Investing in Africa May Not(?) Be the Bargain it Seems..
The growth in Africa can not, and should not rest solely in the service sector (mostly financial service). I fear that the markets may over heat prematurely, which in turn means that Africa will wait for the next wave. You know what they say about development being like surfing. Though this article clearly overstate the possibility of a turn down, the fears expressed are valid. Necessary steps to consciously develop infrastructure that will support the influx of investment ought to be developed, as fast as we can. Investment flows find its level like water, a thin vessel will over flow rather quickly, and in no time the party will be over. I am concerned at Nigeria’s capacity to absorb foreign investment, as it is right now a moderate injections of foreign money into the economy generates a rather uncomfortable aftershock (Re: MTN). With the shake ups being experienced in the Western economies we expect to see a spike in the flow of FDI into Africa. Is the Nigerian economy ready to receive?
.While higher commodities prices were certainly the catalyst, other changes in the financial landscape might give Africa its best chance yet to become an investment destination. Many analyst believe the current run up in commodity prices is secular in nature, as the price increases are mostly attributable to long-term trends, and will continue as long as China, India, and other emerging markets continue to grow.
If Africa is really going to avoid landing hard if commodities turn south, it will have to undertake difficult but necessary steps to remove the plague of corruption.The growth in the major emerging markets is feeding back into Africa in new ways as well. Investors from China, India, Russia, and the Middle East do not like to invest in credit default swaps and the other new-fangled financial tools touted by Western banks in recent years, according to a recent report (PDF) from RogersCasey. These “resource rationalizers” instead like to park their newfound riches in real assets, which Africa offers at a discount.
Written a couple of months ago.
8Comment(s):
The investement is driven by commodities.
The increased demand for commodities is structural.
Where does the overheat risk come from ?
...and should not rest solely in the service sector (mostly financial service). I fear that the markets may over heat prematurely, which in turn means that Africa will wait for the next wave....
here's what i don't get:
if the growth is driven by commodities (and telecom and transport, which are related to the commodities), where is the fear of african growth resting on service sector (mostly financial service) coming from ?
Aplogies I'd get to this before the end of the day. Thanks man.
Okay @Random African, what do services have to do with the commodities led growth in FDI.
Trip to Econ 103.
FDI inflow in economies with poor mechanisms for capacity building in the 'non-service' sectors..i.e. manufacturing etc...will further exercabate the already un-balanced growth in the different sectors of the economy. Example if China chooses to invest in mining activities in Northern Nigeria, or Mittal invest in Aladja, the government reciepts that result from this boost, is not put to 'productive' use but kept in a bank to service the blaoted civil service. The financial sector has this false sense of security a la 1979 oil boom. Okay all of that is the push form the demand side.
From the supply side, the rush for to hold stakes in this rather impressive sector will further bring in more money and probably result in a false sense of performance. If nothing is done about this situation and equity is being build just for 'equities' sake. It's only a matter of time before the stack come falling down. I know this are rather simplistic debates. a platform like this only allows for so much. Keep in mind that a country like Nigeria puts a new meaning to insider trading. I really hope this is not the case with Africa. I hope the high returns on investment is strictly due to the scarcity of Capital(K). On the flip-side I am also aware that it will be extremely naiive to beleive that. Thanks Random african, I hope I explained myself well enough, if not I'll like to give it another shot next week. Its Friday...LOL.
Ok I see what you meant.
And for the most part I agree.
However there are a few objections:
- there are reasons to believe that the financial service sector won't be the main recipient of the additionnal revenue in commodities sector. after all, the political climate tends to push for more investment, mostly in infrastructure (which could lead to overcapacity, right ?) but also health, education which are services but which would also increase the prospect for investment in manufacturing.
- the rest of Africa is not really different from Nigeria when it comes to insider trade. And of course, that means that lots of money would be lost when building infrastructure or anything.
- isn't the growth of the financial sector good news for capital scarcity issues ? Of course, that means there could be lower returns to investment on the long return, but then again that depend on how the demand for capital reacts, right ?
But like I said, overall I agree.
Though, I still think that any strategy that ignores massive investments in human capital will miss the point.
Health manufacturing etc... that brings us full circle. Ina functional model the increased K will lead to a boost in the supply of funds to this sector right..guess what in Nigeria it does not work that way...rather there seem to be a siphon somewhere...I'd like to see a study that measures the effective power of government spending in Nigeria that will be ridiculous. Health is left the aid agencies...I do hope that the complimentary industries to the commodity trade do take off, so that at least there would be some returns to the people. But agian NEPA grrr.Thanks again for being great sport. still waiting for that guest post.
please check this out..http://allafrica.com/stories/200710210038.html