Developing investment

The 'developing' label placed on many nations and regions across the world is looking increasingly out of date, with the massive global economic growth witnessed over the last century, which is largely the result of increased international money flows.

Foreign investment is vital for countries looking to repeat the economic expansion seen over the past few decades, and Africa is a case in point. An independent report we launched in November 2014, 'Jersey's Value to Africa', examines Africa's future investment needs, and considers where the required funding could come from.

The figures are surprising. The continent's potential is huge, but in order to realise it, Africa's capital stock will need to increase by an estimated six times by 2040, and its economy would need to quadruple over the same period. By 2040, Africa will require a cumulative investment of $85trn (£53.75trn) equivalent to annual global GDP.

While local businesses, foreign aid and governments all have a part to play in providing this investment, even together they do not have the resources required. Our research predicts an investment gap of $11.4trn by 2040.

Africa's domestic private sector will struggle to finance the shortfall, likely to only be able to contribute $1.6trn of the gap. In addition, governments experiencing significant day-to-day demands on their resources (as well as limited access to debt compared to western governments) will only be able to contribute an estimated $2.8trn.

At a time of austerity in Europe, foreign aid is unlikely to be able to effectively shore up the investment needed: aid amounted to only $51bn in 2012, and it's difficult to imagine aid contributing even as much as $1trn towards the $11.4trn required. It is clear that the bulk of Africa's investment needs will have to be met by foreign investment.

Financial crime, meanwhile, is a major problem for the developing world. The World Bank estimates that over $1trn a year is paid in bribes globally, while the World Economic Forum puts the cost of corruption at more than 5 per cent of global GDP.

This all gives robust international financial centres like Jersey a significant role to play in helping African nations access the investment funds they need. Facilitating foreign investment into the continent should encourage global investors that would otherwise be reluctant to invest directly, particularly through cross-border investment pooling.

There are signs that a hitherto reluctance to invest in Africa could be changing. Over the past decade, Africa's economy has grown by an average of 5.2 per cent a year, helped by improvements in political stability and governance, the development of key infrastructure, and the expansion of the natural resources industries. However, progress remains uneven, with the continent's five largest economies accounting for nearly two-thirds of its output.

Over the next 30 years, Africa's working age population should double to around 1.2 billion. Such growth is a step-change opportunity that increases the productive potential of economies. However, it may also be a challenge if there isn't a corresponding increase in jobs.

All of this is clearly of interest to the investment community, but on a holistic level it should resonate with those working in private client wealth management too. While Jersey has significant experience in advising clients on transactions in a number of African countries, including corporate, funds, project and infrastructure work, it also has sizeable and well established private wealth links with Africa.

As African economies grow, these links are set to become even stronger, with Jersey's high levels of corporate governance, experience in handling secure cross-border transactions and a range of specialist wealth management vehicles being given an even more important purpose. Approximately 9 per cent of assets looked after by trusts in Jersey, for instance, have come from African sources and a number of African banks have a presence in Jersey including Standard Bank, FirstRand, Nedbank and Investec.

In addition, the Jersey authorities have sought to engage with the African Tax Administration Forum (ATAF) and other international bodies on ways in which it believes it can assist African countries in enhancing their revenue raising capacity and tackle issues of financial crime.

Investors and the continent as a whole both stand to benefit from Jersey's commitment to working with African countries to improve infrastructure and economic governance. Private client professionals would do well to monitor these developments closely as they develop their African strategies.

Geoff Cook is the CEO of Jersey Finance

He writes a regular blog about Jersey for Private Client Adviser

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