Saturday, 17 August 2019

Germany's FDI to Africa: still low


Deutsche Bundesbank has recently presented its latest inventory of foreign direct investments (FDI)[1]. The publication contains data on German gross assets from active direct investment and, corrected for associated liabilities, also net assets. The key figures of the German companies investing in the target countries are also informative, i.e. number of firms, number of employees and turnover. Table 1 summarises Africa's role in German FDI for the last observation year 2017.
Table 1: German FDI in Africa, stocks 2017

bn Euro/number
Share Africa/World, %
Gross claims, € billion
9.2
0.6
Net claims, € billion
8.4
0.8
Number of companies
849
2.2
Staff, thousand
201
2.6
Annual turnover, € billion
30.8
1.0
Source: Deutsche Bundesbank (2019)
At the end of 2017, gross claims of German companies from active direct investments amounted to €1,568 billion worldwide; Africa's share amounted to €9.2 billion, or 0.6 per cent. In terms of net claims, Africa's share was slightly higher, 0.8 per cent. Explanation: Direct investments can be hedged against exchange rate risks by borrowing in the host country, which is why worldwide net claims amount to only two thirds of Germany's gross receivables. In Africa, however, local financial markets are less developed than in the rest of the world, which is why FDI made there is relatively less hedged by offsetting loans.
Africa's share of the worldwide turnover of German companies with active direct investments was just one percent. Companies investing in Africa were relatively more numerous with a share of 2.2 percent. The proportion of people employed in Africa was relatively even more important, at 2.6 per cent of those employed in German companies worldwide. These numbers indicate that the German companies invested in Africa are smaller and more labour-intensive than elsewhere in the world. This means that their developmental contribution in Africa is likely to be relatively more significant than their percentage share of world investment stocks would suggest.
The importance of even Africa as a whole for German direct investment is very low; however, it tends towards zero if North Africa, South Africa and the tax haven Mauritius (keyword Mauritiusleak) are excluded. German companies traditionally concentrate almost exclusively on North Africa (especially Egypt) and South Africa. Germany´s development bank KfW recently stated: "There are hardly any German companies between Cairo and Johannesburg. The companies of the other major industrial nations, France, Great Britain and the USA, have a broader regional base. The common language and the cultural proximity due to the African diaspora are important reasons for this"[2].

Table 2: Geographical distribution of German FDI in Africa 2016, $ billion

Germany
France
Italy
UK
USA
North Africa
3.7
16.2
18.2
16.3
28.4
Subsahara
1.8
30.1
2.0
30.1
23.9
South Africa
5.2
2.0
1.6
19.7
5.0
Total
10.7
48.3
21.8
66.1
57.3
Source: Tim Heinemann, KfW

The focus of German companies outside the OECD area, on the other hand, is on Asia and Eastern Europe. The level of direct investment in these regions is more than ten times higher than in Africa. In Eastern Europe, low-cost production was available close to the European sales markets. So far, Asia has attracted with a higher degree of industrialization and a larger middle class. Of course, the Maghreb is geographically close and Africa's middle class is growing - so an increase in German FDI in Africa can certainly be expected in the future. However, Africa's high unit labour costs act as a brake on direct investment in industrial manufacturing[3].
As part of the ´G20 Compact with Africa´ (CwA), the German government has been trying since 2017 to boost German direct investment in twelve selected African partner countries. These include three promising emerging countries in North Africa (Egypt, Morocco, Tunisia), but also nine poorest countries south of the Sahara (Ethiopia, Benin, Burkina Faso, Côte d´Ivoire, Ghana, Guinea, Rwanda, Senegal, Togo). Companies can participate in the implementation of the measures within the framework of the current tendering and award procedures of bilateral development cooperation. Germany is now trying to develop further instruments and incentives of ´de-risking´ to complement the CwA, beyond  her 25(!) measures[4] (funding instruments, programs and other initiatives) already in existence meant to foster private investment.


Table 3: German net FDI in Africa, 2016-18, € million
Transaction values according to balance of payments statistics

2016
2017
2018
North Africa
- CwA
1.198
1.037
418
-4
1.445
1.325
Subsahara
-CwA
82
23
145
8
66
15
South Africa
445
553
429
Total
-CwA
1.725
1.060
1.116
4
1.940
1.340
Source: Deutsche Bundesbank, Balance of payments statistics, Xcel file, 14. August 2018
Note: Transaction values may be negative; the positions listed are netted.

