0 Foreign Investor Perspective of Africa September 2006 Leon Myburgh Sub-Saharan Africa Specialist

1 Overview  FDI  Portfolio flows  Country ratings / rankings  Conclusion

2 Foreign Direct Investment

3 Determinants of FDI  Structural  Economic  Political and social Key source: FONDAD, ‘Private Capital Flows to Africa”

4 Global FDI flow Source: World Bank

5 FDI: Structural determinants  Market size  GDP per capita, domestic savings, other  Focus on lost-cost goods, exports, niche markets  Regional markets  Infrastructure (particularly financial)  Labour productivity

6 FDI: Economic determinants  Actual and perceived performance  IMF programs nice but not critical  Reform credibility and consistent and transparent execution  Foreign exchange availability  Fiscal policy, particularly transparent tax policy  Privatisation  Regulatory environment (less not more!)

7 FDI: Political and social determinants  Political stability very important  Social stability very important  Corruption  High-level and inconsistent dissuades  Low level and consistent does not detract

8 Portfolio Flows

9 Determinants of portfolio flows  Global  Perceptions  Country specific Key source: FONDAD, ‘Private Capital Flows to Africa”

10 Gross portfolio inflows in 2004 ($mn) Source: IMF

11 Portfolio flows: Global determinants  Increasing asset base  Decline in global rates until 2004  Risk diversification  Low correlation between SSA exchanges  Protection against global sell-off

12 Macro economic environment GDP growth (% change)Inflation (% change) Source: IMF

13 External debt as % of GDP Source: IMF

14 External trade Current account (as % of GDP) Terms of trade (% change) Source: IMF

15 Commodity prices Source: Bloomberg

16 Portfolio flows: Perceptions  African-focused funds tend to be realistic  Global fund managers  Swing from euphoric to pessimistic  More diversification leads to less information by market  Short-term performance benchmarks reduce appetite for long-term illiquid assets

17 Market characteristics  Low liquidity  Few market players  Dominance of government  Bureaucratic regulatory environment  Lack of issuers

18 Portfolio flows: Country specific  Many of FDI determinants also apply  General macro economic indicators  Donor support / technical assistance  Helps identify opportunities  Ability to exit trade  Development of stock exchanges

19 Information flow  Often cited as most important factor  Probably matters more for FDI and bank flows  Potential profitability more important for portfolio flows

20 Ratings / rankings

21 Country ratings/rankings  Formal ratings (Fitch, Moody’s, S&P, etc)  Important for sovereign bond issues  Coverage is limited but increasing  Tend to lag developments  Informal ratings (IFC, EIU, etc)

22 S&P average rating BB/BB- BBB+/BBB BB-/B+ BBB+/BBB AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC

23 S&P Country ratings

24 IFC: Ease of doing business 2007

25 Index of Economic Freedom

26 EIU: Country risk rating Feb 2007

27 EIU: Risk components

28 Conclusion

29 Recent research FDIPortfolio flows What attractsHigh investment rate Market size Public finances Economic growth Per capita GDP Ratings What hampersHigh interest rates Lack of political freedom Capital account restrictions Lack of political freedom What does not matterEconomic growth Export growth Interest rates Inflation rate External debt International reserves Source: Cassou and Molina, “What kind of capital flows does the IMF catalyse?”

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