TEXT-Fitch : Sovereign ratings help attract FDI to Sub-Saharan Africa

Thu Feb 28, 2013 4:28am EST

(The following statement was released by the rating agency)

Feb 28 - Fitch Ratings says in a new report that the growth in sovereign ratings in sub-Saharan Africa (SSA) over the past decade has helped increase foreign direct investment (FDI) flows to the region.

Research on the links between FDI and sovereign ratings in SSA is now possible by comparing the experiences of the increasing number of rated African sovereigns and those which remain unrated. The universe of rated sovereigns in SSA has grown from just one, South Africa, in 1994, to twenty in 2012.

Econometric estimates by Fitch suggest sovereign ratings have contributed to net FDI flows in SSA between 1995 and 2011, adding on average the equivalent of 2% of GDP in FDI every year into rated countries.

The positive impact of sovereign ratings on FDI may reflect a number of factors: a signal effect, whereby the sovereign rating tells investors that a country is open to foreign capital and under scrutiny by a rating agency; an information effect, which reduces adverse selection for solid performers in SSA; an identification between sovereign and country risk, whereby investors may use ratings to assess risks in the private sector; and a positive effect on economic policy, as rated countries aim to improve their ratings and avoid downgrades.

In the early 2000s, new sovereign ratings in SSA were sponsored by development partners who saw the potential for sovereign ratings to promote transparency, improved governance and development. Since 2006, given the increased investor interest in the region, seven SSA countries have requested ratings before they subsequently were able to issue international bonds for the first time.

The marked increase in net FDI to SSA in the past 15 years (from an average USD6bn every year from 1995 to 1998 to USD35bn from 2007 to 2011) reflects the boom in commodity prices and mineral discoveries in SSA and more recently the growth in consumer spending. In addition to South Africa and Nigeria (the main FDI recipients), new commodity countries have gained in importance (e.g. Angola, Ghana, Mozambique, Uganda, Zambia). Mozambique was the second largest recipient in SSA after South Africa for greenfield FDI in 2011.

Improved macroeconomic conditions with high real GDP growth and lower inflation and increased political stability have also attracted market-seeking FDI in the service sectors (e.g., banking, retail, telecommunications) to respond to new consumer needs associated with rising incomes. FDI in service sectors accounted for 34% of total greenfield projects in Africa in 2011. FDI flows have contributed to economic development through employment creation and technology transfers.