Unpublished flow data[5] provided by the Deutsche Bundesbank record German FDI in individual African countries up to 2018. Morocco as an outlier received € 1,199 million in German net FDI in 2018, presumably due to construction investments for the Ouarzazate solar power plant[6], which had been initiated long before the CwA. Apart from the individual case of Morocco (and Ethiopia), the African CwA partners received less German FDI on balance over the past two years. So now we have it officially. So far the CwA ressembles a Potemkin village, with colourful displays in the form of declarations of intent and of many conferences.



[1] Deutsche Bundesbank (2019), Bestandserhebung über Direktinvestitionen 2019, Statistische Sonderveröffentlichung 10, 30. April.
[2] Tim Heinemann (2018), „Warum halten sich deutsche Unternehmen mit Investitionen in Afrika zurück?“, KfW Research Nr. 171, 27. December. 
[3] Robert Kappel (2018), „Afrika braucht einen anderen Entwicklungsweg“, MAKRONOM, 29. May.
[4] Deutscher Bundestag (2019), Bundestagsdrucksache 19/10272, 21.5.2019.
[5] Deutsche Bundesbank (2019), Inländische Netto-Direktinvestitionen im Ausland, Transaktionswerte lt. Zahlungsbilanzstatistik, Xcel-Datei, 14. August.
[6] Individual details are not published by the Bundesbank for reasons of confidentiality.

Friday, 9 August 2019

From HIPC to CwA: New Trends in Public Debt


The nine LICs (low-income countries) of the twelve CwA (Compact with Africa) countries have been part of the so-called Heavily Indebted Poor Countries (HIPCs) in the 1990s. They were part of the HIPC initiative and were granted debt relief from bilateral Paris Club creditors from 1996.  Further, Multilateral Debt Relief Initiative (MDRI) in 2005 allowed for cancellation of claims on HIPC completion point countries by the IMF, World Bank Group and African Development Bank. These are exactly those multilaterals that run the Compact initiative today. In this sense, the CwA initiative is a déjà vu experience for Africa´s HIPC countries.
The HIPC / MDRI Initiative has clearly reduced the indebtedness of the beneficiaries and in some cases led to a reboot after a "Lost Decade of Development”. Debt relief has enabled most countries to return to the capital market or access it for the first time. The new borrowing that has taken place since then has already led a number of countries back into debt problems. For the assessment of “Risk of Debt Distress”, IMF debt sustainability analysis classified seven of the 35 post-completion HICs as high (and none in default) end 2015; by end 2018, ten countries were assessed as high debt distress and two were in default[1].



Table 1 provides a snapshot of the most recent indicators of debt sustainability since the launch of the CwA initiative for the twelve CwA countries. Only public debt figures are available are available for the period 2016-2018, the year preceding the CwA launch (2016) and the last observation (2018/19). The first two columns refer to central government debt as a percentage of GDP, which excludes state-owned enterprises and subnational public authorities. While public debt ratios in CwA countries remain relatively low by OECD-level standards, so is their debt tolerance. The debt ratios have been on an upward trend during 2017-19, from 60.4 to 63.5 % of GDP, quite strongly so in Senegal and Tunisia. Debt tolerance, as implied by CPIA scores, has remained stagnant, as did sovereign ratings by Standard & Poor´s or Moody´s.
Growth forecasts and thus debt sustainability assessments of the IMF and World Bank should be treated with scepticism, as the IMF has been found to be biased, especially for IMF program countries for which growth estimates tend to be too optimistic[2]. Currently, most recent IMF/WBG assessments of CwA countries´ debt sustainability would signal some scope for debt finance (including contingent liabilities implied by public-private partnerships) in Rwanda only, given the moderate public debt ratio paired with good CPIA scores. By contrast, Ethiopia and Ghana are gauged as ´high debt distress´ so that they should prefer foreign direct investment, portfolio equity finance and grants over debt finance. Senegal tops the group of CwA countries with the worst public debt dynamics as the respective debt-GDP ratio has soared by more than 14 percentage points since the launch of the Compact. Public debt ratios are largely driven by the difference between growth and interest rates[3] on public debt, the primary budget balance, and, as emerging countries had to learn in the 1980s, by the exchange rate[4].
Countries with solid institutions are perceived as more debt tolerant in the IMF/WBG debt sustainability framework (DSF). This requires for low-income countries improved CPIA scores (those do not exist for middle-income countries). Lower public and corporate debt means less default risk, less exposure to currency and maturity mismatches in public and private balance sheets and better sovereign ratings. Countries with sustainable debt levels have more fiscal space and buffers to engage in private-public partnerships and other forms of blended finance that entail contingent public liabilities. A sound debt situation is a prerequisite for portfolio and bank credit investment to fund infrastructure. However, neither is a solid debt situation given in all CwA countries nor has it improved anywhere.



