Opportunities in Africa

Construction markets require two key elements to thrive: strong economic growth and low investment risk. These have not been available in Africa in recent times, with the result that the developing economies of Asia, Eastern Europe, and South America have received greater attention. However, conditions are improving, and while Africa is unlikely to become more attractive than other developing regions, it does offer opportunities.

Economic growth

Macroeconomic activity in sub- Saharan Africa will continue to improve in the near term. Real GDP growth of +5.7% in 2006 will be one of the strongest rates ever recorded by the sub-region. Growth may even trend higher in 2007 if oil and non-oil commodity prices remain strong.

Higher-than-average real GDP growth in Nigeria and South Africa, which account for a combined 56% of the region's economy, bodes well for the its near-term growth prospects. South Africa's investment environment will benefit from large capital outlays in the electricity and transportation sectors.

Debt relief & investment

Debt relief for many African countries will be a positive factor. The external debt burden makes it difficult to reduce poverty in large parts of Africa, and the recent debt forgiveness for 13 countries in the region will be a great help to these economies.

Foreign direct investment (FDI) to sub-Saharan Africa doubled in 2005 to an estimated US$ 25 billion. The investment outlook is strong for 2006 as commodity prices remain high and industrialised nations, as well as China and India, look to Africa for strategic economic resources.

Angola and Nigeria have been the prime targets for capital spending in the region, and their petroleum industries will continue to rank among the most attractive opportunities in Africa. Smaller oil exporters, such as Equatorial Guinea, Congo, Gabon, and Cameroon, should also benefit. The mining sector will also see strong investment growth over the near term, led by the recapitalisation of this key sector in recently stabilised Sierra Leone and Liberia.

Risk factors

Such investment is a reflection of lowered risk, particularly in the forms of political stability and inflation, although progress has been uneven. The graph risks illustrates the broad range of risk for the construction industry, as measured by an index of contract enforceability, government regulation, labour costs and/or shortages, construction materials costs, the ability to repatriate earnings, and the risk of currency depreciation and the costs of corruption and physical hazards to production.

On average, the political environment has continued to improve, but some sore spots remain. On the positive side, the situation in Sierra Leone is getting better; Liberia has conducted a successful presidential election, and the recent meeting of the warring parties in Côte d'Ivoire points to an increasing chance of a peaceful settlement of the conflict in the West African nation.

On the downside, President Robert Mugabe remains defiant as both economic and political conditions in Zimbabwe continue to deteriorate. The attempt to amend the Nigerian constitution and allow President Olusegun Obasanjo to run for a third consecutive term was voted down overwhelmingly by the Nigerian Senate, a good omen for the nation's fledgling democracy.

Opportunities

Immature financial markets and the lack of opportunities tend to result in high savings rates and low rates of investment in sub-Saharan Africa. There is some 'informal investment' in the region, which is difficult to measure, but it is clear that there will be a substantial savings/investment gap going forward.

Capital spending in South Africa, the region's largest economy, follows global patterns more closely. Investment is approaching 20% of GDP, a key threshold for developing economies. Modest rates of inflation going forward should allow the monetary authorities to keep interest rates low.

Several other factors will impact South Africa's medium-term fixed capital formation outlook - high- profile foreign investments, low mortgage rates and large capital outlays on infrastructure in the run- up to the 2010 Soccer World Cup.