Monday, December 21, 2015

Africa: the allure of Arab money

Arab money
With the prospect of European and U.S. economic recovery uncertain, African countries are going for something more certain—Arab money
Africa’s traditional economic partners have for a long time been European countries and the U.S. This has not changed. The level of commitment of these western countries, however, has wavered in the recent past. It has simply not met Africa’s huge and growing appetite for foreign investment.
Europe and U.S. are still in a tepid recovery and are more inclined to look inward than outward at the moment. This doesn’t serve in the interest of Africa, which is presently in need of sustained investments to grow; investments that cannot be mobilized by domestic savings.
Africa has been compelled to court the attention of others, most notably China, but now, also the Middle East. It is no secret that countries in the Gulf often have surplus money lying around. The popular ‘Arab money’ imagery is no myth at all.
Thanks to an overabundance of oil, most banks and financial institutions in the Arabian Gulf are overflowing with liquidity. “Many of these companies are generating very high cash returns,” says Walid Shiabi, head researcher at the Dubai-based Shuaa Capital. “And in a lot of cases, they are beginning to outgrow their own markets and are looking elsewhere to expand,” he expands.
The interest that Africa is showing in reeling in Gulf investors is not one way. Investors from the Gulf, too, have expressed interest in Africa. A new report by the Economist Intelligence Unit that the Gulf is also showing strong interest in Africa, particularly in Uganda and Kenya.
The report, commissioned by the Dubai Chamber to examine Africa’s growth drivers outside of the historically dominant natural resources and raw commodities sectors, shows that the sub-Saharan African countries that have attracted the largest number of Gulf investors — between 10 and 25 firms each — are Nigeria, South Africa, Kenya and Uganda.
One of the areas away from the key resource areas that has aroused the interest of Gulf investors in Africa is retail.
Retail
According to the study, there are gaps in retail that are well worth filling. While consumer spending is increasing, large-scale retail centers are lagging behind. This market gap is an opportunity that Arab investors are eyeing, though difficulties of developing commercial real estate in crowded capital cities across Africa remain.
These challenges notwithstanding, there are many examples that indicate that commercial real estate with a particular emphasis on retail can be developed in Africa. In Nairobi, the Garden City mall, which is world class as evidenced by the global brands that have secured space, is one such example.
Retail Africa
Africa’s retail segment is a key area of focus for Gulf investors
Another challenge is adapting to local tastes. The gap in retail in most of Africa is filled by informal traders, who despite not enjoying the pomp or scale of formal brands, have close relations with the local consumers and bear an intimate knowledge of their needs.
“Traditional and informal retail remains the most prevalent form of shopping in both urban and rural areas as it meets consumers’ needs in terms of convenience, local proximity and flexibility in packaging, pricing and trading hours,” said Ailsa Wingfield of Nielsen’s Africa Marketing & Communication
Gulf investors therefore need to find a way to adapt to local tastes in the African retail market, even as they seek to bring the efficiency and quality that global scale affords. “Gulf firms that are considering making an acquisition in the retail sector should not overly brand it, as local products are the ones that sell best,” said Roze Philips, the managing director of products for Accenture South Africa.
The Economic Intelligence Unit report, however, affirms that Gulf companies “have a comparative advantage thanks to a track record in franchising and adapting brands to local tastes and cultures. These firms are also skilled at managing the logistics of multi-country distribution.”
Besides retail, other sectors that have caught the attention of Gulf investors are the automotive, commercial banking and tourism sector. The automotive sector is particularly vibrant in markets such as Nigeria and Kenya where a new middleclass that associates driving a car with class has emerged.
Banking has also emerged as a highly attractive proposition, particularly in East Africa where there is an ever growing affinity toward Islamic Banking products. In fact, Gulf investors established one of Kenya’s first Islamic banks, Gulf African Bank, in 2007.
Political sway
Whereas there is nothing wrong with business between nations—and it is to be encouraged—Africa will need to tread carefully. In the past, the conflict between Chinese and Western interests in Africa have displayed just how important political sway is for foreigners.
Foreign investments almost always come with strings attached. This is simply just a natural consequence of investing. This notwithstanding, Africa should be keen to protect its interests while still preserving the interests of its partners. Simply put, it is not a zero-sum game and interests—whether Chinese, European or Gulf—are not necessarily mutually exclusive, though they often compete.
Global brand
Africa should use trade and investment to push for equal voice in global order
Meanwhile, the continent will need to look at intra-African trade so that as trade flows and investment with the rest of the world grow, trade flows and investments within the country also grow. While regional trade in blocs such as the EU stand at 61 percent, it is just 12 percent in Africa, according to figures from the UN.
Greater collaboration in Africa will give the continent leverage and a stronger voice in multilateral platforms. It will also allow it to press for more favorable terms when striking deals with foreign investors. This will reduce the all too common scenario where foreign investors are offered a wide range of incentives such as tax breaks, free utility and infrastructure at detrimental costs to the host nation.

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