South Africa retained its position as the most attractive investment destination in Africa, despite a reduction in its score owing to a weaker business environment and a faltering business outlook, Rand Merchant Bank’s (RMB’s) ‘Where to Invest in Africa 2015/16’ report has revealed.

Egypt recaptured its spot as the second most attractive investment destination in Africa, following three years of political instability. It jumped four places as a result of its sizeable domestic market, relatively low unit labour costs and rapid uptake of technology, but still trailed South Africa by a sizeable margin.

Further, Nigeria, which had ranked second last year, fell to fifth place, mainly owing to a combination of local deterrents and its relative economic underperformance over the past year.

“But, we are encouraged by the peaceful transition of power in the country and continue to believe in its long-term economic viability based on the sheer size of its economy and the prospect of a demographic dividend,” report coauthor and RMB Africa analyst Nema Ramkhelawan-Bhana highlighted.

Meanwhile, the report sought to address two of the most underinvested sectors on the continent – power and energy – while looking at opportunities for investors.

“In many African countries, agriculture is the lifeblood of the economy, employing a vast majority of the population. But, despite an abundance of arable land, Africa continues to import food products to satisfy its insatiable level of demand, which is set to triple by 2050. Investment is key to improving agribusiness and, therefore, the report highlights those countries that have been outperforming from an industry growth perspective.

“Like agriculture, energy is fundamental to sustainable growth. However, the power sector is faced with a plethora of constraints, not least of which is funding. The amount required to electrify the continent far outstrips what any government or donor can reasonably provide, necessitating private funding,” the report stated.

Meanwhile, Morocco and Ghana placed third and fourth in this year’s ranking, impressing offshore investors with the integration of value chains and the progress of collaborations between big firms and small- to medium-sized enterprises.

Ethiopia earned the sixth position, given its stable economic environment, strong investment guarantees, natural resource base and programmes to develop skilled labour.

Tunisia fell two spots in the rankings to seventh place, reflecting the government’s struggle to revive an ailing tourism industry and safeguard its borders against terrorist attacks. Algeria, however, continued to make strides in the rankings, rising two places to number eight.

“Its recovery in the rankings following the Arab Spring is mainly ascribed to an improvement in the economic growth outlook and the realisation of greater levels of competitiveness,” report coauthor and RMB Africa analyst Celeste Fauconnier explained.

Tanzania and Kenya were ranked ninth and tenth respectively, with Kenya nudging Rwanda to number 11. 

In total, 25 countries improved their standings over the last year, five remained unchanged and 23 fell in the rankings. 

The report noted that, despite the improved economic performance of some African countries, the continent was still at the lower end of global investment attractiveness.  South Africa was the highest ranked African country at 41 out of 183 jurisdictions measured in the report.

“Africa accounted for only 4.4% of global foreign direct investment (FDI) flows in 2014, but that is almost double the amount invested nine years ago. To place that in context, Africa attracts a greater proportion of FDI than South and West Asia and transition economies,” Ramkhelawan-Bhana said.

Fauconnier added that regional inflows ranged between $10-billion and $15-billion in 2014, reflecting a seismic shift in investor perceptions since 2006, when inflows amounted to less than $5-billion in the majority of African countries.

The increased investment interest was as a result of superior returns realised in Africa relative to most emerging market economies, as well as numerous investment opportunities. “But, Africa is also fraught with challenges that require meticulous planning,” the report warned.