FOREIGN PRIVATE CAPITAL IN RWANDA
Year 2017
1
CHAPTER ONE
INTRODUCTION
1.0 Introduction
F
oreign Private Capital (FPC) refers to inward investments in terms of equity
or/and non-equity (debts) from nonresidents into Rwanda and outward
investments of Rwandan residents to the rest of the world. It is composed of foreign
direct investment which is the most important component, portfolio investment
and other investments.
This chapter presents an overview of the global performance of the Foreign Direct
Investments (FDI) flows in 2016 with a focus on Africa.
In 2016, FDIs to Africa declined by 3 percent from $ 61 billion in 2015 to $ 59
billion in 2016 as a result of the slowdown in the global economy. In contrast,
East Africa recorded higher FDI inflows rising by 13 percent from $ 6.3 billion
in 2015 to $7.1 billion in 2016. The prospects for Africa is positive with a projected
growth in FDI inflows of 10 percent in 2017 to $ 60 billion. FDI investments in
oil and gas continue drive the prospects in Africa.
1.1 Global Foreign Direct Investment trends
Foreign Direct Investment is at the center of foreign private investment analysis
a s o n e o f t h e m a j o r c o m p o n e n t s i n f o r e i g n i n v e s t m e n t s a n d i t s b e n e fi t s t o
economies. In his publication, Charles W. L. Hill (2015), asserts that foreign direct
investment can make a positive contribution to a host economy by supplying
capital, technology, and management resources that would otherwise not be
available and thus boost that country’s economic growth. Other components of
private foreign investments are considered short term and volitile and therefore
less analysed on global level.
The According to WIR (2017), global FDI inflows in 2016 fell by 2 percent to $ 1.75
trillion from $ 1.76 trillion in 2015. Investment in developing countries declined
even more, by 14 per cent, and flows to LDCs and structurally weak economies.
After a strong rise in 2015, global FDI flows lost growth momentum in 2016,
showing that the road to recovery remains bumpy. FDI inflows decreased by
2 per cent to $1.75 trillion, amid weak economic growth and significant policy
risks, as perceived by multinational enterprises.
Inflows to developing economies were especially hard hit, with a decline of 14
per cent to $646 billion. FDI remains the largest and most constant external
FOREIGN PRIVATE CAPITAL IN RWANDA
Year 2017
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source of financing for developing economies compared to portfolio investments,
remittances and official development assistance. Overall inflows were down
across all developing regions.
FDI flows to developing Asia contracted by 15 per cent to $443 billion in 2016.
This first decline in five years was relatively widespread, with double-digit drops
in most subregions except South Asia.
FDI flows to Africa continued to slide, reaching $59 billion, down 3 per cent from
2015, mostly reflecting low commodity prices.
The downward trend in FDI flows to Latin America and the Caribbean accelerated,
with inflows falling 14 per cent to $142 billion, owing to continued economic
recession, weak commodity prices and pressures on exports.
FDI in structurally weak and vulnerable economies remained fragile. Flows to
the least developed countries fell by 13 per cent, to $38 billion. Similarly, those to
small island developing States declined by 6 per cent, to $3.5 billion. Landlocked
developing countries saw stable FDI, at $24 billion.
Global investment is seeing a modest recovery, with projections for 2017 cautiously
optimistic. Higher economic growth expectations across major regions, a
resumption of growth in trade and a recovery in corporate profits could support
a small increase in foreign direct investment (FDI). Global flows are forecasted to
increase to almost $1.8 trillion in 2017, continuing to $1.85 trillion in 2018, a level
that is still below the 2007 peak. Policy uncertainty and geopolitical risks could
hamper the recovery, and tax policy changes could significantly affect cross-
border investment.
FDI prospects are moderately positive in most regions, except Latin America and
the Caribbean. Developing economies as a group are expected to gain about 10
per cent. This includes a sizeable increase in developing Asia, where an improved
outlook in major economies is likely to boost investor confidence. FDI to Africa is
also expected to increase, with a modest projected rise in oil prices and advances
in regional integration.
