Investment Considerations
Basically, investing is about risk versus reward. We haven already commented about the
potential rewards that Africa has to offer. So let us speak about risk now.
Risk at Direct Investments
If you take a look at a single investment, things are different. The risk of a single
investment in an African project is remarkably higher than that of listed securities (stocks,
bonds, commodities, money markets), precious metals or real estate. This risk composes of
the following parameters:
Company risk: this is higher in Africa because principles of good governance
are slowly becoming common practice, with big differences from country to country. Legal certainty
cannot be compared with the situation in Europe since corruption is widespread, and for a number
of other reasons.
Country risk: it includes the political risk, risk related to the code of
law, and the fiscal risk, mainly associated with high external debts.
Currency risk: currencies were weak in the past and have been devalued.
Risk of transferring foreign exchange: the risk of limited or restricted
repatriation of capital invested in foreign currency is evident in countries with acute lack of
foreign exchange (currently [Feb 2016] Nigeria) as well as in countries with nonconvertible
currencies (Ethiopia). There are foreign exchange control systems in various other countries,
i.e. South Africa, but they are less relevant in practical terms. However, this might change in
the future.
How will these risk factors develop in the future?
The political risk is decreasing in almost all sub-Saharan countries.
Democratization has made big progress. Many governments fight decisively against corruption.
Social unrest and some long-lasting civil wars have been ended.
The financial risk is also decreasing. Many highly indebted nations have
benefited from debt relief by international donor communities many years ago. Many African
countries are much better situated than most of the highly indebted developed nations.
