Investing in Transition States: the Horn of Africa Opportunity a Briefing Note for South Korean Investors
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Investing in Transition States: The Horn of Africa Opportunity A briefing note for South Korean investors 2018 AFRICAN DEVELOPMENT BANK GROUP Front cover picture: Cityscape of Khartoum, capital of the Republic of the Sudan Investing in Transition States: The Horn of Africa Opportunity A briefing note for South Korean investors Foreword It is my pleasure to introduce this report on the investment Investing in Transition Countries presents, not only the opportunity in the Horn of Africa. prospect of making a difference in Africa, but a real financial opportunity with potential for outsized returns, As a development financial institution, the African for those willing to engage in these markets and seize the Development Bank works to promote economic growth first-mover advantage. This report outlines the Horn of and social progress across the continent. The Transition Africa opportunity, namely the investment climate and States Coordination Office (RDTS) was established to opportunities in Djibouti, Eritrea, Somalia, South Sudan support the Bank’s commitment to play a leadership role in and Sudan, with Ethiopia also considered as an entry point stimulating economic and social development in countries to these markets. in transition. Our ‘Strategy for Addressing Fragility and Building Resilience in Africa (2014-2019)’ recognizes the I commend the report to you, and assure you of my potential of private sector investment to kick-start office’s every support as you consider your participation transformational change by leveraging the opportunities in these markets. present in these markets and providing better livelihoods and economic prospects to vulnerable populations. Sibry Tapsoba Director, Transition States Coordination Office African Development Bank AFRICAN DEVELOPMENT BANK GROUP The Horn of Africa Opportunity 1 The Horn of Africa is a large and dynamic market – with 174 million people and a total GDP of $188bn. Total foreign direct investment to the region automotive, electrical machinery, and is USD 4.8 BN annually, and has been infrastructure. Three additional sectors are growing 12% year on year. In addition, also introduced for consideration in this Korean investors have had a longstanding region: textiles, agriculture and extractives. relationship with the region – the Korean For the engaged investor, there are Trade-Investment Promotion Agency opportunities to invest to tap the large, local (KOTRA) has offi ces in Sudan and Ethiopia, market; as well as to manufacture for and Korean FDI has increased fi ve-fold export, both regionally and further afi eld. since 2014. We invite you to read this summary note. This summary briefi ng note presents the A copy of the full, extended version of this “Horn of Africa opportunity”. It outlines the report can be obtained by contacting the market dynamics in each country, as well Transition States Coordination Offi ce of the as specifi c sectors for consideration: African Development Bank. Methodology This, ongoing, work was commissioned by the AfDB’s regulatory environment, risks and the region’s trading Transition States Coordination Offi ce (RDTS), with sup- relationships. Based on typical investor patterns, the port from KOAFEC Trust Fund. Dalberg Advisors and Horn of Africa emerged as the fi rst priority region. In CrossBoundary LLC have prepared this summary note. 2018, the African Development Bank, supported by CrossBoundary, is facilitating investments from Korean In late 2017 Dalberg Advisors analysed 80+ metrics businesses into this region. across 16 countries and four regions in Africa; Sahel, Mano River Basin, Great Lakes region and Horn of Africa. This work focused on ‘transition states’ and aimed to evaluate which region might have the best ‘fi t’ for Korean investors. These regions were assessed based on their local economy, available resources (e.g. land and labour), prior relationship with Korea, AFRICAN DEVELOPMENT BANK GROUP 2 The Horn of Africa Opportunity FDI inflows into the Horn of Africa Vehicle Imports into the Horn of Africa USD Millions; including Ethiopia USD Millions; 2016 4,794 1481 The Horn of 4,Africa329 Opportunity2015 1392 2016 3,633 The3, 009Horn of2 Africa,827 has a large and growing GDP, with FDI inflows into the Horn of Africa 1031 Vehicle Imports into the Horn of Africa most economic activity and wealth concentrated in USD Millions; including Ethiopia USD Millions; 2016 Sudan and Ethiopia. Total GDP for the region is $188B, 4,794 1481 with 89% from these two markets ($95bn and $72bn 4,329 2015 1392 527 2016 respectively). Economic growth is high across the region — 3,633 Sudan, Ethiopia, Djibouti and Eritrea are between 5 and 9% 375 2012 2013 2014 2015 