Lies, Damned Lies, and FDI Statistics

The term “Lies, Damned Lies, and Statistics” was popularized by the great US author Mark Twain, who attributed it to the British Prime Minister Benjamin Disraeli. Weak arguments are bolstered by the use of statistics, to the point that the credibility of quantitative economics is often seen to be undermined by datamining.

It would seem that there is an even stronger form: Lies, Damned Lies, and FDI Statistics.

In recent work for the forthcoming African Economic Outlook 2016, my colleagues Birte Pfeiffer, Robert Kappel and I found that the statement applies to FDI inflows to Africa in particular. There are two main official sources for numbers on recent FDI flows: the IMF World Economic Outlook database, and the UNCTAD Global Investment Trends Monitor. Consider the differences provided by these prominent sources:

FDI inflows (USD billion) to Africa

Source	2014	2015
IMF_WEO	28.2	51.5
UNCTAD	55.0	38.0
Difference	- 26.8	+ 23.5

The lower UNCTAD estimate for investment in Africa in 2015 reflects a sharp drop into Mozambique (-21%), Nigeria (-27%), and South Africa (-74%). FDI inflows form an important part of the roughly USD 200 billion financial flows (including remittances, the most important inflow ahead of ODA) to Africa. The reported differences are so striking that, according to the FDI source chosen, total net financial flows in 2015 to Africa rose by 5.9% (IMF-based), that total inflows dropped by 12.8% (UNCTAD-based) or that inflows dropped by 7.4% if erratic FDI data are ignored altogether.

Choose the Africa narrative you like, the poor quality of FDI data is a convenient element for your more or less fairy tales…

Africa´s Frontier Markets are Cheap Again

Africa ´s equity portfolio flows have experienced consistent volatility during the past two decades. From a net equity outflow recorded for 2009 they jumped to a massive net inflow in 2010, to almost USD 20 billion. Since then, they have levelled off, to a mere USD 1.2 billion recorded for 2015. Volatile portfolio equity flows were reflected in most African equity markets indices that produced negative returns amid a challenging economic environment. While many observers see the beginning of the US Fed’s policy tightening cycle as the culprit for the recent retrenchment, domestic factors also seem to have contributed to reduced investor appetite for EME assets. A slowdown in growth added to investor concerns, particularly against the backdrop of the commodity price slump. 

Figure 1: MSCI Emerging Frontier Markets Africa ex South Africa Index vs MSCI World

Figure 1 compares the MSCI Emerging Frontier Markets Africa ex South Africa Index (blue line) with the MSCI World Index (green). It covers six countries (Egypt, Kenya, Mauritius, Morocco, Nigeria and Tunisia), with 38 constituents. The three largest, by index weight, are Egypt´s Commercial International Bank, Maroc Telecom and Nigerian Breweries. No industrial exporter figures among the ten top constituents, reflecting Africa´s industrial weakness. 

Figure 1 shows that Africa´s frontier markets held up well until early 2015 compared to advanced stock markets. Actually, African stock markets performed better than the emerging markets benchmark index (MSCI EM) in 2015.  The Bourse Regionale des Valeurs Mobiliers (BRVM), the regional stock exchange for the West African Economic and Monetary Union member countries, achieved strong positive returns on the back of stronger economic performance in Côte d’Ivoire. East Africa´s stocks did pretty well, as did their underlying economies. Commodity dependent Africa, by contrast is exemplified by Nigeria where uncertainty related to the presidential elections’ outcome and lower oil price contributed to lower returns.

From Spring 2015 to January 2016, however, the MSCI Emerging Frontier Markets Africa ex South Africa Index has almost halved.  With a dividend yield of 4.6% and a P/E ratio of 9.5, the index seems cheap now compared to the MSCI EMF index (3% div yield; 12.6 P/E ratio). In February 2016, the index has started a forceful countertrend rally of 20%, and perhaps even more: a turnaround.