The twin headwinds of the coronavirus pandemic and a sustained fall in global commodity prices conspired to knock foreign direct investment across Africa in 2020 and early 2021.
According to a summary from UNCTAD, foreign direct investment in the continent as a whole fell by 16% in 2020. Foreign inflows to southern Africa fell by the same percentage, with only South Africa and Mozambique escaping a year-over-year contraction.
It bears mention that the pandemic-era drop in foreign direct investment (FDI) to Africa was not as bad as initially feared. In June 2020, UNCTAD predicted a drop of up to 40% from 2019 to 2020.
Still, the continent is only now looking to a post-pandemic future, even as lingering public health worries and supply chain issues threaten foreign direct investment and economic stability moving forward. Whatever happens in the coming months and years, these trends are likely to influence FDI flows across the 16-country Southern African Development Community (SADC).
1. Global Commodity Markets Could Create Continued Headwinds
Global commodity markets have recovered nicely from pandemic lows in the second quarter of 2020. However, pricing for some commodities upon which southern African economies rely remains depressed or rangebound.
This is particularly evident in the precious metals and energy sectors. Despite strong economic growth on the back side of the pandemic, oil prices have failed to break out of a middling range established before the coronavirus hit. Likewise, the platinum price recovery has apparently stalled out, with prices well below the highs of the late 2000s and early 2010s. Other extractive benchmarks remain depressed as well.
This increases uncertainty for southern African economies. Although the region is less dependent on extractive industries today, mining, forestry, and energy remain integral sources of FDI here. In the short term, the quickest path to a rebound in FDI is a sustained bull market for commodities.
2. The African Continental Free Trade Area (AfCFTA) Is Finally Beginning to Bear Fruit
Following years of slow, difficult-at-times negotiations, the African Continental Free Trade Area (AfCFTA) officially “went live” at the start of this year.
This is the first concrete step toward the still-distant dream of a continental common market (modeled on the European Union common market) that includes the bulk of the 55-member African Union. It sends a clear signal to the rest of the world that Africa is open for business, and that FDI partners can expect robust intra-African investment to support their efforts.
3. China Is an Increasingly Important Partner for SADC Economies and Enterprises
China is a relatively recent arrival on southern Africa’s FDI scene, but it’s already clear that the country will be a critical partner for SADC economies in the years ahead.
Chinese investment in local infrastructure and business development projects produce “significant and persistent impacts on local growth” after 6 to 12 years, according to research from the London School of Economics and Political Science. This suggests that successful early partnerships between SADC nations and enterprises and Chinese investors may establish a virtuous cycle that attracts further partnerships and deepens ties between China and the SADC.
This could already be happening. According to LSE’s research, key African recipients of Chinese FDI include several SADC nations, notably South Africa (the most frequent partner), Zambia, and Zimbabwe.
4. Long-Overdue Infrastructure Investment Is Good News for a Growing Logistics Industry
The World Bank finds a sharp increase in logistics FDI in Africa for the period spanning 2016 to 2020 over the period spanning 2006 to 2010. Many of these projects have directly or indirectly benefited SADC nations, increasing their appeal to multinationals seeking local trading partners. From warehousing and last-mile fulfillment to road, rail, and port infrastructure, these investments underpin an increasingly stable and prosperous regional economy.
5. Heavy Manufacturing and High-Tech Industry Are Expanding (Fitfully) in the SADC
Despite supply chain issues caused by the pandemic, the growth of heavy manufacturing and high-tech industry in southern Africa bear watching. Automotive manufacturing is particularly promising for the region, and though South Africa leads the way today, improvements in logistics and technical education elsewhere in the SADC bode well for future expansion.
What’s Ahead for FDI in Southern Africa?
After two years of pandemic, and against a backdrop of longer-term secular changes in the region’s economy and politics, the future of FDI in southern Africa seems more uncertain than ever.
Will the overall decline in FDI that we saw before the pandemic continue into the future? Or will the recent supply chain disruptions spur multinationals to redouble their investments in southern Africa’s infrastructure and manufacturing capabilities, spurring a new generation of homegrown enterprises to take flight while reducing the region’s reliance on imports?
Time will tell. For now, those interested in the future of FDI in the SADC can bank on these five trends playing a role.