Blog » Barclays and foreign investment in Africa

9 May 2005

Barclays and foreign investment in Africa

Filed under: Africa,Economics — paulcook @ 10:30 pm

If you’ve looked at Google News at any stage in the last day or two, you’ll have seen headlines about the 60% purchase by UK-based Barclays Bank of South Africa-based ABSA. Valued at R33 billion (US$5.5 billion), this is the single biggest foreign investment into South Africa ever. In the aftermath, I thought I’d say a few things about foreign investment in Africa generally.

The ABSA deal is actually a return by Barclays to South Africa. Barclays was forced to sell (at a loss) its South African holdings in 1986, in response to huge protests in Britain against apartheid. Today those holdings are First Rand Bank, another of South Africa’s big four commercial banks. Ironically, Barclays has bought one of its original competitors.

Both Barclays and ABSA have operations in a number of other African countries, around 13 together — making the combined entity Africa’s largest commercial bank. Barclays has said that it wants to invest lots more in Africa, which is growing far more rapidly than the British market. It has also agreed that ABSA will remain listed on the Johannesburg Stock Exchange and be run by a South African board, so the deal should avoid getting labelled as economic imperialism.

Obviously, the deal is a huge vote of confidence in South Africa’s economy. The government has been practising a very restrained fiscal policy ever since coming to power in 1994. As a result, compared to 1994 the budget is a lot healthier; taxes are down thanks largely to far more efficient collection; inflation is down from around 16% to around 3%; the currency is, if anything, too strong; and the economy is growing at around 3-4% annually.

It will, of course, take a long time to undo the damage that the last decades of apartheid did to the economy. When first introduced to replace the British Pound, the South African Rand was valued twice as highly as the US Dollar. Now, while the standard of living of the wealthiest 10% of the country can rival anywhere in the world, unemployment amongst the broader population runs at around 40%. And that’s going to require more than 3-4% annual growth to correct.

Which leads to foreign direct investment (FDI). Such investment is an excellent way of introducing capital and expertise into an economy — which explains the cut-throat global competition for investment. Africa received only around $15 billion in FDI in 2003, a third of which was from other Africa countries (particularly South Africa). This is somewhere around a mere 3% of global FDI.

However, new deals like the Barclays one suggest positive change might be on the way. There is a lot of positive feedback coming from current investors around Africa. Many countries seem to be more investor-friendly than ever before. In addition, the African Union’s economy policy, NEPAD (New Policy for Africa’s Development) is looking at a number of long-standing problems, like infrastructure, skills development, cross-border trade, and good government. Indeed, there are a number of sectors that are seeing growing (and highly profitable) investment, notably telecommunications, retail, banking and resources (mining and oil). (See, for example, some interesting articles here).

All of which makes it possible that the Barclays deal will not be the last of its nature. Perhaps even more importantly, it looks like increased investment might go to the rest of Africa too — since South Africa’s economy already accounts for nearly half of sub-Saharan Africa’s GDP, there is more need elsewhere.

But before this starts to sound too much like a propaganda release, there remains a huge problem with the rosy picture above: Africa is not the only developing country in the world. China, and increasingly India and South America, are attracting almost all of the investment that is interested in either cheap labour costs or new consumer markets. And it’s going to take a long time to saturate the Chinese market. So perhaps Africa is going to be left advertising its excellent fundamentals without success for some years yet.

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  1. Because I’m tired and feel like nitpicking:

    “Africa is not the only developing country in the world. China, and increasingly India and South America…”

    I was unaware that either the African nations or South American nations had unified into countries.

    Now to make some real comments (Keeping in mind that I know a lot less than you about all of this stuff, Paul… a LOT less):
    Is China that much of a threat to South African funds? I would imagine that as China becomes increasingly industrialized and capitalist, it will draw less foreign funds of the sort that developing nations compete for. Something else that might work in South Africa’s favor is that it might get used as a stepping stone for ventures in the rest of Africa. Foreign investors invest in South Africa because it has better infrastructure and is less risky. In turn, South Africa, who is less tentative about investing in the rest of Africa, works toward developing surrounding nations. Thus, South Africa benefits from incoming foreign funds, but also benefits from increased opportunities with the other African nations.

    Anyway, like I said, this is not exactly my area of expertise.

    Oh, one other question: Where did the name for South Africa’s currency come from? How does the currency break down? (Okay two questions… purely idle curiosity here)

    Comment by Adam — 10 May 2005 @ 2:51 am

  2. Yeah, yeah, so I fell into my own trap and referred to Africa as a single country. Doh. I’ll be kind to the next person who makes the same mistake (though I haven’t personally met any).

    What you say about South Africa as a stepping stone is, I think, true. Certainly Barclays is looking at the ABSA purchase as the foundation of a broader African roll-out. And even foreign investors who want to invest in the rest of Africa will often set up headquarters in Johannesburg.

