Africa’s FDI drops in line with global trends

NEW YORK - Foreign direct investment (FDI) flows to Africa fell by 3% to $53 billion in 2023, in line with a global trend influenced by “trade and geopolitical tensions,”
according to the latest World Investment Report released on 20 June by the UN’s trade and development agency (UNCTAD). Two of the largest recipient economies – Egypt and South Africa – drove the overall trend.

However, Foreign investment flows to Africa slightly declined in 2023, but significant investments in the clean energy sector offered a positive highlight.

Greenfield announcements included megaprojects like a green hydrogen project in Mauritania. International project finance fell by a quarter in deal numbers and by half in value.

Excluding key European economies that act as conduits for global finance, global FDI flows dropped by 10% while the average decline for developing economies was 7%.

Constraints on international project finance include the rise of protectionist policies and regional realignments that are “fragmenting” trade networks and global supply chains, UNCTAD said.

In Africa, Central Africa was the region that saw the largest drop in FDI inflows, at 17%. Southern Africa bucked the trend, recording 22% growth. Financing conditions are expected to ease this year but countries seeking more investment should improve their transparency mechanisms — for example, by using digital government tools — in order to boost confidence in the business environment, UNCTAD recommends.

During the year, the estimated value of international project finance deals in African nations declined by 50% to $64 billion. This follows a 20% drop in 2022.

However, the continent attracted a growing share of global greenfield megaprojects, six of them valued above $5 billion.

Topping the list was a green hydrogen project in Mauritania, a least developed country in Northwest Africa. This project is expected to generate $34 billion in investment, an amount several times greater than the nation’s GDP.

Africa also received more than $10 billion in project finance for wind and solar electricity production, with the largest projects located in Egypt, South Africa, and Zimbabwe.

Value chains for electric vehicles also prompted foreign investments. The largest deals announced included one to establish a $6.4-billion electric vehicle battery manufacturing facility in Morocco.

The main economies investing in the continent, by FDI stock, are the Kingdom of the Netherlands, France, the United States, the United Kingdom, and China.

How subregions fare

Foreign investments in North Africa went down by 12%. In Egypt, mergers and acquisitions fell from the highs of 2022. Morocco also had decreased FDI inflows but performed well in attracting greenfield projects.

FDI flows to West Africa dipped by 1%, with mixed results across countries. The value of greenfield investment was heavily influenced by the announced $34-billion green hydrogen project in Mauritania. Even excluding this outlier, greenfield project values tripled, and the number of projects remained stable.

In Central Africa, FDI declined by 17%. Despite a 56% increase in the number of greenfield projects and a 119% rise in their value, the region was negatively impacted by the downturn in international project finance deals.

In East Africa, FDI inflows fell by 3%, mainly due to an 11% decrease in Ethiopia. However, greenfield projects and international project finance deals increased by more than 30%, indicating better prospects ahead.

In Southern Africa, fluctuations in Angola continued to influence trends. Inflows to South Africa decreased by 43% despite higher mergers and acquisitions activity.

Compared to 2018, FDI inflows expanded for all major regional groupings, most prominently the Economic Community of West African States (ECOWAS), and the Southern African Development Community (SADC).

Global foreign direct investment remains weak amid crises and economic fracturing

Global foreign direct investment (FDI) fell by 2% to $1.3 trillion in 2023 amid an economic slowdown and rising geopolitical tensions, according to the World Investment Report 2024.

But the report highlights that the decline exceeds 10% when excluding the large swings in investment flows in a few European conduit economies.

FDI flows to developing countries dropped 7% to $867 billion.

Tight financing conditions led to a 26% fall in international project finance deals, critical for infrastructure investment. International project finance is crucial for the poorest countries, making them more vulnerable to the global downturn in this type of investment.

Crises, protectionist policies and regional realignments are disrupting the world economy, fragmenting trade networks, regulatory environments and global supply chains. This undermines the stability and predictability of global investment flows, creating both obstacles and isolated opportunities.

While prospects for 2024 remain challenging, the report says modest growth for the year remains possible, citing easing financial conditions and investment facilitation efforts in both national policies and international agreements.

Investments are growing in several global value chain-intensive manufacturing sectors like automotive and electronics in regions and countries with easy access to major markets. But many developing countries remain marginalized, struggling to attract foreign investment and participate in global production networks.

The downturn in project finance affected sustainable development, with new funding for Sustainable Development Goals (SDGs) sectors dropping over 10%, particularly in agrifood and water. This hampers efforts to achieve the 2030 Agenda and calls for urgent policy action to revamp sustainable development finance.

The report emphasizes that business facilitation and digital government solutions can address low investment by creating a transparent and streamlined environment. It highlights significant growth in online services and information portals, saying such tools also support broader digital government development, benefiting developing nations in particular.

To download the full report, visit: https://unctad.org/publication/world-investment-report-2024