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3.3.3. Foreign Direct Investment Flows and Stocks by origin
Considering the origin of FDI, Switzerland, South Africa, Mauritius and Kenya are the major source of FDI inflows, collectively accounting for 74.6 percent of total inflows in 2013. The level of inflows from Switzerland is less than stocks due to short term trade credits and other accounts payables mostly settled in less than a year.
Table2.15: Foreign Direct Investment Flows and Stocks by origin in 2013(US$ million)
Country
Inflows
Stock
Switzerland
96.0
20.0
South Africa
45.5
161.6
Mauritius
31.2
208.1
Kenya
20.2
76.0
Netherlands
10.8
59.7
Uganda
9.4
13.0
Belgium
6.3
17.9
China
5.9
9.5
United Kingdom
4.6
16.7
Nigeria
4.0
27.0
Others
20.0
228.1
Total
257.6
837.7
Source: Foreign Private investment 2013
3.4. Foreign Portfolio Investment
Portfolio investment which involves the purchase of stocks, bonds, commodities, or money market instruments by non-residents, remain the lowest component of foreign investment in Rwanda mainly due to the low level of financial market development. Its stock increased from US$ 87.8 million in 2012 to US$ 89.4million in 2013 and account for only 0.4 percent of the total liabilities inflows in 2013.
This small increase compared to the year 2012 was due to lack of new listed companies since then on Rwandan Stock Exchange as the portfolio inflows amounted to only US$1.7 million in 2013 compared to US$ 87.3 million in 2012.
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3.5. Other investments
Other investments accounting for 39.4 percent of the overall liability inflows are long term and
short term loans from unrelated sources. In 2013 , a total of US$ 168.4 million of loans inflows
were reported of which US$ 153.6 million (61.2 percent) were long term (mor e than 1 year),
US$ 11.1 million ( 6.7 percent) in form of trade credits and others (employee stocks options,
custody accounts or administered funds, outstanding franchise fees, and other claims not
mentioned elsewhere) amounted to US$ 3.7 million (2.1 percent).
3.5.1. Other investment inflows and stocks by Sector
The sectorial distribution of other foreign investment inflows in 2013 show that they were
mainly concentrated in the finance and insurance sector which received US $ 81.2 million.
Manufacturing came second with US$ 42.0 million followed by transportation with US$38.3
million. In terms of stock, t he finance and insurance had US$ 116.6 million, followed by ICT
had US$ 115.0 million, Transportation US$ 63.3 million, Agriculture US$ 54.8 million and
Manufacturing US$ 53.1 million. Mining s ector decreased from US$ 53.4 million in 2012 to
US$ 2.1 million in 2013. The decrease of inflows in mining sector was explained by the shift of
trade credits to non-affiliates in 2012 to support of affiliated companies in 2013.
Figure3.7: Other investments inflows and stocks by sector in 2013 (US$ million) Source: Foreign Private investment 2013
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3.5.2. Other Investments Inflows and Stock by Source in 2013
In 2013, Preferential Trade Area (PTA) was the major lender with disbursement of US$ 44.5 million, followed by Canada (US$ 38.3 million), and France (US$ 19.4 million). Inflows from African Development Bank and Kenya were US$ 14.5 million and US$ 13.1 million, respectively. In terms of stock, PTA was the major source, with US$ 65.3 followed by Canada in agriculture and transportation sectors with US$ 44.2 million, and France with US$19.3 million investing mostly in transportation & storage sector.
Table3.16: Other Investments Inflows and Stock by Source (US$ million)
Country
Inflows
Stock
PTA
44.5
65.35
Canada
38.3
44.15
France
19.4
19.34
ADB
14.5
17.59
Kenya
13.1
14.06
Austria
10.4
10.36
Tanzania
8.8
0.54
EU
6.0
3.68
Uganda
5.1
5.00
US
3.9
5.15
Burundi
2.1
2.13
Others
2.06
289.76
Total
168.42
477.11
Source: Foreign Private investment 2013
3.6. Income on investments
After a loss of US$34 million registered in 2010, foreign investments have been making profits. In 2013, the overall net profit increased to US$ 73.6 million from US$ 59.9 million in 2012. Out of the profit of US$ 73.6 million recorded in 2013, reinvested earnings were US$ 44.2 million, doubling from US$22 million registered in 2012, coming mainly from manufacturing, finance and insurance as well as mining sectors. The retained and reinvested earnings are net profit minus dividends declared.
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The ratio of dividends declared to net profit was 36.0 percent and the ratio of retained earnings to net profit was 64.0 percent. The reinvested earnings to net profit increased from 36.7 percent in 2012 to 60.1 percent in 2013; showing investors’ confidence in the economy.
Table3.17: Income on investment (US$ million) Item Amount (US$ million) 2010 2011 2012 2013 Net Profit/Loss -34 21.8 59.9 73.6 Dividends Declared 15.1 21 37.9 26.5 Dividends Paid 14.2 14.8 22.9 20.9 Retained Earnings/Loss -49.1 1.3 22 44.2 Source: Foreign Private investment 2013
3.6.1. Income on investment distribution by sector
The average income on investment in 2013 was 60.1 percent of total profit. The findings indicated that the more the sector makes the profit, the more it distributes and the more the sector makes profits, the more retained earnings as seen in table3.18
Table3.18: Income on investment distribution by sector in 2013 (US$ million) Sector Dividends declared Dividends paid Net Profit/Loss Retained Earnings Manufacturing 16.2 16.2 29.7 14.0 Financial and insurance 8.8 3.4 21.9 10.0 Mining
5.5
5.5
Wholesale & retail
0.0
0.0
5.2
4.8
ICT
4.3 4.3 Agriculture 0.1
2.7
2.7
Transportation
1.3
1.3
2.3
1.0
Others
1.4
1.3
Total
26.5
20.9
73.6
44.2
Source: Foreign Private investment 2013
In terms of profit made, manufacturing sector dominated by activities such as manufacturing of food products and beverages had 40.4 percent of the total income, followed by finance and insurance with 29.8 percent while wholesale had 7.0 percent.