    As regards China: I agree that as it becomes industrialised, the profile of investment there will change. But I think that’s still a long way away — China’s economy is still far smaller than America’s, and even smaller when measured per person. So I think there are still tons of new opportunities there for companies searching for new markets. The problems with Africa as an attractive consumer market are (a) there isn’t much investment in Africa as an industrial workhouse at the moment, so no promise of new, wealthy, consumers who need to buy stuff, and (b) logistics. China has 1.5 billion people all near each other, with nice big rivers and railroads connecting them. Sub-Saharan Africa has only around 650 million people, seperated by huge mountain ranges, deserts, jungles and non-navigable rivers. There are efforts to improve this, but it’s going to take a long time before companies can easily transport goods to markets — which might be why it’s intangibles like cellphones that are really taking off.

    Lastly, the Rand: It’s named after an area of the country called the Witwatersrand, which is Afrikaans for “white waters ridge”. It was called that because of the numerous little streams that existed before gold was discovered. Now it marks the area of Johannesburg and about 100miles east and west, or so. It’s the northern edge of an ancient inland sea, that for some reason has gold all around its edge. Paul Kruger, the president of the then-independent Afrikaner republic of the Transvaal, in which Johannesburg was founded, minted “Krugerrand” gold coins to help sell the newly-found gold. The British conquered the Transvaal in 1899, after which South Africa used the Pound until the South Africa Rand was introduced in 1961. Apparently it was stronger than the US dollar until 1981, when anti-apartheid sanctions really started biting.

    There are R200, R100, R50, R20 and R10 notes (all in different colours, with animals on one side and major industries of the country on the other, if memory serves). Then there are R5, R2, R1, 50c, 20c, 10c, 5c, 2c and 1c coins. There is also a lot of popular talk about getting rid of the last two or three coins, which are really worth nothing these days.

    Comment by paulcook — 11 May 2005 @ 9:33 pm

  3. So, c = “cent”? It doesn’t have some cool name?

    Also, I personally wouldn’t mind getting rid of pennies here in the US. Of course, if snack machines would accept pennies, that’d be a different story. I’d be set for life then. But I never carry around pennies for the purpose of spending them.

    Comment by Adam — 12 May 2005 @ 3:49 pm

  4. Yes, c = “cent”. Sorry to disappoint! But since there are 100c per R1, it does make sense!

    Now imagine a coin like your penny, but worth one sixth as much. And imagine another, worth one third as much as the penny. And another, worth almost as much as the penny. Now imagine the SA Reserve Bank busy pressing thousands and thousands of them, all the time, because people can’t be bothered not to lose them. Yes, it’s great.

    Comment by paulcook — 12 May 2005 @ 5:34 pm

  5. Paul,

    Excellent post. I see you have an interest in economics which I share though you seem to know more about it then I do. I agree with your sentiments in regards to China. At the end of the day growth rate in China is 9% versus (as you pointed out) 3-4% in South Africa. Makes that decision fairly simple. But I think Adams right that that growth rate in China won’t last forever and when it does investors will look for a new place to put their money.

    I also agree with your point about infrastructure in Africa. Having driven around a lot of Southern Africa, I can say that they are a long way from most industrialized countries. But I would think that an even bigger threat to foreign investment is the stability of the governments. Last I heard the leader of South Africa was good friends with Mugabe. Any threat of South Africa heading in the direction of Zimbabwe I’m sure keeps out a lot of potention investment.

    Comment by Griztown — 13 May 2005 @ 12:33 pm

  6. Thanks for the comments! I did a lot of economics-related debates in competitions and such in undergrad, so picked up a few things along the way — like the ability to use economics terminology so that it sounds like I understand it :)

    I think you’re right that Zimbabwe does have something of an effect on the region, including South Africa, but I think it’s pretty minor amongst large investors. The South African government has an excellent record elsewhere on the continent, having spearheaded the African Union’s drive to promote good governance, and brokered peace deals in places like Burundi, Congo (DRC) and the Ivory Coast. Even more importantly, while the government is publically supportive of Mugabe, management of the economy and property rights within SA has won nothing but support from international bodies. There’s absolutely no indication of South Africa following Zimbabwe at all, at least not for a long time (and one would hope that the wealth would have spread by then already). There are a number of reasons why SA is still supporting Mugabe (though not, in my opinion, convincing ones), but agreement with Mugabe’s actual policies is not one of them.

    Many African countries have been trying for a long time to communicate that the continent is made up of over 50 very, very different countries, of which only a few are the “basket cases” that make the western media. So for every Zimbabwe or Sudan, there are tens of stable and well-run countries — just like how for every Kosovo or Belorussia there are a number of well-run and stable European nations. The message from deals like the Barclays one is that some investors are, finally, realising this truth.

    Comment by paulcook — 13 May 2005 @ 2:50 pm

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