As more countries turn to populist leadership in developed markets, investors are increasingly posed with the question, which markets have more country, political and regulatory risks? Until two years ago, conventional wisdom held that emerging markets had the greater risks, but this question has turned into a perception altering exercise.
Investors are increasingly open to considering emerging markets as developed market governments risk making unexpected regulatory and political decisions that undermine returns in private investments.
Perhaps nowhere is the emerging market opportunity greater than in Africa. The continent is home to more than 1.2 billion people and six of the top 13 fastest-growing economies, including the world’s fastest, Ethiopia, according to analysis by the World Bank’s Global Economic Prospects.
For infrastructure investors seeking opportunities in developed markets glutted with capital and overvalued investments, the right emerging market opportunities in Africa could help them get capital allocated and meet target allocations goals.
According the G20 backed initiative, the Global Infrastructure Hub, $621 billion of investment is needed in 10 African countries, including Ethiopia, Côte d’Ivoire and Rwanda — each ranked among the top 13 fastest growing economies — by 2030, in order to meet UN Sustainable Development Goals for universal access to drinking water, sanitation and electricity.
This is three times what is expected to be delivered based on current investment trends ($206 billion), which reveals an investment gap of $415 billion, according to the GIH report, Global Infrastructure Outlook: Infrastructure Investment Need in the Compact with Africa Countries.
“[The] Outlook report reveals the magnitude of that need at a country and sector level, helping public and private investors to better direct their financing,” says GIH CEO Chris Heathcote. “However, the huge challenge of delivering the UN SDGs is not only a matter of finance, but also of policy reform — we need strong governance and well-planned projects in these 10 countries.”
In 2017, the Global Infrastructure Hub and EDHEC Infrastructure Institute-Singapore surveyed infrastructure investors in their Annual Global Infrastructure Investor Survey 2017 and found 37 percent of infrastructure investors invest in emerging markets, up from 20 percent in 2016. Of those already investing in emerging markets, 82 percent expected to increase their investment.
Furthermore, in its Global Infrastructure Outlook: Infrastructure Investment Need in the Compact with Africa Countries, GIH found that $2.4 trillion of investment is required in the 10 countries by 2040 if they are to keep pace with economic growth and close infrastructure gaps. But only $1.4 trillion is expected to be delivered based on current spending levels. This is a 42 percent investment gap, which is one of the largest regional gaps in the world, the GIH report notes.
“These figures demonstrate a clear desire from investors to spend more in emerging markets,” says Heathcote. “However, attracting private sector investment into African countries remains a major challenge.”
For institutional infrastructure investors trying to get capital allocated, finding good investments outside of highly valued, traditional, core developed markets is becoming a more attractive option, and several countries in Africa could provide opportunities.
“It’s now more important than ever that emerging markets continue to develop their infrastructure project pipelines, as well as continuing a track record of attracting public and private capital into well-identified, selected and prioritized projects,” says Heathcote.