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ICT sector recovered from a loss of 9 percent of the investment in t he sector in 2012 to a profit of 5.9 percent . In the calculations, other changes mainly from exchange rates affected the retained earnings by US$ 2.8 million.
Dividends paid to foreign shareholders decreased from US$ 22.9 million in 2012 to US$ 20.9 million in 2013. Manufacturing sector held 61.2 percent of total declared dividends, followed by finance and insurance with 33.4 percent.
3.7. Return on equity by sectors in 2013
Return on equity is the amount of net income returned as a percentage of shareh olders equity. It measures company’s profitability by revealing how much profit a company generates with the money shareholders have invested. Net income is for the full calendar year (before dividends paid to common stock holders but after dividends to pr eferred stock.). ROE is useful for comparing the profitability of a company to that of other firms in the same industry. In our case, we use it to calculate sector profitability. According to Aswath (2007), the ROE is calculated as follows:
During the pe riod under review, the overall return on equity attributable to for eign direct investments was 16.1 percent decreased from 20.6% in 2012 . This change is attributed to higher volume of FDI Equity stock compared to profit made in 2013.
The net profit is the net income of the year before dividends paid to common stock holders, whereas FDI Stock includes accumulated equity capital and accumulated retained earnings as presented in table 3.18.
The main objective of foreign investors in investing in foreign econom ies is to maximize their global profits. Firms invest abroad when the expected return exceeds the costs (Caves 1982).
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Among other factors, the rate of return on investments positively affected FDI inflows in Sub Saharan Africa (Opolet et al 2008). In Rwanda, profitably of 16.1 percent continues to be higher than the world average return of 6.1 percent.
Table3.19: FDI profitability 2013
SECTOR
NET PROFIT AV. STOCK FDI
ROE
Manufacturing
29.7
122.6
24%
Financial and insurance activities
21.9
149.1
15%
Mining
5.5
24.1
23%
Wholesale & retail
5.2
48.1
11%
ICT
4.3
334.8
1%
Agriculture
2.7
39.4
7%
Transportation
2.3
11.5
20%
Others
12.0
43.0
28%
Weighted Average
74
772.73
16.1%
Source: Foreign Private investment 2013
Considering profitability per sector, manufacturing came first with 24 percent followed by
mining with 23 percent and last come ICT with 1 percent. ICT improved form negative in 2012
due to new investments in the sector to 1 percent in 2013, which is an indication of taking off of
the sector.
The slight decrease of foreign investments ROE from 20.6 percent in 2012 to 16.1 percent in
2013 is explained by a larger increase in stock of FDI from US$715,5million in 2012 to US$
837.7 million in 2013 compared to a lower increase of retained earnings from US$ 22,0 million
in 2012 to US$44,2 million in 2013.
3.8. Macro-economic analysis of census findings
Table3.20 shows some key analytical ratios of foreign assets and liability flows and stocks. In terms of inflows, FDI became increasingly important as a source of investment funds as it stood at 16.7percent of Gross Fixed Capital Formation (GFCF) in 2013. In average it contributed 22.3
30
percent of the last 5 years GFCP. The ratio FDI/GFCF shows the contribution of FDI in country‘s financing of capital formation.
The importance of FDI to the economy is also shown by the increasing share of its stock to GDP equivalent to 12.8 percent in average during the last five years. In 2013, the ratio of FDI inflows to GDP was 3.9 percent and contributed 4.9 percent of GDP on average over the last five years.
The share of PSED stock to GDP shows a similar increasing trend from 3.6 percent in 2009 to 11.9 percent in 2013. Its service to GDP rose from 11.1 percent in 2009 to 15.3 percent in 2013, due to increasing level of debt.
Table3.20: Selected indicators of FDI flows and stocks (percent)
Indicators
2009
2010
2011
2012
2013
FDI Inflows/GFCF
16.0
36.4
14.6
28.0
16.7
FDI Inflows/GDP
3.5
7.6
3.1
6.1
3.9
FDI stock/GDP
7.9
12.9
12.9
17.4
12.8
PSED Stock/GDP
3.6
5.8
6.5
6.8
11.9
PSED Service / PSED Stock
11.1
9.5
8.8
5.8
15.3
Return on assets of non-residents
2.2
2.8
1.2
2.4
6.8
Return on equity of non-residents
9.1
13.4
19.5
20.6
16.1
Source: Foreign Private investment 2013
Using the world available data on FDI return on equity, in 2013 the rate of return on FDI in Rwanda compared to main economic regions was higher. The global rate of return on FDI was 6.8 percent, slowing from 7.6 percent in 2012. While the global average rate of return on FDI for 2011–2013 was 7.1 percent in average, this indicator reached 18.7 percent for Rwanda. According to the world investment report (2013), the first ranked in return on FDI for the year 2011 was Angola with 87 percent, Bahrain with 50 percent and Rwanda would rank 8th with 19.5 percent. Rwanda is doing well in FDI profitability as shown in the table3.21.