Why German investors see business in Africa as too risky – DW – 11/29/2024

Africa is back in the spotlight as a continent of opportunities, with German Economy Minister Robert Habeck traveling to Kenya to open next week’s two-day German African Business Summit (GABS).

The gathering, which is held in a different African country every two years, is Germany’s largest business event focused on the continent, bringing together business and government leaders from Germany and Africa. 

Perceptions of Africa’s investment climate

“The perspective on Africa is one of exaggerated political, policy and economic risks: politically unstable, corrupt, weak infrastructure, bureaucratic hurdles and high-risk environment,” said Serwah Prempeh, a senior fellow at the Africa Policy Research Institute’s (APRI) economy and society program.

“This, of course, deters German investors, particularly those in small and medium-sized enterprises (SMEs), who are typically more risk-averse,” Prempeh told DW. 

In her recently-published autobiography “Freedom. Memories 1954-2021” former German Chancellor Angela Merkel mentioned the difficulty of persuading senior executives from large German companies to accompany her on trips to African countries.

“Most of them saw few opportunities for themselves on the African markets,” she wrote.

Attempts to foster investment

Previous German governments have made several attempts at persuading German SMEs to increase investments in Africa. Initiatives such as the Compact with Africa — established during Germany’s 2017 presidency of the G20 — aims to generate additional private investment in African nations to boost their economies.

Overall, however, Germany has hardly been politically and economically active in Africa in recent decades, according to APRI.

Foreign direct investment data reflects this. Germany ranked ninth among the top 10 investor countries in Africa in 2022 with $13 billion (€12.3 billion) — only 2 billion more than 2018, according to the United Nations Conference on Trade and Development (UNCTAD).

Prempeh told DW that German investors generally have a low appetite for risk.

“Many are holding out for increased government support before they invest in Africa,” Prempeh said.

“This support might not come considering the tight fiscal position of the German government and the increasing pressures from citizens to focus and spend more on internal development issues.”

Challenges for German investments

In 2022, Habeck called for a “restart” and a new approach to relations between Germany, Europe and Africa ahead of his first trip to Africa, during which he visited South Africa and Namibia.

In Kenya, Germany is acting as a financing partner for the expansion of Africa’s largest geothermal power plant in Olkaria.

In May 2023, Chancellor Olaf Scholz personally announced a new €45 million loan on-site in Olkaria.

Habeck also plans to visit the power complex, whose capacity is set to double to 2,000 megawatts by the end of the decade.

According to Kenyan economist James Shikwati, the German investment approach to Africa and Kenya is facing a double crisis. 

“When it comes to Africa the potential German investments are facing competition from China and other emerging economies that have become aggressive in their investment approach to Africa,” Shikwati said.

Shikwati suggested that Germans often come with a “mindset of how things should work,” and should rather step back from assuming that “they are the experts and creating possibilities where they can co-create with Kenyan and African counterparts.”

Continent of opportunities

Africa offers significant opportunities for German companies looking to diversify and reduce dependencies, especially from China. The green energy, infrastructure and IT sectors are attractive for investment projects.

But since the COVID pandemic and new conflicts on the continent, many African economies have been hit hard, financial budgets have become volatile. 

Many experts warn that mitigating those risks will be important forfuture investments.

Christoph Kannengiesser, CEO of the German African Business Association, pointed out that while there is a lot of talk about risk, Africa can actually help safeguard business models against risks and make them more resilient.

 “The continent does not share many of the global risks and supply chains to the same extent and is objectively no more risky than other regions of the world,” he told DW.

The false and defensive perception by rating agencies and listed risk classes by the Organisation for Economic Cooperation and Development (OECD) makes it more expensive for companies that want to become active in Africa to raise debt capital, Kannengiesser argued.

Companies increasingly recognize the need for diversification and for the incredible potential offered by the neigboring continent, noted Kannengiesser. But the recession, the need for transformation in local markets is absorbing a lot of resources.

Africa ready to do business

Before the current economic challenges and the consequences of Russia’s war in Ukraine, Germany had a well-functioning business model with investments in China, Western Europe, and the USA.

“Many German companies had the impression that the markets on the African continent, which are perceived as complicated and unknown to the vast majority, were not needed for business success.”

Prempeh said that African governments are open and ready to do business. Most have very vibrant investment promotions institutions and special economic zones working to bring investors with different incentive packages, she stressed.

“Prospective German businesses should be talking to these state institutions,” Prempeh said, adding that the German banking sector, including the public banks, must urgently develop new funding models for African investments.

“The current approach is not working,” she concluded.

Edited by: Keith Walker