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.

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[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.

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.

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[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.