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For African economies living on the brink, could the Middle East provide a much-needed boost to Africa’s underserved Muslim population?
GCC investment in Africa has continued to grow, reaching $8.3 billion so far in 2022.
Source: Market data
According to the IMF, sub-Saharan public debt has reached around 60 percent of GDP by mid-2022, a level last seen in the early 2000s. The composition of this debt has steadily shifted towards more expensive private sources, raising debt service costs and default risks, with 19 of the region’s 35 low-income countries now considered either in trouble or at high risk of trouble.
After a clear retreat from China – the region’s largest inward investor in recent history – policymakers across the region now face the sobering task of setting a stabilizing course against a backdrop of geo-economic turmoil. After two decades of strong and ever-growing investment and engagement, President Xi Jinping announced in January 2022 that China would cut the main amount it supplies to African countries by a third, from US$60 billion to US$40 billion. Following China’s decline, opportunities have arisen for increased investment by countries within the Gulf Cooperation Council (GCC), which consists of the Kingdom of Bahrain, Kuwait, the Sultanate of Oman, the State of Qatar, the Kingdom of Saudi Arabia, and the United States of America. Arab Emirates (UAE). For the GCC countries, particularly Saudi Arabia, the UAE and the State of Qatar, the Middle East/Africa corridor has become an increasingly prominent investment strategy in recent years. Between 2017 and 2019, prior to the COVID-19 pandemic, the volume of investment through capital investment and FDI from GCC countries to Africa increased steadily. Now, as the world recovers from the effects of the pandemic and manages geopolitical instability, GCC investment has continued to grow, reaching US$8.3 billion so far in 2022, almost back to pre-pandemic levels.
Buoyed by strong GDP growth across the GCC in 2021 and an increase in deployable capital, GCC states are increasingly turning their attention to sub-Saharan Africa
According to the AfDB, Africa’s infrastructure financing needs will be as high as $170 billion per year by 2025.
Buoyed by strong GDP growth across the GCC in 2021 and an increase in deployable capital, oil and commodity prices rose in 2022. Traditionally, GCC-Africa ties have been strongest between the GCC and North Africa, especially Egypt—perhaps an obvious connection given the cultural and Arabic-speaking connection and relative proximity. However, the space for direct business between the continent and the GCC has far greater potential than this well-trodden path. There is evidence that GCC states are increasingly turning their attention to sub-Saharan Africa. UAE-based Mashrekbank is currently the leading GCC bookrunner in Africa, investing in 14 countries across the continent. GCC financiers also appear to be looking at Africa as a long-term investment prospect. While GCC banks’ African operations are still typically GCC-led, they are actively seeking partnerships with local lenders.
While many consider the GCC states only in the context of oil and gas, these countries have in fact had a consistent diversification away from sole reliance on natural resources over the years, investing heavily in infrastructure, telecommunications and food security instead. Africa has so far been a major recipient of this focus: Qatar-based investment firm IAS International plans to invest US$1.6 billion in a series of development projects in the Central African Republic, including the development of a tax-free special economic zone; and Saudi Arabia has become one of the largest buyers of agricultural land across Africa, followed by the UAE, Qatar, Bahrain and Kuwait—all states increasingly focused on food security and reduced reliance on market imports.
Widely regarded as a fast-growing industry across Africa, telecoms have also proved popular for foreign direct investment from the GCC. E& (formerly known as Etisalat), the UAE telecom operator, has stakes in several African telecom companies in Tanzania, Benin, Burkina Faso, Togo, Niger, Mali, Mauritania, Central African Republic, Chad, Gabon and Cote d’Ivoire. Qatar’s Ooredoo has operations in North Africa, and Kuwait’s Zain operates in Sudan, South Sudan and Morocco.
The GCC’s growing infrastructure presence in Africa is particularly notable, with UAE-based DP World operating nine ports and terminals in eight African countries, including Algeria, Angola, Egypt, Mozambique, Rwanda, Senegal, Somalia and South Africa, and most recently has acquired a controlling stake in Nigerian Africa FMCG Distribution Ltd. Investments like this continue to contribute significantly to local employment and trade synergies. Sultan Ahmed Bin Sulaiem, Group Chairman and CEO of DP World, notes as an example that the company “has been in Senegal for the last 12 years…[…]… During this period, growth increased, volume doubled, and therefore the number of employees.”
Crucially, GCC investment in Africa does not appear to be limited to ad hoc purchases of strategic assets by state-owned enterprises. The commitment to the development of ongoing, sustainable trade has also been demonstrated by recent diplomatic and political decisions. In the summer of 2022, we saw the UAE and Kenya release a joint statement announcing their intention to negotiate a Comprehensive Economic Partnership Agreement (CEPA). This has been recognized as a precursor to an increase in the total value of non-oil bilateral trade between the UAE and Kenya, which rose to $2.3 billion last year. Private companies are also seeing the benefits of strengthening relationships, with African businesses increasingly choosing the UAE as a base of operations, with 1,600 new African member companies registering with the Dubai Chamber of Commerce since October 2021, demonstrating the opportunities for such companies to use the UAE as a base for outbound engagement and a platform for leveraging global export opportunities.
With pressure on debt levels rising, the need to restructure and refinance existing debt, and a reduction in demand in international capital markets, debt markets remain a key point to support these demands. The traditional higher yields available from pan-African lending may also prove attractive in an environment where local spreads in the GCC are relatively tight.
Islamic finance also offers significant opportunities. With Sub-Saharan Africa home to approximately 15 percent of the world’s Muslim population and approximately 40 percent of Sub-Saharan Africa identifying as Muslim, there is an obvious synergy between the continent and the GCC to provide not only conventional finance but also Sharia-compliant financing. Foreign investment through Sharia-compliant financing would diversify the sources of funds needed to bridge the continent’s infrastructure gap. Despite this need for financing, the use of Sharia-compliant financing across sub-Saharan Africa has not developed at the pace it could have. a number of political, socio-economic, legal and regulatory considerations resulted in a more measured acceptance. To date, the use of Sharia-compliant fundraising in sub-Saharan Africa has been opportunistic, largely driven by sovereign sukuk issuance, but we expect the use of Sharia-compliant inflows to become necessary as the gap between available funding from “usual” market participants and the need for funding continues to grow.
The Middle East/Africa corridor makes a lot of sense from a proximity, travel and logistics perspective. Policymakers seem to be in agreement that closer ties in the two regions are mutually beneficial. While the undoubted increase in transaction flow between the two regions over the past few years shows that these political ties are bearing fruit, there remain a number of potential areas where the Middle East/Africa corridor appears to offer the easiest – but underutilized – route to success. Since many African economies require significant inward investment, why can’t it serve the Middle East region with significant capital to deploy, its own strategic policy aims to cater to a sophisticated and well-developed Islamic financial market, which could easily be used to the growing and underserved African Muslim population? This could be the perfect partnership.
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