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FDIs to Nigeria, S’ Africa, Kenya fall by 46%

By Adeyemi Adepetun
25 July 2016   |   3:37 am
Current World Investment Report (WIR 2016) has revealed a seven per cent drop in Foreign Direct Investments (FDI) to Africa to $54 billion in 2015.Specifically, the report noted that while FDI inflows to South Africa...
KPMG

KPMG

SSA’s GDP shrinks
Current World Investment Report (WIR 2016) has revealed a seven per cent drop in Foreign Direct Investments (FDI) to Africa to $54 billion in 2015.Specifically, the report noted that while FDI inflows to South Africa, Ghana and Nigeria dropped by 30.3 per cent, 4.9 per cent and 11.1 per cent respectively, inflows to Angola increased by 352 per cent to $8.7 billion and to Kenya by 42 per cent to $1.4 billion.

The WIR 2016 stated that FDI inflows to Africa could start to increase during 2016 due to the liberalisation of investment regimes and privatisation of state-owned commodity assets by a number of African countries.

According to KPMG, while making reference to the WIR, Gross domestic product (GDP) growth in sub-Saharan Africa declined from 4.5 per cent in 2014 to an estimated three per cent in 2015. This decline is attributed to low commodity prices, particularly oil, rising borrowing costs and other domestic challenges such as power shortages, the Ebola epidemic, conflict and political and security issues.

KPMG noted that the decline is expected to continue in 2016 with GDP projected to reduce to 2.5 per cent, adding that this on-going decline is due to the issues mentioned above, compounded by tightening global financial conditions and drought in certain parts of the region.

According to Robbie Cheadle, (CA) SA Associate Director – JSE Advisory Services, Mergers & Acquisitions at KPMG, in the document noted that the recent decision by the United Kingdom to exit the European Community has taken place against this background and the impact on Africa as a continent is currently unknown, however, the expectation is that it will add to Africa’s woes.

According to the Brookings Institute, the potential areas where Brexit could impact on African countries are through the impact of Brexit on the global economy, reduced British outwardness when it comes to global development issues and decreased bilateral development assistance and trade.

KPMG in the report noted that in recent years, many African countries have also implemented reforms facilitating the created private pension systems that are rapidly accumulating assets under management, largely as a result of Africa’s growing middle class, rise in consumption, increasing urbanisation and rising per capita incomes.

It noted that pension funds played an important role in deepening financial markets and making cheaper funding available to corporations thereby contributing to national economic development and growth, as they are long-term investors.

Historically and currently, KPMG observed that African pension funds have invested heavily in domestic debt due to a combination of regulatory hurdles, risk adverse trustees and poor incentives.

“Many African governments are in the process of liberalising regulations in respect of the pension fund industry, thereby, allowing them to put money into certain alternative investments, including private equity, and to invest outside of their own countries.

“The rapid growth of the African pension fund industry is necessitating diversification of investment risk by trustees and fund managers, and this, together with more favourable regulation, is resulting in an increase in funding available for investment into listed equities, bonds and also into private equity”, it stated.

According to the OECD Annual Survey of Investment Regulation of Pension Funds, the following regulations apply to selected African countries with regards to pension funds investing into listed equities:
Kenya: Pension funds may invest up to 70 per cent of the value of their total assets under management (TAUM) into listed equities on any of the stock markets in Kenya, Uganda or Tanzania.

In Malawi, the survey observed that pension funds may invest up to 100 per cent (direct investment limit) of the value of their TAUM into listed equities on the Malawian Stock Exchange.In Mauritius, it disclosed that pension funds may invest up to 100 per cent (total exposure of fund including investments through collective investment schemes) of the value of their TAUM into listed equities on the Stock Exchange of Mauritius.

For Namibia, it observed that pension funds may invest up to 75 per cent (direct investment limit) of the value of their TAUM into listed equities. Namibian pension funds are subject to various restrictions regarding their equity investments including an investment limit of 30 per cent into assets consisting of shares outside of Namibia.

OECD noted that in Nigeria, pension funds may only invest up to 25 per cent (direct investment limit) of the value of their TAUM into listed equities and such investments are subject to further restrictions, while in South Africa, it may invest up to 75 per cent (same as main limit, look through principle applies) of the value of their TAUM into listed equities on the JSE Limited and 25 per cent, subject to further restrictions, into equities listed on a foreign exchange that is a member of the World Federation of Exchanges.

According to KPMG, the above indicates that African pension funds are growing rapidly and have the legislative ability to invest into listed equities, particularly, in their own jurisdictions. The increased availability of local capital for development should lead to an increase in the number of African initial public offerings (IPO’s) and listings, which in turn, should contribute to an increase in the liquidity of the African stock exchanges. It stressed that what is needed, is more sizable local businesses coming to market in their local jurisdictions.

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