Business
Africa prospects lure investors, but is it ready?
Ethiopia and Rwanda are among the smaller African economies seen as promising. They show how previously ignored countries scarred by war are emerging as possible investment magnets alongside those such as Ghana, a relatively stable democracy which is soon to become an oil producer.
There are risks, though, with concerns over political stability even in bigger economies such as Nigeria and Kenya.
Africa experts underline the fact that new mineral riches have rarely been shared widely, and suggest reliance on such income for national coffers could discourage establishing tax bases that would put states on a sounder footing.
“Where I think the real caution has to come in is the quality of the growth,” said Patrick Smith of the Africa Confidential newsletter. “It would be pretty silly to say success is certain.”
A big influx of investment funds could in itself pose a problem for African countries less prepared to cope than those in other rapidly growing regions that have felt the pain of such flows in the past.
“Africa has no experience of huge capital inflows,” said Renaissance’s Jennings. “Under the scenario I’m painting, the capital inflows will be way above and beyond the ability of those countries to absorb them.”
Most African countries have small, illiquid markets and little financial infrastructure, raising the chances of economic distortions and asset bubbles that could lead to currency crises and long-term damage.
“People look at how certain African economies have been getting their act together and there is a risk you will get significant capital inflows,” said Mohamed El-Erian, chief executive officer of PIMCO, the world’s largest bond investor.
“That will provide quite a challenge to policy makers.”
Source: Reuters
