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

Foreign Investor Perspective of Africa September 2006 Leon Myburgh Sub-Saharan Africa Specialist Leon.myburgh@citigroup.com +27 11 944 1830. Overview. FDI Portfolio flows Country ratings / rankings Conclusion. Foreign Direct Investment. Determinants of FDI. Structural Economic

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

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  1. Foreign Investor Perspective of Africa September 2006 Leon Myburgh Sub-Saharan Africa Specialist Leon.myburgh@citigroup.com +27 11 944 1830

  2. Overview • FDI • Portfolio flows • Country ratings / rankings • Conclusion

  3. Foreign Direct Investment

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

  5. Global FDI flow Source: World Bank

  6. 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

  7. 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!)

  8. 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

  9. Portfolio Flows

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

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

  12. 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

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

  14. External debt as % of GDP Source: IMF

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

  16. Commodity prices Source: Bloomberg

  17. 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

  18. Market characteristics • Low liquidity • Few market players • Dominance of government • Bureaucratic regulatory environment • Lack of issuers

  19. 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

  20. Information flow • Often cited as most important factor • Probably matters more for FDI and bank flows • Potential profitability more important for portfolio flows

  21. Ratings / rankings

  22. 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)

  23. S&P average rating AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- BBB+/BBB BBB+/BBB BB/BB- BB-/B+ 13 15 18 17

  24. S&P Country ratings

  25. IFC: Ease of doing business 2007

  26. Index of Economic Freedom

  27. EIU: Country risk rating Feb 2007

  28. EIU: Risk components

  29. Conclusion

  30. Recent research Source: Cassou and Molina, “What kind of capital flows does the IMF catalyse?”

  31. Disclaimer For information regarding the Firm’s Market Commentary disclaimer please refer to the following website address at: https://www.citigroupgcib.com/data/documents/MarketCommentaryDisclaimer.pdf

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