According to the 15th annual index from global strategy and management consulting firm AT Kearney, two-thirds of companies plan to return to pre-financial crisis levels of foreign direct investment (FDI) by 2016, but no African or Middle Eastern countries ranked in the top 25 FDI destinations in 2015.
Last year, South Africa ranked 13th in the index.
The other African countries included in the survey are Algeria, Angola, Egypt, Ethiopia, Ghana, Kenya, Nigeria, Sudan and Tanzania.
Martin Sprott, principle of AT Kearney Johannesburg, told Fin24 on Tuesday the main reason for South Africa slipping out of the index is the the capital flight to developed markets, as investors move away from emerging markets towards safer destinations for better returns.
“The overall driver is a flight to safety,” he said, adding that “the strong performance of Eurozone countries is driven by the prospect of quantitative easing having the same positive effect on Europe’s economy as it has had on the US economy in the past 4 years”.
“People are moving their capital into markets that are perceived to be more secure – like the EU and the US,” said Paul Laudicina, founder of the FDI Confidence Index and chairperson of AT Kearney’s Global Business Policy Council.
“Against that, emerging markets look more difficult. African growth was substantially driven by resource investments. With lower commodity prices, investments in oil, gas and mining in emerging markets look less attractive.
“Resource companies have diverted their investments away from new-build and into acquiring existing operations. They have also been negatively affected by stories out of Syria, Iraq and north East Nigeria,” he said.
Sprott said South Africa also has had perception issues driven by lower growth and ratings downgrades by Standard & Poors.
“The energy situation has also affected the public view of the country.”
“Fundamentally, investors require regulatory certainty and an open investment environment. They will wait with investments for more positive conditions.”
The FDI Confidence Index offers an in-depth view of forward-looking global investment sentiment from senior executives.
Since its inception in 1998, the study has consistently pointed toward top choices globally for foreign direct investment, with FDI destinations ranked in the index receiving the majority of global FDI inflows about a year after the survey results are released.
The index is constructed using primary data from a survey administered to senior executives of the world’s leading corporations. All companies in the survey report global revenue of more than $500m.
The survey was conducted in January 2015 and the index is calculated as a weighted average of the number of responses indicating high, medium, and low likelihood of direct investment in a market over the next three years.
Asked about the recent spate of xenophobic attacks and how this will impact future FDI in SA Sprott said “it will add to the perception issues that South Africa has”.
“However, should they stop and not recur then SA may benefit from having been seen to deal with the issue effectively”.
He said the most important thing for South Africa to do to restore investor confidence is to provide regulatory clarity. “A clear set of guidelines for what is required from investors in given sectors, combined with consistent implementation is critical.
“Further, South Africa is undergoing strong economic transition, so needs to be clear about which areas it wants to invest in. Which added-value sectors like manufacturing should receive support and how?”
Sprott reiterated that there is a strong element of perception management involved in attracting FDI. “The Netherlands, for example, has performed well in the 2015 FDICI index (up 9 points) in part due to its ‘Invest in Holland’ programme and targeting investment in high-tech sectors,” he said.
According to Wim Plaizier, partner at AT Kearney in Johannesburg, the relative improvement of European countries downplays the long-term attractiveness of African markets.
“There is ongoing investment in infrastructure, services, consumer goods and retail and generally, sectors that benefit from consumer growth and urbanisation,” he said.
In this year’s Index, 66% of companies plan to return to their pre-financial crisis levels of FDI by 2016, with Asian investors revealing the strongest commitment to restoring pre-recession levels.
Nearly 75% of countries ranked in the top 25 are from developed economies, as investors see new opportunities as safe ground.
For the third year in a row, the United States and China are ranked first and second as target countries for investment, while the United Kingdom continues its three-year rise to claim third position.
The US leads all countries when it comes to investors’ positive macroeconomic outlook, with 46% of those surveyed more optimistic in their outlook for the US economy than they were a year ago, and 44% expecting GDP growth of about 3.6% over the next three years.
The global executives indicate that even continued gridlock in Washington is unlikely to diminish their interest in investing in the US.
Asian investors are particularly optimistic about the growth outlook in the Americas, and overall, they are less concerned than others about geopolitical instability and the regulatory environment of destination countries, expressing the strongest interest in frontier markets.
More than 80% of Asian investors say they are currently interested in maintaining, commencing, or increasing investments in these countries.
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