2016 3,282009 2,827 1031 GDP growth per annum; although conflict has led to the 141 114 112 South Sudanese economy shrinking, while that Somalia is 64 21 7 growing at a slow pace. GDP per capita is highest in Sudan at $2,899. In Eritrea, Somalia, S. Sudan and Ethiopia it is Djibouti Eritrea Ethiopia Somalia South Sudan 527 less than $800. Total FDI into the region largely goes to Sudan 375 2012 2013 2014 2015 2016 Ethiopia; which has been growing its FDI flows by 12% p.a. 282 and could be higher as official figures may not capture all Source: UNCTAD, World Bank Development Indicators 2017, 141 114 112 64 UNECA 2016, Ethiopian Investment Commission, Korea EX 21 7 Electricalof the FDI Machinery flows. In terms Imports of the in relationshipthe Horn of withAfrica South Africa Infrastructure Development Index (AIDI)* USDKorea, Millions; Sudan 2016 is slightly ahead of Ethiopia as the primary Score out of 100 Djibouti Eritrea Ethiopia Somalia South Sudan importer of South Korean goods (USD 178M annually). The investor climate may also vary within a single Sudan 23.9 2015 2590 country.2 3Somalia.4 itself remains very challenging; but AIDI 2014 Each2016 market is different1750 – and local conditions evolve Somaliland, an autonomous region within Somalia, is AIDI 2016 swiftly. There is a wide range in the level of market peaceful and more open. Country-wide ‘doing business’ 551 Electrical Machinery Imports in the Horn of Africa Africa Infrastructure Development Index (AIDI)* readiness, and each market needs to be individually rankings will not always reflect the local nuance. Some 470 USD Millions; 2016 14.7 Score out of 100 understood (see country profiles and full report for more regions in the country may be difficult to do business in. 13.7 23.9 351detail).353 Recent development and efforts to secure peace 2015 2590 23.4 AIDI 2014 in the Horn present a new dynamic for investors. Sudan, Public stakeholders2016 are 1committed750 to streamlining the AIDI 2016 7.9 8.3 7.6 having had sanctions lifted in 2017, has great opportunities investment process. There6 is.4 an appreciation from public to invest (alongside a large domestic market). However, stakeholders that in order to successfully attract5541 .investment3 4.9 106 110 3.2 3.4 doing business in neighbouring South Sudan remains into the various markets, the creation of and470 support for 14.7 33 43 35 19 13.7 challenging. Whilst Eritrea remains largely closed to over- investment promotion agencies will be essential. This is 351 353 seas investment, the peace deal with Ethiopia in July 2018 evident in various markets (e.g., Somalia, and South Sudan) 8.3 Djiboutihas broughtEritrea renewedEthiopia optimismSomalia and momentum,Sudan Southand we where entitiesDjibouti haveEritrea been establishedEthiopia Somaliato provideSouth the Sudan 7.9 7.6 Sudan Sudan 6.4 expect that the foreign investor climate will soon improve. necessary interface with investors. 4.3 4.9 106 110 3.2 3.4 33 43 35 19 South Korea’s exports to the Horn of Africa (2016) Djibouti Eritrea Ethiopia Somalia Sudan South Djibouti Eritrea Ethiopia Somalia South Sudan USD Millions Sudan Sudan Somalia Hyundai and Kia cars are available in Sudan; Sudan and there is a local manufacturing plant Ethiopia for two Hyundai lines South Korea’s exports to the Horn of Africa (2016) USD Millions Source: International Trade Centre, 1 Dalberg analysis. Somalia Note: South Sudan figures negligible; 92 Hyundaino reported and Kia data cars for Djibouti are available or Eritrea. in Sudan; Sudan 38 and there is a local manufacturing plant Ethiopia for two Hyundai lines 2 5 1 11 ½ 92 18 44 11 38 33 22 18 2 17 13 6 1 3 1 4 8 4 5 11 Vehicles Mechanical Plastics Electrical Organic Pharma Rubber Zinc Iron and Optical and ½ Machinery Machinery Chemicals Steel Medical18 44 Equipment 11 33 22 18 17 13 6 1 3 1 4 8 4 The Horn of Africa Opportunity 3 Vehicles Mechanical Plastics Electrical Organic Pharma Rubber Zinc Iron and Optical and Machinery Machinery Chemicals Steel Medical Equipment Country Profiles The transition markets in the Horn Ease of Doing Business Score of Africa, and the focus of this report, 49.6 are Sudan, South Sudan, Djibouti, 44.5 Eritrea and Somalia. 32.9 22.9 However there are many regional entry points, which can 20.0 provide a stable platform for a region-wide investment, and to build experience with local market dynamics. These border the Horn of Africa region, and include Ethiopia, Sudan South Djibouti Eritrea Somalia Kenya, the Democratic Republic of the Congo, and Uganda. Sudan Based on data from regional private equity flows, a third of Note: Ease of Doing Business is an annual ranking and score investors make multi-country investments, rather than in published by the World Bank on the business and investment climate any one market. in each country. A score is provided, from zero (poor)