[1] Jürgen Kaiser (2019), 20 Jahre nach der Schuldenerlass- Initiative des Kölner G8-Gipfels: Was wurde aus den HIPC-Ländern? Friedrich-Ebert-Stiftung, Globale Politik und Entwicklung, Berlin, April.
[2] Indermit Gill, Kenan Karakülah, and Shanta Devarajan (2019), Stressful speculations about public debt in Africa, Brookings Institute, Washington DC, June.
[3] While IMF growth estimates tend to be biased, effective interest rates on public debt are hard (or costly) to acquire. Senegal most recently paid 5.5% on FCFA (=€) public treasury bonds. See https://agenceecofin.com/finances-publiques/0406-66690-l-etat-du-senegal-choisit-le-marche-des-titres-publics-pour-son-retour-sur-le-marche-financier-regional
[4] Helmut Reisen (1989), Public Debt, External Competitiveness, and Fiscal Discipline in Developing Countries, Princeton Studies in International Finance No. 66, Princeton NJ.

Sunday, 14 July 2019

Sobering Results of the G20 Compact with Africa


The G20 Africa Partnership was launched in 2017 to build on and streamline a proliferation of regional and international strategies in order to ensure alignment, coherence and ownership. While there has been a long history of G-7/8/20 initiatives relating to Africa, the Compact with Africa (CwA) is the first comprehensive initiative between the G20 and Africa. 

Two years after inception, the results of the CwA are sobering.

Why? It is not that ambition, effort and input have been lacking. The CwA’s has aimed at levering private infrastructure finance via blended finance to facilitate subsequent foreign direct investment (FDI) flows. The hope was that better governance would help attract those private flows.

Well, governance did improve. Table 1 shows three governance indicators (IFC Doing Business, Bertelsmann Transformation Index, and Transparency International Perceived Corruption) emphasised by the German administration. The twelve CwA countries today are generally managed better than in the period just prior to the launch of the Compact in 2017. 

Table 1: African Compact Countries Governance Scores

Compact Countries
BTI 16
BTI 18
DB 16
DB 18
CPI16
CPI18
Benin
4.72
5.86
48.5
51.4
36
40
Burkina Faso
4.92
5.20
51.3
51.6
42
41
Côte d´Ivoire
5.13
5.54
52.3
58.0
34
35
Egypt
4.44
3.96
56.6
58.6
34
35
Ethiopia
3.49
3.65
47,2
49.1
34
34
Ghana
4.44
6.18
58,8
59.2
43
41
Guinea
5.83
5.82
46.2
51.5
27
28
Morocco
4.37
4.28
67.5
71.0
37
43
Rwanda
5.10
5.20
69.8
77.9
54
56
Senegal
6.65
6.70
50.7
54.2
45
45
Togo
4.84
5.10
48.6
55.2
32
30
Tunisia
5.33
5.33
64.9
66.1
41
43
Mean
4.94
5.26
55.2
59.3
38
39


https://www.transparency.org/cpi2018.
Notes: EoDB = Ease of Doing Business score is reflected on a scale from 0 to 100, where 0 represents the lowest and 100 represents the best performance ever worldwide. BTI = Bertelsmann Stiftung Transformation Governance score from 1 (lowest) to 10 (best), a composite of scores for steering capacity, resource efficiency, consensus-building and international cooperation. The Transparency International Corruption Perception Index (CPI) use a scale of 0 to 100, where 0 is highly corrupt and 100 is very clean.