FOREIGN PRIVATE CAPITAL IN RWANDA Year 2017 3 Figure 1: Global Foreign Direct Investments trends in 2014-2016 ($ Billion) Source: UNCTAD, World Investment Report 2017 1.2 Africa FDI trend and prospects In Africa and on the global level, FDI is the main component of Foreign Private Investment and is the most reported and analyzed component of FPC. This section discusses the FDI trend in Africa according to the UNCTAD World Investment Report (2017) and regional private sector investment reports. UNCTAD (2017), FDI inflows to Africa declined by 3 per cent to $59 billion, Africa’s share in global FDI decreased marginally from 3.5 per cent to 3.4 per cent. FDI flows into North Africa rose by 11 per cent, to $14.5 billion, driven by foreign investment reforms and new gas discoveries. As in 2015, much of the growth was due to investments in Egypt, where FDI inflows increased by 17 per cent to $8.1 billion. The discovery by Shell (Netherlands) of gas reserves in Egypt’s Western Desert continued to drive investment in the country’s hydrocarbons sector. FDI inflows to Morocco, in contrast, were down by 29 per cent to $2.3 billion in 2016, owing to reduced European consumer demand, which negatively affected export- oriented FDI in the country. After registering negative inflows in 2015, Algeria attracted $1.5 billion in FDI in 2016, led partly by improved investment policies and a recent recovery in its oil production. Low oil prices and continued conflicts kept FDI flows to the rest of North Africa subdued. FDI flows to West Africa increased by 12 per cent to $11.4 billion in 2016, driven by recovering investment into Nigeria. Although flows to Nigeria rebounded to
FOREIGN PRIVATE CAPITAL IN RWANDA Year 2017 4 $4.4 billion in 2016 (up 45 per cent from a 2015 low), they remained well below previous record levels. Nigeria’s FDI remained relatively depressed, as its oil output declined to historic low in 2016, and the country fell into recession for the first time since 1991. FDI inflows to Ghana increased by 9 per cent to $3.5 billion. Vitol Group (Netherlands) and Eni (Italy), in partnership with Ghana’s National Petroleum Corporation, continued development on the $7 billion offshore oil and natural gas project in West Ghana. Ghana’s and Côte d’Ivoire’s industrial policy efforts to combine cocoa processing bode well for future investment regionally, although the latter experienced a minor decline (-3 per cent) in FDI inflows in 2016. FDI flows to Senegal slid by some 4 per cent in 2016, FDI flows to Central Africa fell by 15 per cent in 2016, to $5.1 billion. The Democratic Republic of the Congo saw FDI decline of 28 per cent to $1.2 billion in 2016, as the country attracted only investment into its mineral sector. Central Africa’s major net oil exporters saw mixed performances, highlighting the importance of strong government responses to macroeconomic and financing conditions. Equatorial Guinea saw a substantial decline in FDI inflows (-77 per cent to $54 million), Chad experienced no change, while flows to Gabon increased by 13 per cent to $703 million. FDI in the Congo rose by 8 per cent, to $2 billion, mostly due to continued investments by Chinese companies operating in cobalt and copper extraction. East Africa received $7.1 billion in FDI in 2016, 13 per cent more than in 2015. However, the aggregate increase masks divergent FDI performance within the sub region. Flows to Ethiopia rose by 46 per cent to $3.2 billion, propelled by investments in infrastructure and manufacturing. FDI was also buoyant in Mauritius, thanks to a variety of services investments and in Madagascar, in the context of a continued recovery since the decline in 2014. FDI into Kenya continued its decline, slumping by 36 per cent to $394 million in 2016 – only slightly more than a quarter of its 2011 level – despite investment reforms and a supportive domestic policy environment. Yet the trading value on Kenya’s liquid stock exchange overtook that of Nigeria’s exchange for the first time last year. This propped up cross-border Mergers and Acquisitions (M&As), with the private equity fund Helios (United Kingdom) buying 70 per cent of Telkom Kenya from Orange (France). Flows to the United Republic of Tanzania shrank by 27 per cent to $393 million, despite policy efforts to attract more investors, such as the revamping of the country’s special economic zones, in partnership with Mauritius. In Southern Africa, FDI inflows contracted by 18 per cent to $21.2 billion. With the exception of Malawi and South Africa, FDI fell in all the economies of the sub region. FDI flows to Angola declined by 11 per cent to $14.4 billion, mainly due to a decline in reinvested earnings, reflecting the impact of low prices on
