Africa & Middle East, investment partnership.
Can the Middle East offer the necessary support to the underserved Muslim population in Africa, considering the precarious economic situation of African countries?
As of mid-2022, sub-Saharan African countries had amassed public debt that amounted to about 60 percent of their GDP, a level not seen since the early 2000s, according to the IMF. The debt makeup has shifted towards higher-cost private sources, which increases debt service costs and rollover risks. Consequently, 19 of the region's 35 low-income countries are either in debt distress or at high risk of it. Meanwhile, following China's reduction in investment to African nations, the Gulf Cooperation Council (GCC) countries have stepped in to fill the gap. The Middle East/Africa corridor has become an increasingly prominent investment strategy for GCC nations, particularly Saudi Arabia, the UAE and Qatar, with investment volumes through capital expenditure (capex) and foreign direct investment (FDI) steadily increasing between 2017 and 2019. Despite the COVID-19 pandemic, GCC investment in Africa has continued to grow, reaching US$8.3 billion in 2022, almost matching pre-pandemic levels. In the face of geopolitical instability, African policymakers are now tasked with setting a stabilizing course.
Despite the historical emphasis on ties between the GCC and North Africa due to shared cultural and linguistic connections, there is a growing interest among GCC states in establishing direct business relationships with sub-Saharan Africa. This is fueled by a strong rise in GDP and ready capital for investment across the GCC in 2021, which has resulted in a corresponding increase in oil and commodity prices in 2022. The UAE-based Mashreqbank has emerged as the leading GCC bookrunner in Africa, investing in 14 countries on the continent. GCC funders are also actively seeking partnerships with local lenders, viewing Africa as a long-term investment prospect.
In addition to their traditional reliance on oil and gas, GCC states have been actively diversifying their investments into infrastructure, telecommunications, and food security. They have directed significant attention towards Africa in these areas, with Saudi Arabia emerging as one of the largest acquirers of agricultural land on the continent, followed by UAE, Qatar, Bahrain, and Kuwait. This focus on food security reflects their efforts to reduce reliance on market imports and enhance their own food production capabilities. Qatar-based investment company IAS International, for example, has earmarked $1.6 billion for investment in development projects in Central African Republic, including a tax-free special economic zone.
Telecommunications is considered the fastest-growing industry in Africa and has attracted significant foreign direct investment from the Gulf Cooperation Council (GCC). E& (previously known as Etisalat), a telecommunications operator from the United Arab Emirates (UAE), holds stakes in various African telecommunications companies across several countries, including Tanzania, Benin, Burkina Faso, Togo, Niger, Mali, Mauritania, the Central African Republic, Chad, Gabon, and Ivory Coast. Additionally, Qatar's Ooredoo has operations in North Africa, while Kuwait's Zain operates in Sudan, South Sudan, and Morocco.
The GCC's expanding presence in African infrastructure is noteworthy, with DP World, based in the UAE, operating nine ports and terminals across eight African countries, including Algeria, Angola, Egypt, Mozambique, Rwanda, Senegal, Somalia, and South Africa. The company has also recently acquired a controlling stake in Nigeria's Africa FMCG Distribution Ltd. Such investments are significant contributors to local employment and trade synergies, with DP World's Group Chairman and CEO, Sultan Ahmed Bin Sulayem, citing growth and employee numbers doubling in Senegal during the company's 12-year presence there.
GCC investment in Africa is not limited to ad hoc purchases of strategic assets by state-owned enterprises. Recent diplomatic and policy-driven decisions demonstrate a commitment to developing ongoing, sustainable trade. For example, in the summer of 2022, the UAE and Kenya issued a joint statement announcing their intention to negotiate a comprehensive economic partnership agreement (CEPA) as a precursor to increasing the overall value of non-oil bilateral trade between the two countries, which rose to US$2.3 billion in the previous year. Private companies are also benefiting from the strengthening relationships, with African businesses increasingly choosing the UAE as a base of operations. Since October 2021, 1,600 new African member companies have registered with the Dubai Chamber of Commerce, highlighting the opportunities for these companies to use the UAE as a base for outbound engagement and a platform for utilizing global opportunities for export.
There are significant opportunities for GCC financial institutions and credit providers, both state-owned and private, to become cornerstone lenders in sub-Saharan Africa. These institutions possess exceptionally strong liquidity, with UAE banks having liquid assets at 38 percent of total assets as of December 2021. The vast infrastructure and energy demands in Africa offer numerous project opportunities that require private sector funding, as per the African Development Bank. However, according to McKinsey & Co, 80 percent of infrastructure projects in Africa fail at the feasibility and business-planning stage. The UAE has shown an appetite for investment in African infrastructure, second only to the United States.
Debt markets remain the key focal point for supporting the funding requirements of African infrastructure projects, particularly as demand in the international capital markets is contracting. The potential for higher returns from lending across Africa may be attractive in an environment where local spreads in the GCC are relatively low. Islamic finance presents significant opportunities, given that sub-Saharan Africa is home to 15 percent of the world's Muslim population and 40 percent of sub-Saharan Africa identifies as Muslim. However, the use of Shari'a-compliant financing across sub-Saharan Africa has not developed at the pace it could have, primarily due to political, socio-economic, legal, and regulatory considerations.
The Middle East/Africa corridor presents a logical partnership, given their proximity and logistical advantages. Policy-makers across both regions seem aligned that closer ties would benefit both parties. With many African economies in need of significant inbound investment, the Middle East region could deploy its significant capital, strategic policy aims, and sophisticated Islamic finance market to cater to the burgeoning African Muslim population. This partnership could be a perfect fit.