1

Foreign Investor Perspective of Africa

September 2006

Leon Myburgh

Sub-Saharan Africa Specialist

Leon.myburgh@citigroup.com

+27 11 944 1830

2

Overview

FDIPortfolio flowsCountry ratings / rankingsConclusion

3

Foreign Direct Investment

4

Determinants of FDI

StructuralEconomicPolitical and social

Key source: FONDAD, ‘Private Capital Flows to Africa”

5

Global FDI flow

0

50

100

150

200

250

1998 1999 2000 2001 2002 2003 2004 2005

$bn

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%All developing countries

SSA ex SA

% of total

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 importantSocial stability very importantCorruption

High-level and inconsistent dissuades Low level and consistent does not detract

9

Portfolio Flows

10

Determinants of portfolio flows

GlobalPerceptionsCountry specific

Key source: FONDAD, ‘Private Capital Flows to Africa”

11

Gross portfolio inflows in 2004 ($mn)

-

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

3,500.00

4,000.00T

unis

ia

Mor

occo

Nig

eria

Côt

e d'

Ivoi

re

Mad

agas

car

Gab

on

Ken

ya

Zim

babw

e

Alg

eria

Cam

eroo

n

Bot

swan

a

Sen

egal

CA

R

Gha

na

Uga

nda

Sud

an

Leso

tho

Tan

zani

a

Con

go,

Rep

. of

Zam

bia

Sw

azila

nd

Rw

anda

Source: IMF

12

Portfolio flows: Global determinants

Increasing asset baseDecline in global rates until 2004Risk diversification Low correlation between SSA exchangesProtection against global sell-off

13

Macro economic environment

0

1

2

3

4

5

6

7

2000

2001

2002

2003

2004

2005

2006

2007

SSA

Major advanced economies

Other advanced economies

0

2

4

6

8

10

12

14

16

18

20

2000

2001

2002

2003

2004

2005

2006

2007

SSA

Major advanced economies

Other advanced economies

GDP growth (% change) Inflation (% change)

Source: IMF

14

External debt as % of GDP

20

25

30

35

40

45

50

55

60

65

70

2000

2001

2002

2003

2004

2005

2006

2007

Source: IMF

15

External trade

-4

-3

-2

-1

0

1

2

3

4

5

6

2000

2001

2002

2003

2004

2005

2006

2007

SSA

Major advanced economies

Other advanced economies

-10

-8

-6

-4

-2

0

2

4

6

8

10

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

SSA

Major advanced economies

Other advanced economies

Current account(as % of GDP) Terms of trade (% change)

Source: IMF

16

Commodity prices

CRB Index

150

200

250

300

350

400

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Source: Bloomberg

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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

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Market characteristics

Low liquidityFew market playersDominance of governmentBureaucratic regulatory environment Lack of issuers

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Portfolio flows: Country specific

Many of FDI determinants also applyGeneral macro economic indicatorsDonor support / technical assistance

Helps identify opportunities

Ability to exit tradeDevelopment of stock exchanges

20

Information flow

Often cited as most important factorProbably matters more for FDI and bank

flowsPotential 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)

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S&P average rating

0

2

4

6

8

10

12

14

16

Africa East Europe Latam Asia

BB/BB-

BBB+/BBB

BB-/B+

BBB+/BBB

AAAAA+AAAA-A+AA-BBB+BBBBBB-BB+BBBB-B+BB-CCC+CCCCCC-

15 18 17 13

24

S&P Country ratings

0

2

4

6

8

10

12

14

16

18

Cameroon

Burkin

a Fas

oM

ali

Mad

agasc

ar

Moz

ambiq

ue

Benin

Ghana

Kenya

Seneg

al

Niger

ia

Egypt

Mor

occo

Tunisi

a

South

Afri

ca

Botsw

ana

AA-

A

BBB+

BBB-

BB

B+

B-

CCC

25

IFC: Ease of doing business 2007

0

20

40

60

80

100

120

140

Africa East Europe Latam Asia

26

Index of Economic Freedom

2.4

2.5

2.6

2.7

2.8

2.9

3

3.1

Africa East Europe Latam Asia

27

EIU: Country risk rating Feb 2007

0

10

20

30

40

50

60

Africa East Europe Latam Asia

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EIU: Risk components

6.30 4.47 5.67 5.568.85 7.29 8.58 7.223.00 2.41 3.00 2.332.45 2.12 2.25 2.222.60 2.06 2.58 1.334.10 2.59 4.25 3.002.30 1.59 1.92 2.002.55 2.35 2.83 2.563.00 2.82 3.25 2.003.10 3.18 3.50 1.221.95 1.24 3.42 0.782.45 2.29 2.92 2.78

10.10 9.65 10.50 7.1153.05 42.53 53.58 39.11

East Europe Latam Asia

OVERALL

Debt structureFinancial structureLiquidity

Africa

Regulatory policyGlobal climateGrowth/savingsCurrent account

Monetary policyFiscal policyFX policyTrade policy

Political stabilityPolitical efficancy

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Conclusion

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Recent researchFDI Portfolio flows

What attracts High investment rateMarket sizePublic finances

Economic growthPer capita GDPRatings

What hampers High interest ratesLack of political freedomCapital account restrictions

Lack of political freedom

What does not matter Economic growthExport growth

Interest ratesInflation rateExternal debtInternational reserves

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

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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