While governance improved, neither private cross-border flows nor local resource mobilisation have followed. The CwA architects had initially conceived a sequence of private cross-border flows to the Compact countries that would first stimulate portfolio flows into infrastructure from institutional long-term investors such as pension funds, life insurance companies and sovereign wealth funds.  In turn, as infrastructure bottlenecks were slowly removed, it was hoped that foreign direct investment flows would follow.

  • By its very nature, it is difficult to trace portfolio flows arising from, say, pension fund assets as these are not earmarked, shrouded in secrecy, liquid and reversible. The IFC is trying to help tap assets held by institutional investors with its Managed Co-Lending Portfolio Program (MCPP). It offers a big carrot: MCPP provides a credit enhancement through an IFC first-loss tranche, in other words investors are attracted by a given return guaranteed for an initial period. Information available on MCPP Infrastructure for the year 2018 reports that $1.6 billion MCPP Infrastructure funds had been raised. Of these, $300 million investments had been approved for nine projects in eight countries. Of the approved funds, only 8% had been allocated to Sub-Saharan Africa (and none to North Africa). So, just $24 million of MCPP funds had been earmarked for Sub-Saharan Africa. Peanuts.  
  • Political attention related to the CwA has meanwhile shifted toward foreign direct investment (FDI). The most recent CwA Monitoring Report proclaimed end 2018: “Compact with Africa countries have demonstrated resilience as a destination for FDI in the region against the backdrop of declining FDI inflows into Africa.”  Graph 1 based on UNCTAD FDI statistics disproves the CwA Monitoring Report as ´spin´related to a period prior to the launch of the CwA. The twelve CwA countries (and the rest of Africa) have received more FDI in 2018 than in 2017 but the exponential FDI upward trend (line) established between 2013 and 2016 in CwA countries has not been held in 2017/18.
Graph 1: Gross Foreign Direct Investment Inflows, Africa 2013-2018, $bn

The UNCTAD data available since June do not give rise to a jubilatory interpretation of trends in gross FDI inflows since the launch of the CwA initiative. To the contrary, and with all the caveats that apply to the volatile nature of FDI data, if anything there is a tendency for gross FDI inflows to continuously shrink in CwA countries since 2016. This observation holds both for the amount of flows measured in US dollar and as a fraction of gross fixed capital investment in the unweighed average of the twelve CwA partner countries. 

If the CwA has not been sussessful so far in stimulating cross-border flows into Compact partners, have they instead mobilised higher national savings to finance transformative investment via gross domestic capital formation (GFCF)? Again, the answer is rather negative for the unweighed average of the twelve countries. To arrive at data on the national savings-GDP ratio as a measure of domestic resource mobilisation (DRM) for the most recent period 2016-18, I had to rely on national account identitites and current account imbalances for deriving indirectly at the data presented in Table 2.

Table 2: National savings rate and gross investment rate, 
CwA countries 2016-18% of GDP
Countries
S/Y 2016
S/Y 2017
S/Y 2018
GFCF 2016
GFCF 2017
GFCF 2018
Benin
15,2
18,5
15,9
24,6
28,4
25,8
Burkina Faso
17,4
15,3
15,3
25
24,8
22,8
Côte d´Ivoire
17,1
17,1
17,4
18,3
19,5
20,8
Egypt
8,5
8,7
15,1
14,5
14,8
16,3
Ethiopia
28
29,9
27,6
37,3
38,4
34,1
Ghana
21,8
17,2

27
20,6

Guinea
20,8
13,8
3,4
52,4
20,6
19,5
Morocco
24,2
26,3
15,5
28,4
29,9
19,1
Rwanda
11
16,1
15,9
25,3
22,9
23,7
Senegal
21,5
17,4
17,7
23,5
24,6
25
Togo
18,8
17,4
17,4
28,1
22,5
25,3
Tunisia
10
6,5

19,3
16,7

Mean
17,86
17,02
16,12
26,98
23,64
23,24

Table 2 documents that for the average of the twlve CwA countries neither national savings nor gross fixed investment rose since the CwA launch. Actually, the national savings effort weakened on average. The savings ratio rose only in Egypt and Rwanda since 2016.

The verdict on the CwA two years after is that the anticipated private cross-border equity flows did not materialise nor did domestic resource mobilisation. Consequently, public debt dynamics often could not be tamed. The positive tone of the CwA monitoring reports sounds hollow so far in view of the macroeconomic data recorded here.