untapped potential to trade with each other."