FOREIGN PRIVATE CAPITAL IN RWANDA Year 2017 5 profit margins. Flows to Mozambique declined by 20 per cent, although they remained sizeable at $3 billion. Despite a serious financial crunch, investors remained upbeat about long-term value in Mozambique’s commodity sector, with Eni (Italy) approving $8 billion in offshore gas exploration at the end of 2016, and ExxonMobil (United States) buying a multibillion-dollar stake in Eni (Italy). Flows to Zambia fell sharply, dropping 70 per cent to $469 million, amid low commodity prices. South Africa, the economic powerhouse on the continent, continues to underperform, with FDI at a paltry $2.3 billion in 2016; that was up by 31 per cent from a record low in 2015 but still well off its past average. Nonetheless, State-owned Beijing Automotive International Corporation (China) agreed to build a $759 million automotive plant − the biggest investment in a vehicle-production facility in the country in four decades. Figure 2: Foreign Private Direct Investment, in Africa, 2015-2016 ($ billion) Source: UNCTAD, World Investment Report 2017 1.3 Monitoring foreign investment in Rwanda Globally, countries around the world have committed to collect information on foreign private flows following international standards on data collection methodology and share their information with World Bank and UNCTAD for comparability and communication. Rwanda has also committed to annually conduct this exercise and share the results.
FOREIGN PRIVATE CAPITAL IN RWANDA Year 2017 6 With the objective of complementing internal resources, Rwanda has actively attracted FDI by creating and sustaining a sound and conducive investment climate through important reforms which has made easier for businesses to get started, get loans, pay taxes, etc. A whole package for investment promotion in general can be found within Rwanda Development Board. The package for investment promotion includes among others: regulatory framework, registration facilities and requirements, change of registered businesses, closing of businesses, disclosure requirements, and other facilities such as working permit, government’s protection of investments, settlement of disputes, transfer of funds, special economic zone facilitations, public private partnership (PPP) where RDB is chief negotiator between public and private sector. Rwanda enacted a new investment code in 2015 which includes additional tax incentives, principles of national treatment, free transfer of funds and protection in case of expropriation. According to the World Investment Report (2017), Rwanda improved its world ranking to 41st position in the world in doing business, up from 62th last year. In Africa, Rwanda ranks 2nd from 3rd last year and remains number one in the East African Community. 1.4 Doing Business in Rwanda Moving up fifteen places globally from 56th to 41st position means that Rwanda has become even more competitive and that the business and investment environment of the country is improving. Rwanda, which ranks second in Africa in Doing Business 2018, is an example of an economy that used Doing Business as a guide to improve its business environment. From Doing Business 2005 to Doing Business 2017 Rwanda implemented a total of 47 reforms across all indicators. Rwanda is one of only 10 economies that have implemented reforms in all of the Doing Business indicators and every year since Doing Business 2006. These reforms are in line with Rwanda’s Vision 2020 development strategy, which aims at transforming Rwanda from a low-income economy to a lower-middle- income economy by raising income per capita from $290 to $1,240 by 2020. In the Doing Business Report 2018 that was launched on 31st October, 2017. Rwanda’s overall ranking has made positive shift from 56th position to a position of 41st worldwide. Rwanda managed to register 5 reforms which were captured and reflected in this doing business report 2018. Today, Rwanda is again ranked the 2nd easiest to do business in Africa after Mauritius. The reforms that impacted our business regulatory environment include;